Save A Worker by Keeping Him Unemployed

Here is a portion of Kevin Drum's argument against lowering the minimum wage to stimulate employment

Is this really what we've come to? That we should provide a (probably very small) boost to the job market by allowing businesses to hire people for $9,500 per year instead of $14,500? Seriously? I mean, this is the ultimate safety net program, aimed squarely at working people at the very bottom of the income ladder. If we're willing to throw them under the bus, who aren't we willing to throw under the bus?

Part of the problem is that Drum is absolutely convinced that our intuition (and, oh, 200 years of experience) that demand curves slope downward is flawed in the case of low-skill labor.  He has read the two studies out of a zillion that, contrary to all the others, suggests that minimum wage increases may not affect employment and has convinced himself that these are the last word in the science.    As an employer who has laid people off and made larger and larger investments in automation with each successive minimum wage increase, I will continue to trust my intuition that higher minimum wages makes hiring less desirable.

I will say, though, that there are a number of reasons why a change in the minimum wage may have a smaller overall effect nowadays than one might expect.  That is because the minimum wage vastly understates the cost of taking on an unskilled worker.  Even with a lower minimum wage, these government costs will remain:

  • Soon, the employer will have to pay for the employees health care, a very expensive proposition
  • Workers comp and other labor taxes add as much as 20% to the cost of labor
  • In states like California, bad employees have an increasing number of avenues to prevent employers from firing them, from appeal to an ADA law stretched out of recognition to any number of other legal presumptions that employers have to just live with hiring mistakes

Hiring employees used to be a joyous occasion.  Now I cringe and wonder what kind of liabilities I am taking on.

But back to Drum's statement, how sick is it that allowing people off the dole to actually get a job is called "throwing them under the bus?" Drum, for someone so fired up to make decisions based on academic work, sure is willing to put on blinders to all the academic work that actually characterizes who works for minimum wage and how long they stay on it.  He who argues against making policy based on flawed intuition is operating here entirely from a flawed perception of who minimum wage workers are.  He seems to want to picture families of eight supported for decades by someone trapped in the same minimum wage job, for whom a raise only comes when Congress grants it, but that is simply not the reality.

Just as one metric, for example, the percentage of all wage and salaried workers making minimum wage or less fell from 8.8% in 1980 to 1.7% in 2008.  In fact, the actual absolute number of people making the minimum wage fell by over 2/3 during these years.    I would argue that this number is probably too low.  A dynamic labor market needs to bring people in at the bottom, and raising the minimum wage makes this harder, and so traps people into unemployment.  In fact, the number of unemployed in this country is at least 6 times larger than the number of minimum wage workers.

If we dropped the minimum wage, only a fraction of the 2 million or so who make the minimum wage would see their wages go down, but lets assume a quarter of them would.  We are therefore trying to prop up wages for 500,000 but at the same time creating barriers for 13.9 million people who are unemployed and are looking for work.  And it is low-skilled workers who we are most particularly throwing under the bus by keeping minimum wages high.

  • Matt

    Why is the minimum wage even required any more? Don't some people with jobs still receive public assistance? It would be nice to have compulsory employment for those who receive benefits and are able to work, but in practice it would be too difficult to implement.

    Another regulatory impact of hiring is the risk of firing members of protected classes.

  • http://politicalcalculations.blogspot.com/ Ironman

    Speaking of all the other costs associated with employing people (above and beyond what they see on their paycheck!...)

    How Much Does It Cost to Employ You?

  • caseyboy

    If you are going to have a minimum wage why limit it to $14,500 per year? As Matt infers that could still leave someone on public assistance. Why not a nice round number like say $20,000? Or better yet, why not $50,000. Why they could take care of their school loans, buy a car, rent a better house. Come to think of it shouldn't they be able to own their own home? I think maybe adding a signing bonus equal to the 20% down-payment required to finance the a new house in their area. Now we are taking care of people. $14,500 per year, don't insult them. Why that isn't a living wage.

    I like to hire unpaid interns myself.

