Can minimum wage laws halt, reverse, or eliminate any or all of these? In my study of cited minimum wage effects (Part II), I am left with more questions than answers.
I need to determine which effects I believe to be sound and those I believe are unsound. After reaching a conclusion on the validity of cited effects, I may compare these effects with my original desires (Part I).
Disclosure #1: I am considered young, naive, and well educated with an upper middle class income. According to County Health Rankings and Roadmaps, I live in Minnesota's 3rd lowest social and economic county and work in the 2nd lowest.
Disclosure #2: As stated in Part I, I disagree an individual's value is tied to their income, wealth, or productivity.
Tldr(too long didn't read)
Cited effects I believe to be true of minimum wage legislation –
1. Wages are determined by productivity- The more productive an individual is, the higher the wage they will attain.
- Example: Peyton Manning’s $20 million annual salary versus Christian Ponder’s $3.5 million annual salary. Even though both athletes are employed in identical positions, no one would argue Ponder should be paid the same as five time MVP Manning. This is a direct result of productivity. NFL teams will pay more for 5,000 yard, 50 TD seasons than 3000 yard, 15 TD seasons marred by injuries and inconsistency.
2. Increases consumer prices
- If you raise production costs (labor), the increased costs must be paid for by consumers via increased prices or investors/owners through decreased profits. For better or worse, prices are more likely to be increased rather than owners/investors taking a pay cut.
- This effect can seen by comparing the Consumer Price Index (CPI) of years minimum wage was increased to years when it was not. Starting with the minimum wage increase in 1974:
- CPI increased an average of 6.3% in years minimum wage was increased
- CPI increased an average of 3.0% in years minimum wage was not increased
3. Increases difficulty of less productive workers gaining and retaining employment (possibly leading to unemployment)
- Laws can demand workers be paid a certain wage. However, to maintain fiscal solvency and remain competitive, employers will choose to not hire, nor retain, employees whose productivity does not cover the cost to employe them. Rather, as Peter Roth writes:
- “Unskilled workers get laid off, replaced by machines and higher-skill workers who are more valuable. Self-checkout lines appear in grocery stores. Credit card machines take the place of the fellow who used to take the money in the parking lot.”
Case Study: American Samoa and Commonwealth of the Northern Mariana Islands (CNMI)
Timeline -
2014 GAO Report - Talanei.com Summary
- 2007: American Samoa’s minimum wage: $3.26/hour
- 2007: Congress enacts legislation to raise American Samoa’s minimum wage by $0.50/hour annually until it meets the United States minimum wage ($7.25/hour)
- 2009, May: Minimum wage has risen to $4.76/hour
- 2009, 2011: U.S. Congress passes legislation to halt minimum wage increases until September 2015
- 2011: American Samoa National Emergency Grant
- March 2011 unemployment rate: 46.9%!
- Historic unemployment rate: 7.0%
- We are now spending public funds to rebuild American Samoa
- 2011: Government Accountability Office (GAO) report found unemployment increased by 14% and inflation adjusted wages fell 11% between 2006 and 2009
- 2011: American Samoa Governor Togiola Tulafona testifying before Congress in September 2011 objected that:
- “this GAO report does not adequately, succinctly or clearly convey the magnitude of the worsening economic disaster in American Samoa that has resulted primarily from the imposition of the 2007 US minimum wage mandate.”
- Gov. Tulafona pointed out that American Samoa’s unemployment rate jumped from 5 percent before the last minimum wage hike to over 35 percent in 2009. He begged Congress to stop increasing the islands’ minimum wage:
- “We are watching our economy burn down. We know what to do to stop it. We need to bring the aggressive wage costs decreed by the Federal Government under control. But we are ordered not to interfere… Our job market is being torched. Our businesses are being depressed. Our hope for growth has been driven away… Our question is this: How much does our government expect us to suffer, until we have to stand up for our survival?”
- Samoan employers responded to higher labor costs the way economic theory predicts: by hiring and retaining fewer workers. Congress hurt the very workers it intended to help. Fortunately, Congress heeded the Governor’s plea and suspended the future scheduled minimum wage increases. (Source: James Sherk at the Heritage Foundation)
- Both territories (American Samoa, Commonwealth of the Northern Mariana Islands - CNMI) experienced economic downturns between 2007 and 2009, including the complete exodus of the CNMI’s garment industry and the closure of one of two tuna canneries in American Samoa.
