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Understanding the Minimum Wage

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PostPosted: Tue Jul 28, 2009 10:07 pm    Post subject: Understanding the Minimum Wage Reply with quote

Increase in Minimum Wage = Decrease in Hours

HUNTSVILLE (WATE) -- The federal minimum wage has gone up to $7.25 an hour and in a county that already has Tennessee's highest unemployment rate, a grocery store has to make some changes.

Scenic Foods sits just off of Highway 63 in Scott County. It's the kind of store where you can get a little bit of everything, including a down home feel. But owner Bruce Posey isn't exactly happy about the 70 cent minimum wage increase. "It is hard on a small business to absorb this."

Starting Monday, the 12 part time employees making minimum wage will have their hours cut. "If we don't cut hours, it could add as much as $400 to $500 per week to the pay roll," Posey explains.

MP: As I pointed out recently, increases in the minimum wage are guaranteed to have adverse effects on employees that will NOT necessarily be reflected in increases in the teenage unemployment rate. In the case above, none of the minimum wage workers at Scenic Foods have lost their jobs because of the minimum wage hike, but they have all had their hours reduced. These workers and thousands of others like them whose hours have been cut, will still be counted as being employed by the BLS, and the teenage unemployment rate won't necessarily change.

Bottom Line: The demand curve for unskilled workers, like all other demand curves, slopes downward. At higher wages, the number of hours demanded for unskilled labor decreases. Period. Unskilled workers are harmed by increases in the minimum wage, even those who manage to keep their jobs like the employees at Scenic Foods.

My Reply:

Using one store to imply that a rise in the minimum wage has a powerful effect on employment, and to dispute the economic literature, is a poor methodology.

In China, a few years ago, there was a shortage of factory workers. Many found they were better off not working than working for low wages.

In the U.S., about 99% of the workforce has a reservation wage above the minimum wage, given slightly over 1% of the U.S. labor force works for the minimum wage.

A Walmart rolling in to eliminate the 12 part-time minimum wage workers at your store would be an improvement.

Moreover, I can present real examples how higher wages reduce accidents, injuries, and employee turnover, while increasing productivity and profits.

Chinese factories struggle to hire
By Paul Wiseman, USA TODAY

DONGGUAN, China The unthinkable is happening in China: This country of 1.3 billion can no longer find enough people willing to work long hours for low wages churning out cheap consumer goods for the export market.

Entrepreneur Johnny Jiang, who owns a plastics factory in Dongguan, says workers used to be too frightened to make demands. Now, they'll walk out if he doesn't boost pay.

Yau...says he just quit his factory job. After two years, he is tired of earning less than $75 a month from an employer who withholds pay when workers don't meet production quotas. Yau plans to get some technical training and join the army.

In January, entrepreneur Jiang visited Hunan recruit engineering graduates. He borrowed an office and waited at a desk for applicants for two hours. No one showed up.

Workers are increasingly knowledgeable about the job market. Local governments in the Chinese hinterlands are trying to keep rural workers informed about job conditions in the booming coastal areas. And migrants themselves are trading information about which factories are good employers and which are stingy and cruel.

"Factories in China have been spoiled," says economist Chi Lo, author of The Misunderstood China. "They still want to pay cheap wages."

Also, I may add, an analogy is a baseball team. You can pay rock bottom wages for rock bottom players, or pay a little more to attract better players and become competitive (of course, some businesses don't have to be competitive, or are charity cases).

Moreover, a rise in the minimum wage has little or no effect on employment. However, if it has a negative effect, the laid-off workers would receive unemployment benefits, while the employed workers received higher wages. So, raising the minimum wage would have a stimulative effect on economic growth.

Survey of economists:

Until the 1990s, economists generally agreed that raising the minimum wage reduced employment. This consensus was weakened when some well-publicized empirical studies showed the opposite, but others consistently confirmed the original view. Today's consensus, if one exists, is that increasing the minimum wage has, at worst, minor negative effects.[60]

According to a 1978 article in the American Economic Review, 90 percent of the economists surveyed agreed that the minimum wage increases unemployment among low-skilled workers.[61]

A 2000 survey by Dan Fuller and Doris Geide-Stevenson reports that of a sample of 308 American Economic Association economists, 45.6% fully agreed with the statement, "a minimum wage increases unemployment among young and unskilled workers", 27.9% agreed with provisos, and 26.5% disagreed. The authors of this study also reweighted data from a 1990 sample to show that at that time 62.4% of academic economists agreed with the statement above, while 19.5% agreed with provisos and 17.5% disagreed. They state that the reduction on consensus on this question is "likely" due to the Card and Krueger research and subsequent debate.[62]

A similar survey in 2006 by Robert Whaples polled PhD members of the American Economic Association. Whaples found that 37.7% of respondents supported an increase in the minimum wage, 14.3% wanted it kept at the current level, 1.3% wanted it decreased, and 46.8% wanted it completely eliminated.[63]

Surveys of labor economists have found a sharp split on the minimum wage. Fuchs et al. (1998) polled labor economists at the top 40 research universities in the United States on a variety of questions in the summer of 1996. Their 65 respondents split exactly 50-50 when asked if the minimum wage should be increased. They argued that the different policy views were not related to views on whether raising the minimum wage would reduce teen employment (the median economist said there would be a reduction of 1%), but on value differences such as income redistribution.[64] Klein and Dompe conclude, on the basis of previous surveys, "the average level of support for the minimum wage is somewhat higher among labor economists than among AEA members."[65]

In 2007, Daniel B. Klein and Stewart Dompe conducted a non-anonymous survey of supporters of the minimum wage who had signed the "Raise the Minimum Wage" statement published by the Economic Policy Institute. They found that a majority signed on the grounds that it transferred income from employers to workers, or equalized bargaining power between them in the labor market. In addition, a majority considered disemployment to be a moderate potential drawback to the increase they supported.[66]

From Wikipedia under Minimum Wage
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