Minimum Wage Part IV: Uncle Rico, Buzz Lightyear, and Questionable Claims

We have all experienced it. Someone has exaggerated the greatness of something or someone.

Last month, I detailed cited effects I believe are caused by minimum wage legislation. Today, I will detail cited effects I would refute or find unreliable to be caused by minimum wage, much as I believe we all find the claims of Uncle Rico and Buzz Lightyear to be unreliable at best :).


Cited effects I would refute –

1. Increases productivity

• As Governor Peter Shulmin, Governor Dan Malloy, and Mike Konczal have stated (Minimum Wage Part II: Cited Effects), higher earnings encourage employees to work harder and when workers have more to lose, they do their jobs better leading to productivity increases. Unfortunately none of these authors cited the studies they referenced.
• I agree as minimum wage increases, average worker productivity increases. However, I would suggest this occurs as individuals and businesses are forced to find ways to increase average worker productivity to cover increased employee costs. Unfortunately productivity increases often come in the form of automation, outsourcing (China, India), consumer effort (self checkout lines), labor-labor substitution (replacing less productive workers with higher productive workers), and/or increasing prices. All of which primarily affect the least productive workers.
• Much like the price of an item does not affect its function, productivity capacity is not connected to wages. Paying twice as much for the same item does not increase the function or productivity of the higher priced product.

• An artificial wage floor may increase average worker productivity, however it decreases total economic productivity as some workers are priced out of employment. As detailed last month, it is unfortunate those workers most in need are often the ones who find it increasingly difficult to acquire and maintain employment.

2. We should support it because it is popular

• We have all seen it. Just because something is popular does not make it good or truthful.

• I disagree we should pass legislation simply because a majority wants it. Rather, policies should be considered on the basis of sound theory/logic and available empirical evidence demonstrating a measure accomplishes our core desires.
• Enough said, just don’t support something on the sole basis others do. We don’t need to follow the fool’s parade.

Cited effects I find unreliable -

1. Boosts economy

• A general consensus states low income earners spend a greater proportion of their income than they save. The opposite is said of higher income earners who tend to save and invest rather than spend. Subsequently, it is proposed by raising minimum wage, money will be transferred into low income households who will in turn spend their earnings immediately providing an economic boost.
• Many authors cite a study by Daniel Aaronson and Eric French from the Chicago Federal Reserve estimating  raising the minimum wage to $9 an hour would create a $28 billion boost in 2012 GDP.
• I agree with the general consensus and the results found by the Chicago Federal Reserve. However, as stated in Aaronson and French’s conclusion (below), I find the effect of an economic boost unreliable as it depends on what time frame you assess. It is likely a short term economic boost is seen with minimum wage increases. Unfortunately this effect appears unsustainable and potentially detrimental to sustainable economic growth, a core desire of mine (Minimum Wage Part I)
• Aaronson and French conclusion
• “Finally, it’s important to stress that the aggregate household spending response discussed in this article is relevant for only the first few quarters after a minimum wage hike. Beyond that time frame, households must pay off debt they incurred in the short run by spending less. Thus, a minimum wage hike provides stimulus for a year or so, but serves as a drag on the economy beyond that.”

2. Pulls people out of poverty

• A popular cited effect of minimum wage legislation is raising the wages of the lowest income earners will raise people out of poverty through increased incomes. With countless variables affecting the poverty rate, it is difficult to determine the true effect of minimum wage legislation on the nation's poverty rate. Hence I consider it an unreliable cited effect as:
1. Due to efforts to increase average worker productivity (automation, outsourcing, etc.), minimum wage increases the difficulty of workers most likely living in poverty acquiring and maintaining employment, the exact population minimum wage is intended to help.
2. It may push as many people down into poverty as it raises out. Middle class gets a double whammy by paying all the costs of minimum wages (increased prices) while receiving none of the benefits (income is not increased).
3. From 1959 to 2012, in the year of and year after minimum wage was increased, average poverty rates increased 0.9% while in all other years the poverty rate decreased 2.3%.
• Not strong enough data to make a sound judgment, however the data does trend towards minimum wage failing to pull people out of poverty.
• Data Source: United States Census Bureau 

