A new take on the devastating effects of ‘political wage-setting’: the ‘minimum wage paradox’

There are some uncomfortable truths about raising the minimum wage from its current level of $7.25 per hour to $15 per hour that are revealed by an online tool created by our Center for the Study of Economic Mobility (CSEM) at Winston-Salem State University. The tool, which we call the Social Benefits Calculator, enables anyone to go online and experience for themselves what it is like to be receiving social benefits and experience a monthly wage increase. Designed for Forsyth County (North Carolina), the calculator shows that with more than a 100% rise in the minimum wage, many people who currently receive social benefits will barely experience a change in their standard of living.

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Let’s use the calculator and create a hypothetical example: a full-time working parent earning the minimum wage, who is unmarried with two children in subsidized day care. As seen in Table 1 (above, click to enlarge), after his or her wages more than double from $7.25 an hour to $15 an hour, earnings rise from $1,160 to $2,400, or a $1,240 change.

Sounds good, right? That’s an enormous bump up of wages by 107%. But after subtracting the decrease in benefits and higher taxes, that $1,240 increase erodes to just a $199 net improvement, or just a 16% change.
Imagine getting a big raise and seeing 84% of it go away. In comparison, millionaires and billionaires pay just 37% for the federal marginal tax rate on higher income. Through multiple scenarios using the CSEM calculator, I have found long ranges of income where work barely pays — what I call “disincentive deserts” in my published research. In some cases, individuals are actually worse off by accepting wage increases because of larger drop-offs in benefits, in what are called “benefits cliffs.”

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Notice another surprising consequence: dependency on social programs drops with higher wages. For the full-time employee making $7.25 an hour, social benefits make up 74.3% of the overall wage and social benefits package; at $15 an hour the share drops to 52.3%.

This is a finding that may irk both conservatives and liberals since the chief beneficiary of a $15 minimum wage is the government itself. If passed, the cost of providing social programs will fall (though I don’t expect taxes to fall anytime soon). But from the workers’ perspective, little has changed in their lives after a huge wage hike. Moreover, employers will see little return on investment from higher wages, such as greater retention, loyalty and productivity.

Source: A new take on the devastating effects of ‘political wage-setting’: the ‘minimum wage paradox’

Early Quotes About Minimum Wage and Employment

Here are seven quotes that reveal how early social reformers viewed the minimum wage and the “unemployable.”

1. “It is much better to enact a minimum-wage law even if it deprives these unfortunates of work. Better that the state should support the inefficient wholly and prevent the multiplication of the breed than subsidize incompetence and unthrift, enabling them to bring forth more of their kind.” 

– Royal Meeker, Princeton scholar and labor commissioner to Woodrow Wilson, as quoted in Political Science Quarterly, Vol. 25

2. “How to deal with the unemployable?” asked economist Frank Taussig. They “should simply be stamped out.”

“We have not reached the stage where we can proceed to chloroform them once and for all; but at least they can be segregated, shut up in refuges and asylums, and prevented from propagating their kind…”

– F. W. Taussig, Principles of Economics, Vol. 1

3. “If the inefficient entrepreneurs would be eliminated [by minimum wages,] so would the ineffective workers. I am not disposed to waste much sympathy upon either class. The elimination of the inefficient is in line with our traditional emphasis on free competition, and also with the spirit and trend of modern social economics. There is no panacea that can ‘save’ the incompetents except at the expense of the normal people. They are a burden on society and on the producers wherever they are.”

– A.B. Wolfe, American Economic Review, 1917

4. “Imbecility breeds imbecility as certainly as white hens breed white chickens; and under laissez-faire imbecility is given full chance to breed, and does so in fact at a rate far superior to that of able stocks.”

New Republic editorial, 1916 (most likely written by Herbert Croly)

5. Henry Rogers Seager, a leading progressive economist from Columbia University, argued that worthy workers deserve protection from the “competition of the casual worker and the drifter.”

“The operation of the minimum wage requirement would merely extend the definition of defectives to embrace all individuals, who even after having received special training, remain incapable of adequate self-support…..If we are to maintain a race that is to be made up of capable, efficient and independent individuals and family groups we must courageously cut off lines of heredity that have been proved to be undesirable by isolation or sterilization . . . .”