- 45% increase in unemployment in CNMI for the entire period from 2006 to 2012, with most of the overall decrease occurring from 2006 to 2009 (garmet industry closed)
- 36% decrease in CNMI's real gross domestic product (GDP) from 2006 to 2012
- 4.5% decrease in American Samoa’s real GDP from 2006 to 2012
- 58% employment loss in American Samoa's tuna canning industry from 2007 to 2013
- 5% decrease in average inflation-adjusted earnings from 2007 to 2012
- The inflation-adjusted earnings of minimum wage cannery workers who retained their jobs and work hours also fell by ~5% from 2007 to 2012.
- CNMI: Over the entire period from 2006 to 2012, average inflation-adjusted earnings fell by about 2 percent, with an about 29 percent increase in average earnings offset by an about 31 percent increase in prices.
- 2014 GAO Report Conclusion -
- Both American Samoa and the CNMI have experienced decreases in employment, earnings, and GDP since minimum wage increases began in 2007.
- In 2012, about 36 percent of American Samoa’s workforce worked in the government sector and about 12 percent worked for the canneries.
- In 2005 18.9% of workforce worked in the government sector (American Samoa Department of Commerce)
- CNMI employment dropped every year from 2006 to 2012 (graph on p.73)
- American Samoa response: (Governor Lolo Moliga)
- "Undergoing this exercise [GAO Report] every two or three years is meaningless and a waste of resources. A better alternative would be to have American Samoa develop its own minimum wage schedule with appropriate guidance and oversight provided by the US Department of Labor and US Department of Interior."
- "For reasons stated above, I strongly urge you and US GAO to send a clear and strong message to the Congressional Committees to postpone once more the looming minimum wage increase in 2015. Please bear in mind this federal minimum wage set for 2015 is nothing but a prescription for total economic ruin for the territory of American Samoa."
4. Inefficiently distributes income to those it is intended to help
- Given a desire to increase the standard of living of low income earners from the poorest households, I believe James Sherk and Joseph Sabia are correct in stating the minimum wage is an inefficient method of accomplishing this desire.
- The following numbers assume all of the least productive workers (as measured by income) would retain their positions. An assumption I find unreliable at best, and likely false as seen in American Samoa and CNMI.
- Sherk – Who earns the minimum wage ($7.25)?
- Valid numbers, but somewhat misleading as only accounts for those currently earning the minimum wage, not those who would be affected by increasing it. None-the-less, it does provide some insight into who earns low income wages.
- Only 23% of all workers earning the minimum wage live in poverty while 65% live in households with incomes > 150% of the poverty line
- More than 50% of minimum wage workers are less than 25 years old. Of these 50%, 62% are currently enrolled in school. Only 22% of these live at or below the poverty line.
- 67% of individuals living below the poverty line who were > 16 years old did not work in the last year. Thus, more than 2/3rds of those in poverty are unaffected by minimum wage.
- Sabia - Will a $9.50 Federal Minimum Wage Really Help the Working Poor?
- 2010 study looking at who would be affected by a minimum wage increase to $9.50/hour. Intriguing study as uses income-to-needs ratio to allow scaling of income to needs based on household size and poverty level.
- 17.7% of all workers earn between $5.70 and $9.50 and would be affected.
- Of the 17.7% in line to be affected by a minimum wage increase to $9.50 an hour, only 11.3% of these come from the poorest households (less than the poverty line), with an additional 12.1% of workers coming from households living above the poverty line, but below 150% of the poverty line.
- Almost twice as many workers who stand to be affected by a minimum wage increase to $9.50 live in households with incomes more than 3 times the poverty line. (42.3% of minimum wage workers)
- 1 in 9 workers from households under the poverty line would be affected. Less than 1 in 4 workers earning less than 150% of the poverty line would be affected by minimum wage increase.
- 4.4% of the general working population comes from households with incomes below the poverty line. A minimum wage increase to $9.50 will only affect 2.0% of the poorest households.
- Of the 9.5% poorest households in America, minimum wage will affect less than half of these households. (4.1% of the poorest households)
- As for helping families with children, 26.2% of workers earning minimum wage are the highest earner in their family with children under 18 years old.
