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Minimum Wage

 
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PostPosted: Sun Oct 12, 2014 4:06 am    Post subject: Minimum Wage Reply with quote

PeakTrader:

When the real minimum wage was above $8 an hour, roughly between 1960 and 1980, the teen labor force participation rate rose from below 45% to about 60%.

However, a general decline in the teen labor force participation rate took place when the real minimum wage fell and stayed below $8 an hour, after roughly 1980.

Raising the minimum wage, e.g. to at least $10 an hour, may begin to raise the teen labor force participation rate.

Chart – Teen Labor Force Participation Rate

http://research.stlouisfed.org/fred2/series/LNS11300012?cid=32449

The decline in the real minimum wage isn’t the only factor that caused the teen labor force participation rate to collapse. However, it may be a major factor.

Why should teens work for less than $8 an hour, when they can stay at home, live off their parents (e.g. in a nice house, thanks to the homebuilding boom from 1995-06), and play with electronic gadgets all day, which became increasingly cheaper over the past 30 years.

Or, they can go to college, collect free money, e.g. grants and scholarships, or run-up debt in easy to get student loans.

The opportunity cost of giving all that up for a low-paying job isn’t worth it to many teens.

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Steven Kopits:

I don’t believe the state should be in the business of defining “a living wage”. Here’s why.

As Peak above notes, a higher minimum wage draws in a higher proportion of teenagers who, by definition, should not require a living wage. Therefore, a wage floor will displace from the workforce those who need a job to survive in favor of those who would like some pocket change.

Further, about half of population growth in the US in good years comes from immigration. As we discussed earlier, the average wage of a maid in Mexico is $5 / day; thus, $5 / hour is not a living wage, it is a princely sum. (If it weren’t, I can assure you we wouldn’t need the fence at the border.)

Thus, a minimum wage law, substantively, is intended to favor white, middle class teenagers at the expense of inner city blacks, Mexican immigrants, and low productivity adults. Why this would constitute a policy goal for Progressives is simply beyond me.

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PeakTrader:

Steven Kopits, do we want U.S. teens playing video games, taking poor classes, or smoking marijuana all day?

Or, do we want them to do some work, to raise household income, or income in general, and therefore, raise consumption, saving, and employment?

A work ethic might do them some good.

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Steven Kopits:

I agree. A work ethic is a good thing.

Now, do suburban teens lack a work ethic? Well, I can’t speak to other communities, but in Princeton, they do not. Kids are much more serious than we were at a similar age (albeit, I grew up in Baltimore, not the Princeton hothouse).

The issue is whether you want my very disciplined, very intelligent daughter competing against kids from the inner city in Trenton. If there’s a head to head competition she and her peers will win 95% of the time. The more you raise the minimum wage, the higher the proportion of highly qualified applicants—this is exactly what the experience of SeaTac tells us. Thus, a higher min wage is prejudiced–and I mean this literally–prejudiced against lower income applicants, and most particularly, young black and Latino men.

Discipline would influence the their lives perhaps 100 to 1000 times more than it would the lives of the children of upper middle class households. A minimum wage law will encourage indolence and crime in our weakest communities. Period.

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PeakTrader:

Steven Kopits, it seems, you didn’t understand my statement.

Raising the minimum wage, e.g. to $10 an hour, may put your daughter to work.

So, she’ll have income to spend, e.g. at a restaurant, to help the “young black and Latino men.”

The (positive) income and multiplier effects may be stronger than the (negative) employment effect, perhaps up to $15 an hour.

Also, a higher minimum wage shifts idle capital (earning enough for capital preservation), in the saving glut, into capital equipment (because labor becomes relatively more expensive).

So, better jobs are created, because workers are needed to create, build, ship, install, improve, maintain, operate, and manage those machines.

Currently, in the U.S., there’s an overabundance of capital and an education boom.

There are too many overeducated Americans working at low-skilled jobs, and too much (idle) capital kept in unproductive assets.