  • Dr. T

    The left-wingers, who claim to be supporters of the poorest and weakest of us, actually only support the "haves" while screwing the "have nots." Their rhetoric and actions are antithetical to their stated goals. (Hardly a surprise.) Two examples:

    1. Left-wingers continually lobby not just for a minimum wage, but for an increasingly larger minimum wage. This boosts the pay of those with secure minimum wage jobs (the haves), but screws those who seek low-skill jobs or who get axed when they cost too much (the have nots).

    2. Left-wingers complain about and try to reverse the fall in house prices because it hurts homeowners who need to sell or take out a home equity loan (the haves). But, their actions make housing less affordable for lower middle class people (the have nots).

  • Me

    Many union contracts are base on so many $$ above minimum wage. So they get a raise every time the minimum goes up. I'm guessing all the talk about the poor unskilled labor is just a smoke screen to cover up raise time for the unions.

  • Mark

    I have been working as a contractor for awhile, and indeed that is how contracts stay in full employment. Where I was working, in my industry contract jobs were going at $60 per hour. When the recession hit the rate fell to $45, which was a hardship - now rates are back up to the $55 range.

    If wages across the board were allowed to be elastic we wouldn't have unemployment issues at all, as employee salaries would all drop and companies would absorb extra people, just to take advantage of the low price labor.

    Progressives think elastic wages would cause all our salaries to go to zero. But they forget two things. People are only willing to give their services at a certain level, so while, during a recession, I might be willing to take $40 instead of $60 for hourly pay, I probably would keep looking if the place gave me only $30 per hour. Also, when all the willing workers are absorbed, as the economy starts growing again, and more jobs are needed wages need to go up again, to keep employees, attract those sitting on the sidelines and because the skillset needs to go up as employers focus on increases in productivity during the good times.

    Progressives, really do not understand economics well, or there are worry warts.

    Note on contracts. $60 bucks an hour may sound nice to some, but the reality is contractors pay for all vacation days, holidays, retirement benefits, sick days, health care, and any other corporate "benefit" out of their own pockets. So when you take all that out the nice 120K salary becomes closer to the 90K range. Like this Monday, I was forced not to not work, but next week my pay will be only 80% of normal wheras the regular employees will get 100%

  • Mark

    Two more interesting points I thought of about Minimum wage specifically.

    In CA a 7.5 minimum wage is peanuts, in places like Iowa, if you and your spouse get minimum wage you can afford a house, and decent lifestyle. The national minimum wage hurts low cost states by forcing employers to pay rates higher than necessary to get employees. the minimum may not really hurt in CA, where typical "minimum wage" jobs pay $9 - $10 an hour anyway, but the do hurt states where the costs are less. In Iowa the equivalent of $9 per hour in CA is $5.40. I think my whole point is that what should be minimum wage, if you choose to enforce one, is very regional, so it should be a state issue, not a national one. Let Iowa enact a $5.50 per hour, and CA can enact $9 per hour, if the citizens of those states respectively choose to do so.

  • Chris

    I am struck by his claim that the min wage is "the ultimate safety net", yet he wants to cling to studies that show it has small effects. Despite their own flaws, Medicaid, Food Stamps, and the Earned Income Tax Credit are all better safety net programs.

  • Dan

    I like Mark's suggestion of having regional minimum wages. That makes a lot of sense. One size fits all just doesn't work, because $7.25 an hour in North Dakota goes a heck of a lot farther than $7.25 in California.

  • Dan

    When I was 18 and 19, working at the local video store in the summers (this would have been 1989 and 1990), I earned the minuimum wage. It was $4.25 an hour.

    Today the minimum is $7.25 an hour, or about 1.7 times what it was in 1990, which I think correlates pretty well with the rise in CPI since then, though I confess to not having a CPI chart right in front of me. So it's not like it's getting more expensive to hire a worker at the minimum wage.

    I'm no expert on this subject, and I don't run a business. I certainly haven't read all the studies. I feel torn on this issue, and my thoughts are evolving.

  • Dan

    I just realized I spelled "corellates" incorrectly.