7/07/2004

Raise Minimum Wage?

John Kerry recently proposed that he would raise minimum wage from $5.15 and hour to $7.00 and hour if elected. This would be the first minimum wage increase in America since 1997. Kerry, speaking of President Bush, stated, "If a president can go out and fight for four years to provide over a trillion in tax cuts to the wealthiest people in America, we can fight for a few months to raise the minimum wage for the poorest people in America." I would like to hear some opinions on this proposal.

My personal feeling on the issue is that raising minimum wage won't solve too many problems. Even though the wage increase would increase my current paycheck, I don't feel that it would be a long term benefit to me or America. With a wage increase, inflation is sure to follow. Eventually, costs to employers will go up, prices will climb, and things will balance out. We'll be right back where we started.

I do think the a wage increase would benefit minimum wage workers for a short time, but how long would it be before current $7.00 and hour wage earners would demand that their wage's be increased as well? As I stated before, I think the whole proposal would just start a balancing act that would eventually land us back where we started.

5 comments:

Dr. Tufte said...

This is a good start for the new class, but I would like to see at least one link in most posts. In this case, there must be something either on Kerry's website, or on a major news site about this proposal.

Dr. Tufte said...

This is an issue that has both microeconomic and macroeconomic aspects.

Focusing on the latter, the idea that raising the minimum wage would be inflationary is part of the institutional theory of inflation discussed in Chapter 13 of the Colander text.

I also liked the comparison of the (nominal) minimum wage to prices of other goods - this is exactly the adjustment we talked about in class today, although in this case we are adjusting nominal wages to get real wages.

derek said...

Sorry about not posting a link for this topic. If you want to read more about Kerry's proposal, here is a link to his website:

http://www.johnkerry.com/pressroom/releases/pr_2004_0618.html

Dr. Tufte said...

With respect to Kid's comment, it isn't clear that raising the minimum wage is inflationary. As discussed in Chapter 13, there are two theories of the sources of inflation, and only one of them would attribute general inflation to increases in something like the minimum wage.

Also ... I know we discussed hyperinflation in class the day you posted this ... and even though it is fresh in your mind, we won't get hyperinflation from any increase in the minimum wage. Hyperinflation is always related to plain old easy to understand printing of too much money.

Note that if increasing the minimum wage caused discouraged workers to re-enter the labor force, we could see an increase in the unemployment rate with an increased minimum wage. That isn't something you are likely to hear from the Kerry campaign.

The book does make the case the inflation and unemployment tend to move in opposite directions (this is called the Phillips Curve, and is also discussed in Chapter 13). That idea was very strong in the 1960's, but has faded since then. This book retains that idea a little more prominently than others. My view is that these often move in opposite directions, but that they can both move together as a result of good policy choices (if they go down together as in the 1980's) or bad policy choices (if they go up together as in the 1970's).

Dr. Tufte said...

The ideas in the comments since my last comment all seem pretty good.

Here's something that I'm learning from the blogosphere. There has been a lot of talk about the relevent empirical results and it is best summarized in the post entitled "The Effect of the Minimum Wage" at the Rasmusen Weblog. Macroeconomists tell our students that raising the minimum wage will lower employment in those jobs, and that really doesn't seem to quite be the case. Apparently small increases in the minimum wage don't have much effect on employment. The reason for this is probably that the employers find other ways to save money. Did you ever notice that there usually isn't air conditioning in places where people are making minimum wage? So the employer can always reduce the positive externalities an employee gets from working (e.g.,comfort) to raise the wage.

One thing to keep in mind about any politician wanting to raise the minimum wage is that this money isn't coming out of their pockets, or even out of the governments. They're ordering a small group of employers to pay more for something than it is worth (and yes that is probably to get votes). But I hope when I put it this way that it sounds pretty odious. You never here them propose to subsidize employers to pay their employees more, do you? Since you don't, it should be clear that they care more about trashing the employers than helping the employees.

Oh and Kamm, you misspelled minimum. People in glass houses .... ;)