This is a topic I've frequently covered over the 12.5 years of the blog, most recently here. No, I'm not a trained economist; I haven't published on this or related topics in peer-reviewed journals. But we understand the basic laws of supply and demand: In the context of labor, the demand for labor falls as compensation increases (say, the minimum wage increases) and vice-versa (more labor demand at lower wages); similarly the supply of labor increases as compensation increases and vice-versa (as wages drop, so do available workers).
For example, I have a chemical engineer brother who recently took an early retirement. I knew my little brother had set his sights on becoming a chemical engineer while in high school, once he realized that he could make a good living as one; he never understood given my talent for math and science why I hadn't done the same. He had two careers with major corporations with pension plans and vested in each. This doesn't mean that he won't work, but he can pick and choose his assignments meaning, among other things, he is paid relative to his knowledge and expertise. I do not know his compensation, but according to BLS, the median pay for chem-e's is $52.30/hour. I suspect he wouldn't choose to take a minimum wage job, even one offering $15/hour; if he retired at $52.30/hour, I suspect he valued retirement over continuing work at that rate or he could have continued working to or past 65. Maybe someone offering him $65/hour for part-time work or on a project basis would attract his interest.
The general point is that compensation exists in the context of an existing labor market. I pointed out in a recent tweet. I cleared about $30/month from a daily (except Saturday) newspaper route for about 90 NCO family customers at our Air Force base in south Texas. So I would have to bike a few miles a few days under a broiling son after rolling up my newspapers hitting multiple neighborhoods separated hundreds of yards; the last stop was at the NCO barracks where there were vending machines for soft drinks and beer (!). I would sometimes buy a Fresca (for 25 cents, I think, which meant I had spent a quarter of my income for the day). It was particularly brutal on Sundays (you had to be a daily subscriber) where the paper sack, crammed with oversized papers, dug into my neck and shoulder. I'll never forget this one rainy Sunday I had just started delivering my home street when my bike seat gave way, and I fell back, cold rain seeping through my back and jeans, papers scattered on the street. I remember lying there for a second, thinking, "Damn! I still have 80-odd papers to deliver... There's got to be a better way of earning a buck for college..."
I learned a lot operating a small business. It was hard work trying to gain new customers or keep existing ones. Collecting monthly was a pain and demoralizing to hear customers say they mostly used it for lining the birdcage or wrap the garbage. The newspaper bundle was occasionally a few papers short and I had to call it in. Some customers occasionally called in a complaint they didn't get a paper (I never missed so maybe somebody stole it); I sometimes had to go to the vending machine and buy one with my own money, eating the cost out of my meager profits. And some customers were jerks. This one dude called up, complaining he hadn't gotten his paper. I said, paraphrased, "Dude, it's right in the middle of your rolled up garden hose at the back of your driveway." He wasn't mollified, insisting that I deliver the paper to him in person. Now I had never met him in person; usually when I collected, it was his very tall wife or one of his equally tall teenage daughters, a couple who went to my high school. They were at least 5'l0", taller than me, so I imagined the dad must be some 6-foot bruiser. So anyway, I biked over several streets away, and, of course, the paper was exactly where I told him. So I pick it up and knock on the door. The most memorable thing from the encounter was that he was looking up at me; he couldn't have been more than 5'6" if that; meaning the rest of his family had to be way taller than he was. But yeah, a businessman has to cope with difficult people sometimes.
I really didn't have other ways to earn money on the base. I graduated high school at 16, I think the minimum age you qualified to work as a bagger at the commissary working for pocket change tips was 16. I don't recall the minimum wage then, maybe about $1.60 an hour. I would have loved working a minimum-wage job; I tried to find one. I would have been willing to work for less money; when you factored in all the time I was spending on my paper route, I was making like half the rate/hour. I was saving money for college, and my parents barely made enough to cover basic expenses for 7 kids. In fact, I qualified for the free lunch program all through high school. Ice cream, soda pop, and/or fast food were for special occasions like birthday and religious milestones as Roman Catholics, e.g., First Communion and Confirmation. It boggled my mind years later seeing my baby brother and sister reach into the refrigerator in their late teens for a can of pop or ice cream carton. My Dad retired from the USAF just outside a San Antonio base, and the whole boulevard leading to the main gate had every fast food shop you can think of , supermarkets, and miscellaneous other retailers. I know 2 of my little sisters worked for Arby's and HEB (a well-known Texas supermarket chain). Both Mom (now working since the youngest was in school) and Dad had jobs, plus Dad was pulling in modest military retirement pay. Their standard of living had improved, definitely an upgrade from the lower middle class.