– Henry Rogers Seager, Columbia University scholar and future American Economic Association president, in 1913 (quoted from “Eugenics and Economics in the Progressive Era”)

6. “[Wage] competition has no respect for the superior races,” said University of Wisconsin economist John R. Commons in his 1907 book Races and Immigrants ( p. 151). “The race with lowest necessities displaces others.”

7. “[The minimum wage will] protect the white Australian’s standard of living from the invidious competition of the colored races, particularly of the Chinese.”

– Arthur Holcombe of Harvard University, a member of the Massachusetts Minimum Wage Commission, speaking approvingly of Australia’s minimum wage legislation in 1912 (quoted from “Eugenics and Economics in the Progressive Era”)

Who-d a-Thunk It? Mandated minimum wage increases have adverse effects and lead to lower compensation?

Some new research — “Evidence of The Unintended Labor Scheduling Implications of The Minimum Wages” — shows that every $1 an hour increase in government-mandated minimum wages (“political wage-setting”) leads to the following (mostly) adverse outcomes:

  • a 27% increase in the total number of workers scheduled to work each week

  • a 20.8% decrease in the average number of hours each employee worked per week

  • a 13.6% decrease in the total wage compensation of an average minimum wage worker

  • a 23% decrease in the percentage of employees working more than 20 hours per week (making them eligible for retirement benefits)

  • a 14.9% decrease in the percentage of employees working more than 30 hours per week (making them eligible for health care benefits)

  • a 33% increase in fluctuations in the number of hours worked per week

  • a 9.5% increase in fluctuations in the number of hours worked per day

  • a 9.8% increase in fluctuations of shift start times and

  • average net losses of at least $1,590 per year per employee, equivalent to 11.6% of workers’ total compensation (assuming that workers were able to use their reduced hours to work a second job — an assumption which may not hold true for many employees).

Source: Who-d a-Thunk It? Mandated minimum wage increases have adverse effects and lead to lower compensation?

‘Hero Pay’ for Grocery Workers Is Terrible for Grocery Workers

“Hero pay” laws, which require big wage increases for grocery store workers during the COVID-19 pandemic, are sweeping the West Coast. Store closures, unemployment, and lawsuits have followed in their wake.

The first of these laws, passed in late January by the Long Beach, California, City Council, mandated that grocery workers at large stores get a $4-an-hour pay raise for the duration of the pandemic. By early February, Kroger announced it was shutting down two stores in Long Beach.

The locations had already been underperforming, the company said, but the new pay hike meant they were now unsustainable. It was the same story in Seattle and Los Angeles: In response to “hero pay” laws, Kroger said it would close three stores in each city.

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Even with record pandemic profits, grocery stores operate on very slim margins. Big, sudden increases in expenses have to be absorbed somewhere. Those stores with the least room to make up added costs are the most at risk of being shuttered.

Most supermarkets, of course, will survive, likely through a combination of price hikes, layoffs, and employee hour reductions. These consequences are a compressed version of what we’d expect from the much-discussed idea of raising the federal minimum wage to $15 an hour: pay raises for many workers, job losses for others, and higher prices and fewer options for consumers. Unlike with a minimum wage increase, however, the costs of “hero pay” laws are obvious, immediate, and visible to everyone.

Source: ‘Hero Pay’ for Grocery Workers Is Terrible for Grocery Workers

How does raising the minimum wage affect the labor market? My long-read Q&A with Jeffrey Clemens

By James Pethokoukis and Jeffrey Clemens President Biden’s original American Rescue Plan would have increased the federal minimum wage to $15 an hour from the current $7.25. Ultimately, that part of the proposal did not make it past budget reconciliation rules.

Source: How does raising the minimum wage affect the labor market? My long-read Q&A with Jeffrey Clemens

‘Hero Pay’ Requirement for Grocery Workers Results in Unemployed Heroes

Mandated “hero pay” will add up to about $0 an hour for some grocery store workers in Los Angeles. Grocers there are closing three stores in response to newly enacted legislation that requires them to pay their workers an additional $5 an hour during the pandemic. “It’s never our desire to close a store, but when you factor in the increased costs of operating during COVID-19, consistent financial losses at these three locations, and an extra pay mandate that will cost nearly $20 million over the next 120 days, it becomes impossible to operate these three stores,” said grocery store chain Kroger in a statement given to CBS Los Angeles, announcing that two Ralphs-branded stores and one Food 4 Less location, would be shutting down.