- Refering back to Sherk’s article, one of the primary reasons people live in poor households is not that they are earning minimum wage, rather, it is they do not have work (67% have not worked in the last year).
- Sabia’s findings provide strong evidence minimum wage is an inefficient tool for helping households below or near the poverty line.
- Natalie Sabadish at the Economic Policy Institute
- 2012 study which is for increasing the minimum wage. Uses similar base data, however data is presented in a way to support minimum wage increase.
- Boasts minimum wage increase to $9.80 an hour would raise the wages of ~28 million workers (20 million directly, 8 million indirectly)
- I agree with this, but as Sabia found, only ~3 million of these 28 million come from households living below the poverty line. (11.3%)
- 23.6% of workers affected by a $9.80 raise live in households that make less than $20,000 while 76.4% of affected workers have higher incomes
- For ever 1 low income earner, minimum wage is helping 3 higher income workers. Ideally a measure to increase the standard of living of low income households would affect a majority of low income households.
- Unlike Sabia, does not take into account household size.
- Cites 28.0% of affected workers live in households with children. This is similar to Sabia’s findings and does not exclude those workers who are not the highest income earners of their household.
- Boasts it would boost the economy, I find this effect unreliable as I will discuss later.
- Boasts would disproportionately help women, minorities, and workers of all ages. I would disagree with none of these.
- An interesting graph highlighting the percent of the population that earns minimum wage (Source: Antony Davies at Mercatus Research)
5. Reduces individual freedom
- I am pro-freedom in I believe individuals should be able and encouraged to make self-determined decisions in their own best interest. (exception being when one’s choices infringe upon the rights of others such as murder, theft, etc.)
- This includes the voluntary accepting and denying of wage contracts. As Murray Rothbard writes:
- “This [minimum wage legislation] means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed…”
- I acknowledge some freedom must be surrendered to acquire certain securities (Freedom vs. Security Post). Thus, while I believe minimum wage does decrease our individual freedoms, it remains possible it provides needed income security.
6. Popular proposal across a variety of demographics (democrats and republicans, rich and poor)
- Minimum wage legislation has a broad base of support across a variety of demographics as highlighted by recent polls:
- Gallup Poll - 76% of Americans support raising the minimum wage to $9 (Nov. 2013)
- NELP Poll - 80% of Americans support raising minimum wage to $10.10 (July 2013)
- Of note, Emily Ekins at reason.com found minimum wage was significantly less popular if it was assumed to cause job losses or raise consumer prices.
- 67% support increase to $10.10 per hour given no adverse costs
- Drops to 51% support if caused businesses to raise prices
- Drops to 39% support if caused businesses to lay off or hire few workers
7. Decreases our global competitiveness
- Combining increased prices, reduced freedom, and inability to pay low wages, the United States struggles to compete in the production of low skilled and low cost goods and services. This is readily seen in the outsourcing of manufacturing to China and customer service to India.
- Whether or not this is a poor outcome remains in question.
I congratulate you on your perseverance in reading technical jargon and in surviving a metaphorical textbook being through at you. To recap and bring our tldr viewers up to speed, the list below summarizes effects of minimum wage legislation I find sound:
- Wages are determined by productivity
- Case Study: Peyton Manning and Christian Ponder Salary
- Increases consumer prices
- CPI Historical Data
- Increases difficulty of less productive workers gaining and retaining employment (possibly leading to unemployment)
- Case Study: American Samoa and CNMI
- Inefficiently distributes income to those it is intended to help
- Reduces individual freedom
- Popular proposal across a variety of demographics (democrats and republicans, rich and poor)
- Decreases our global competitiveness
There are many effects cited surrounding minimum wage legislation. Which effects do you believe are true? Why and how did you determine the validity of each effect? Personal experience? Logic? Study results? Other’s opinions?
Minimum wage is complex topic and one size may not fit all (American Samoa and CNMI). In the face of increased unemployment, income equality, difficulty finding jobs, and inability to maintain former standard of living, I believe we can no longer afford to remain ignorant of potential outcomes of minimum wage legislation.
Next Post Topic: Minimum Wage Part IV: Unsound Cited Effects