I finally got my first hourly minimum-wage job through work/study at OLL; I started out as a dishwasher [my clothes were damp and reeked at the end of my shift].(seriously, dude? A high school valedictorian on scholarship, and that's the best you can offer to a math major?); my work ethic got me promoted to assistant cook, but the manager eventually decided the full-time cook didn't need an assistant and had me back in the dishwashing room clearing/trays, rinsing plates, and loading/unloading the dishwasher belt. I also had probably most hated job, mopping floors in the small cafe at 6 AM; it made me feel like puking on an empty stomach. Along the way, I went from being the manager's favorite employee to despised, terminated and blacklisted to his successor. What happened? It was finals week. I had 3 finals scheduled the next day--I think the first and only time that happened over 4 degrees. I was starting to leave at the end of my regular shift when he came in and demanded that we all work .overtime. Normally I would have been thrilled to earn more money, but if I didn't do well on my finals, it put my scholarship at risk. He refused to accommodate, arguing a slippery slope for other employees (who didn't have 3 exams the next day) and fired me on the spot as I left tearing up my time card after I punched out. Not my last experience of working for an asshole. I went without a replacement job for most of the next semester and ended up having to take out a loan to meet my expenses. (I ended up eventually working at a couple of campus libraries.)
What set me off for this post? The progressives were furious that Senator Sinema (D-AZ) and I think 7 other Democrats rejected Comrade Bernie's futile gimmick to add back a minimum wage provision to the Biden COVID-19 relief package after the Senate Parliamentarian had already ruled since the policy did not reflect spending or tax powers relevant to simple majority budget reconciliation rules. I know some disingenuous Senate Democrats wanted to argue what I call the John Roberts' ObamaCare notion that a penalty is part of the taxing authority to penalize employers not paying the target wage. In essence, this approach would be a de facto filibuster killer where you add a penalty to any non-budget policy. I am not sure of what the 8 Democrats had in mind; two of them (Manchin and Sinema) already oppose ending the filibuster. It could be they were afraid the amended bill would be ruled ineligible for reconciliation and then be killed by the Republicans. It could be they saw bipartisan support for a more modest increase in the minimum wage outside of reconciliation. I would like to think that they understood basic economics and see it for what it is: a job and small business killer (but that is probably wishful rhinking). Of course, big corporations love imposing costly regulations on smaller competitors, and few of their own employees make minimum wage. (For example, most McDonald's are operated by franchise owners, not the company itself.)
This whole socialist talking point about the wealthy gaining at the expense of the lower-income class never really has been coherent. If I were going to try to sell something valuable, would I try to target someone living from paycheck to paycheck? When George Bailey in "It's a Wonderful Life" needs to cover an $8000 debt, did he go to his low-income customers or to Potter, the richest man in town? If you're running a business, the only way you're going to build to scale is to make your goods and services affordable to the masses. The reason Walmart does well is because they sell at perceivably lower prices; some of it is being able to negotiate discounts from its suppliers due to scale and some of it is the old law of demand: your sales increase with lower prices. Maybe they shave their margin on sales items, but they make a profit on sales volume. (To give a minor example,, my local Walmart sells a can of Progresso soup for about $1.57. The ShopRite I sometimes shop at probably sells the same can a dollar or more higher., so I'll nearly always buy my soup from Walmart. There are other reasons to shop at Shoprite, e.g., fresh seafood and lots of other items and varieties that Walmart doesn't carry..
But the way the progressive mind works, Walmart is making its profits at the expense of their employees. Now it is true that Walmart hires a lot of people, and labor costs are a significant expense--but roughly just under 8% of costs, comparable to the industry average, If they don't pay a competitive wage, they wouldn't be able to staff and/or retain workers, leading to more labor acquisition and training costs. Financial analysts have argued that Walmart's labor costs are too high, that the company hasn't automated, say to the extent that Amazon has embraced it. [For example, I almost never use regular checkout at my local store, they have several unstaffed checkout aisles, and I usually have to wait to enter their self-checkout cluster.] They also point out that if you increased hourly pay by, say, $4/hour, it would be operating at a loss. I remember blogging about the recent Williston oil boom, Walmart was offering new employees up to $17.40/hour, not because of state and/or federal minimum wage. I'm sure they had to pass on their higher costs to local customers, many of them oilfield workers making up to 6 figures.