Source: ‘Hero Pay’ Requirement for Grocery Workers Results in Unemployed Heroes

A Serious Argument Contains Serious Argumentation

(Don Boudreaux) Here’s a letter to a college student who tells me that she was “shocked,” when while doing research for a debate on welfare policy, she encountered my blog posts on minimum wages.

Ms. L___:

Thanks for your e-mail.

You allege that my and other “neoliberals’” opposition to minimum wages “shows” our racism. You reach this conclusion by asserting that, because blacks generally are paid less than whites, “raising the minimum wage to $15 will raise more black than white incomes.” Therefore, you reason, opposition to raising the minimum wage must be rooted in racism.

Are you aware that most research on the effects of minimum-wage hikes shows that, while some workers do get higher hourly pay, some other workers lose employment? Pushing up employers’ costs of labor makes labor less desirable to employ. And so especially if you’re correct that “America as a nation is inherently racist,” then do you not worry that blacks will bear a disproportionately large share of these job losses? Might it then be said that support for minimum-wage hikes is evidence of racism?

I happen now to be re-reading a book that I recommend to you; it’s my late colleague Walter Williams’s 2011 volume, Race & Economics. In this book Walter presents ample documentation of the racist consequences of minimum wages, as well as of other smiley-face-wearing government interventions, such as statutes mandating equal-pay-for-equal-work. Walter shows also that blacks would now bear a disproportionate share of the unemployment caused by minimum wages even in the absence today of racism.

Ms. L___, you might in good faith disagree with the arguments, and question the data, that are presented in Walter’s book, in the paper linked above (and in those linked below), and in the mountains of other research that reveal minimum wages to be an enemy of blacks and other minorities. I would welcome your reaction to this research after you study some of it.

But even if you have no wish to communicate further with me about minimum wages, it’s in your own interest to carefully study this research. If you’re genuinely convinced that minimum wages are “one of society’s best antipoverty and pro-equity tools,” then you owe it to the groups whose welfare you champion to make yourself as informed as possible in order to be as effective as possible an advocate for minimum wages. You’ll want to know your opponents’ strongest arguments so that you’ll be prepared to counter these with your strongest arguments.

To learn your opponents’ strongest arguments against minimum wages, consult the works of scholars such as – to name only a few – Walter WilliamsThomas SowellDavid Neumark and William WascherJeffrey ClemensJonathan Meer, and Richard Burkhauser.

You’ll greatly improve your prospects of swaying people to support minimum wages if, rather than accusing opponents of minimum wages of racism, you instead address the best arguments offered by these people and then do your best to explain why they are mistaken. If you’re correct about minimum wages, you should have no trouble doing so.

Source: A Serious Argument Contains Serious Argumentation

Again, Put Your Money Where Your Mouth Is or Shut Your Mouth Up

So let me support my claim by pointing to evidence that doesn’t appear in a study but that is as conclusive as evidence on such matters gets. The evidence is your own behavior – specifically, your failure to start a business that employs at least some among these legions of workers who you insist are today underpaid.

If you really believe that America is filled with legions of underpaid workers, you can make a sure fortune by taking a year or two away from school and starting, say, a chain of restaurants or lawn-care companies. Entry into these industries is easy. And with a large pool of underpaid workers currently toiling away at the likes of McDonald’s, Home Depot, and Aunt Myrtle’s Country Kitchen, you’ll easily be able to hire away these workers at wages above the exploitation wages they now earn yet still at levels that enable you to earn a handsome profit by employing each one.

You’ll grow rich as you raise the pay of the workers about whom you care so deeply. It’ll be a win-win.

But if you do not put your time, effort, and money where your mouth is, then I’m left with only one of two possible conclusions. Either you don’t really believe what you assert to be true, or – more likely – you haven’t thought with sufficient seriousness about the meaning and implications of your assertion. No third conclusion is plausible. (Note: The fact that your assertion is made also by some PhD-sporting economists doesn’t save you from my criticism here. Those economists’ failure to start firms that employ these allegedly underpaid workers means only that they, too, either don’t believe their assertions or that they haven’t thought seriously enough about what those assertions imply.)

Source: Again, Put Your Money Where Your Mouth Is or Shut Your Mouth Up