Another view from labor economists:

“An alternate view of the labor market has low-wage labor markets characterized as monopsonistic competition wherein buyers (employers) have significantly more market power than do sellers (workers)…Such a case is a type of market failure and results in workers being paid less than their marginal value.

Under the monopsonistic assumption, an appropriately set minimum wage could increase both wages and employment, with the optimal level being equal to the marginal productivity of labor.”

****

Some people cite the standard textbook model of supply and demand to explain the labor market.

However, prices don’t equal wages and widgets don’t equal workers.

A wage is more than the price of labor. It’s also an input and income.

A partial equilibrium model doesn’t fully explain the labor market.

****

Raising the national minimum wage to $15 an hour, for all firms, levels the playing field.

I’ve explained before how a $15 minimum wage will raise productivity and reduce other production costs.

And, the positive effects of higher wages for workers with the highest marginal propensities to consume.

The higher minimum wage will cause higher prices. However, real wages of low income workers, e.g. up to $25 an hour, will increase more than real wages of high income workers, over $25 an hour, will decrease.

****

Here’s a real example (also, I may add, after the increase in wages, few new workers were hired and existing workers rose to the higher standard):

There was a fast growing firm that was also very disorganized, because it was so busy. One of the recommendations was raising the starting wage from $11 to $13 an hour for all factory workers. However, management decided that was a bad idea. One reason was there were always plenty of applicants for $11 an hour, over the past few years, and of course, there was concern profits would fall, substantially.

However, roughly six months later, management raised the starting wage to $13 an hour and something miraculous happened.

Turnover rates dropped like a rock, overtime was almost completely eliminated, including six day weeks, injuries fell dramatically, hardly anyone called in sick, damage to equipment and products almost disappeared, including steep declines in reject rates, quality rocketed, morale was lifted, management no longer had to spend enormous time interviewing workers, with related paperwork and training, supervisors no longer had to cover for sick workers, to do their jobs, and had time to actually do their work, and profits increased substantially.

Experienced workers who rejected the job when they learned it was $1 or $2 an hour less than they were willing to work for took the jobs at the higher rate. Management had much more time to manage and supervisors had much more time to supervise. So, operations became much more organized and efficient.

****

Why raising the minimum wage is a good idea:

1. Stimulate economic growth.
2. Correct a market failure.
3. Lower production costs.
4. Raise productivity.
5. Reverse the collapsed teen labor force participation rate.
6. Expand better managed businesses.
7. Create less income inequality.
8. Reduce the saving glut.
9. Boost weak demand.
10. Create better jobs in capital goods.
11. Reduce government and parental support for low wage workers.
12. Lift morale.

The (positive) income and multiplier effects may be stronger than the (negative) employment effect up to $15 an hour.

****

Over the past few decades, real wages of fast food workers, for example, declined, while their productivity rose.

Corporate profits as a percent of GDP rose from 8% to almost 15% of GDP.

Per capita real income roughly doubled. And, income inequality increased.

Worker wages: Wendy’s vs. Wal-Mart vs. Costco
August 6, 2013

“Costco seems to be investing some of those profits back into its employees.

Cesar Martinez, a 37-year-old fork lift operator, has worked at a Costco in North Carolina for 19 years. He makes $22.82 an hour, gets health benefits and a pension plan. He manages to save, and doesn’t worry about hospital bills for his daughter, who suffers from asthma.

“That’s the reason why I’ve been here for so long,” he said. “The company gives you a decent wage and treats you with respect and takes care of you. That’s why we all give 100%.”

Research shows that it pays to pay employees well, because satisfied workers are more productive and motivated, according to MIT Sloan School of Management professor Zeynep Ton, who focuses on operations management.

“How many times have you gone to a store, and the shelves are empty or the checkout line is too long, or employees are rude?,” she said. “At Costco, you see a huge line that disappears in minutes.”

The productivity translates into sales, she said.

According to Ton’s research, sales per employee at Costco were almost double those at Sam’s Club, its direct warehouse competitor owned by Wal-Mart.