3. Reduces use of public assistance programs

• Similar to pulling people out of poverty, it is cited raising the wages of low income earners will decrease public assistance expenditures. Determining the utilization of public assistance programs has innumerable variables leading me to label this effect as unreliable. I have these concerns why this effect may be unsound:
• Welfare expenditures increased an average of 9.2% in the 2 years following a minimum wage increase while welfare expenditures decreased an average of 1.2% in other years.
• Again, if automation, labor-labor substitution, increased prices, outsourcing, and increased consumer effort (self checkout lines) increase, more workers will find themselves in search of work (CBO study) and therefore utilizing public assistance programs.
• If prices rise, some will be pulled down into poverty who have their expenses increase without a subsequent rise in income (middle class especially).

• As James Sherk writes, wages are not the primary barrier to higher incomes, obtaining employment is. 67% of individuals living below the poverty line did not work during the last year.
• Does not account for those who would have earned raises by increasing productivity through experience/training. James Sherk cites an Employment Policies Institute (EPI) study which found 2 out of 3 minimum wage workers received an average raise of 24% within 1 year.
• Of minor note, I consider minimum wage a subsidized wage. It is an indirect form of public assistance that is paid for by private individuals rather than directly by government expenditures (which are also paid for by they public through taxes).
• All things considered, I believe minimum wage will lift some out of poverty, but largely at the expense of the least productive workers being replaced/not hired and higher prices placing an added burden on all, especially low and middle income households. With cost of living rising, more people will find themselves in poverty rather than out of poverty. A trend supported by the subsequent increases in both public assistance program expenditures and the poverty rate in those years following a minimum wage increase.

4. Reduces gender and income inequality

• I am for equal compensation across all demographics (Minimum Wage Part I). I find implementing policies on the basis it favors certain demographics more than others a slippery slope. I believe the means to accomplishing the end of reduced gender and income inequality do matter. Attempting to cater public policy to favor certain demographics over others may reduce quantitative inequality, however I fear it may be detrimental. Rather than giving equal treatment to all, it attempts to favor disadvantaged groups perpetuating the cycle of favoritism.
• While I oppose prospective favoritism to rectify past injustices, I do support retrospective litigation to compensate workers who experienced past injustices.
• In addition, if gender and income inequality exists because of differences in productivity, the least productive workers will find it increasingly more difficult to obtain employment in a world of automation, outsourcing, consumer effort (self-checkout lines), and labor-labor substitution. Thus, minimum wage legislation may actually worsen inequality by enacting a policy that is prohibitive of the lowest productive workers to acquiring employment. Referring again back to James Sherk, 67% of workers living in poverty have not worked in the last year. Thus, employment is a bigger problem than wages.

5. Morally just

• Workers should be paid fair wages and not unjustly employed. However, I believe this should ideally come from generosity, not forced payments (see Private Charities).
• We should desire to care and meet one another’s needs, however I believe this is more effectively and efficiently accomplished by individuals and private charities rather than impersonal public assistance programs.
• I am unconvinced you can force morals upon people. I believe pandering "good morals" will at best change some outward behavior while producing inward bitterness and resentment.

Many states and cities have taken action apart from the federal government to raise minimum wage in its jurisdiction. Most notably, Seattle has passed legislation to raise minimum wage to $15. Seventeen months after President Obama proposed a higher minimum wage in his January 2013 State of the Union Address, minimum wage has remained a prominent topic in the news media.

With a myriad of potential effects, who benefits from minimum wage legislation? My next minimum wage series post will detail who I believe benefits and is harmed by minimum wage. Lastly I will explore viable alternatives to minimum wage and determine which, if any, may more effectively accomplish my original desires.

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