But getting back to the Sinema kerfuffle, I remember one troll passionately arguing that a higher minimum wage was voting to give the people a long overdue raise. Well, there are a lot of problems with that notion. We are not talking about government employees. And according to BLS, "The percentage of hourly paid workers earning the prevailing federal minimum wage or less declined from 2.7 percent in 2016 to 2.3 percent in 2017. This remains well below the percentage of 13.4 recorded in 1979, when data were first collected on a regular basis." Let that sink in for a minute. That meant nearly 98% of workers were making more than the statutory minimum. (A subtle point here. The government enforces the higher of federal or state minimum wage laws. Several states have hiked their minimum wages in recent years, many with adverse effects on employment. AEI has a cluster of related articles here.)
Let's point out that the Dems are remarkably inconsistent here. Take their key constituency here, public teacher unions. Nearly all of them have agreements embracing seniority retention in layoff policies, i.e., typically among the highest-paid teachers. One of my nieces, a primary school teacher, was laid off from a Colorado public school during the Great Recession and has struggled to find public teaching jobs since then. I don't know the specifics but I believe she had been making in the low 30's. I would be willing to bet retained teachers probably made up to double or more of what she was making, not that they were teaching more students or more effectively. Teaching salaries aren't tied to student performance metrics, and unions are opposed to concepts like merit pay and market-based pay for say, in-demand positions in math and science.
There is a point to the concept of raising the minimum wage if you accept the legitimacy of the construct, in the sense that the purchasing power of $7.25 has declined since 2009, although I would argue a lot of this has to do with government or quasi-governmental (e.g., the Federal Reserve) policies, like zoning, But part of the problem here is that the cost of living varies greatly over the states, and a federal minimum wage would have a disparate effect over states/regions. I remember having to pay $1350/month for a spartan one-bedroom apartment in Santa Clara back around 1999. I used to joke it would cost $400K to buy an outhouse in Silicon Valley; you could probably buy a better house for half the price or less in TX. Almost everything was more expensive (like 25% or more, except maybe produce) Not only that, but my state income tax rate had tripled, and although I was making decent money, my costs increased more than my pay.
So let me end by summing up some points made in recent tweets or past posts (@raguillemette):
- Increasing the minimum wage doesn't necessarily translate to higher compensation. It doesn't guarantee work at the higher rate. It attracts more (experienced, e.g., retired) workers to enter the market. Employers may not be able to pass on those costs to consumers. Employers may respond by reducing hours, increasing work requirements, deploying labor-saving automation or closing money-losing operations.
- It's not a question of empathy for lower-wage households. We just feel the free market, which has done more to lift people out of poverty than any government and ideology, provides a better solution. Government introduces economic uncertainty and policies have morally hazardous and unintended, even counterproductive effects. Most of us favor charity over government mandates made by people who have no clue about the challenges of meeting a payroll.
- The minimum wage is typically a starter wage, Most jobs pay more for market reasons, not government mandates.
- A large plurality of minimum wage earners are not heads of household but household dependents like older children and spouses.
- The minimum wage makes jobs feasible under the floor illegal, reducing critical first job opportunities for entry-level positions; job experience is a fungible benefit leading to higher-paying opportunities. Doubling the minimum wage doesn't help younger/inexperienced workers who have challenges finding work at current or interim rates.
- The minimum wage is fundamentally unfair to lower-income people by reducing their negotiating position. I gave an example when I made a campus visit to Providence College which had capped its MIS position at $35K, significantly less than I had made as a state university professor. (No, I wasn't extended an offer.)
- Government is not bearing the costs of its regulations. There are better ways of addressing social welfare preferences, like an earned income tax credit which spreads the cost over the overall economy.
- The pandemic has had a disparate effect on lower-wage workers, many of them employed in lower-wage businesses, like restaurants. What would help is reopening the economy, not adding costs to already struggling businesses. A failed business hires nobody.