The median pay for fast food workers nationwide is $9.05 an hour, or about $18,800 a year.

While the fast food and retail industry is making record profits, its workers are forced to rely on public assistance just to afford the basics.”

And, we did “think of this before:”

Since the minimum wage was established, U.S. per capita real GDP has grown at a much faster rate (of course, there are other factors that contributed to faster growth).

Average annual per capita real GDP growth:

1863-1937 (75 years): 1.33%
1938-2012 (75 years): 2.44%

Source: Census data and the BEA.

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Spencer:

The BEA publishes a series of real restaurant sales. If you deflate that by restaurant employes from the BLS it shows that real restaurant sales per employee is now about 95 as compared to 100 at January, 1992.

I know this is not exactly fast food restaurants, but what is your source for the claim that fast food worker productivity has risen?

COSCO has always paid wages above their competition and finds that it pays large dividends.

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PeakTrader:

It would be better, for example, to use output per hour, average the series, and define “employee.”

I suspect, one fast food restaurant today is capable of serving many more people than several decades ago.

It seems, all, or more than all, of the productivity gains went to profits and upper management salaries.

Perhaps, customers also gained.

What about the low wage workers?

http://www.bls.gov/opub/mlr/2008/02/art4full.pdf

****

Low wages may cause low productivity.

****

So, how much of that small increase in wages was spent and how much was saved?

The purpose of a higher minimum wage is to increase real economic growth, through consumption and productivity.

If you want to increase employment, instead, you can pay people to dig holes and fill them up again.

A higher minimum wage will cause weak or poorly managed firms to lose business or fail.

However, stronger or better managed firms will gain their business.

And, if the higher wage is spent, they’ll also gain from the increased demand.

A minimum wage that’s too high or too low is suboptimal.

And, China is not the U.S..

****

I wouldn’t be surprised, since the federal government has spent trillions of dollars more than it collected in taxes.

However, I can’t think of any “transfer payments” I receive.

I know, I work very hard and live too poorly, for all that work, here in California.

Menzie Chinn is talking about a cyclical phenomenon, while Bruce Hall is talking about a structural phenomenon.

Government spending raises growth, when the country is below full employment, because even if government pays people to dig holes and fill them up again, they’ll have income to buy goods & services from workers creating valuable goods. Therefore, more workers will be hired to create those valuable goods.

****

The purpose of a minimum wage is not to create employment.

It’s to bring better workers into the workforce, raise productivity, employ more capital, create higher skilled jobs, correct a market failure, and reduce exploitation.

There are more powerful factors that influence employment.

However, since the minimum wage was established, U.S. per capita real GDP has grown much faster.

Average annual per capita real GDP growth:

1863-1937 (75 years): 1.33%
1938-2012 (75 years): 2.44%

Source: Census data and the BEA.

****

Feb 2015:

It’s uncertain when’s the best time to raise the minimum wage.

Perhaps, now is the best time, since strong job growth has taken hold.

****

Patrick R. Sullivan:

I’m curious as to what rationalizations the usual suspects here can come up with for their favorite, ‘monopsony explains low wages for unskilled labor’ argument, now that Wal-Mart is raising its lowest wages to $10/hour.

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PeakTrader:

Patrick, until the demand for labor equals the supply of labor, employers have more bargaining power than employees.

We’re nowhere near a shortage in unskilled labor.

So, employers can exploit unskilled labor.

That’s why labor standards, including a minimum wage, are important.

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Patrick R. Sullivan:

The ‘demand for labor equals the supply of labor’ at the market price, Peak.

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PeakTrader:

With abundant unskilled labor, the market may determine labor is expendable.

Is that good?

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Menzie Chinn:

Well, it’s commonly understood that once one departs from atomistic competitive situations, monopoly/monopsony power can vary with the business cycle.

As the degree of monopsony power varies, then the deviation from of wage from that obtaining under perfect competition will vary.

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