Wednesday, February 09, 2005

Tidal Wage

The more things change, the more they stay the same. “A number of Washington’s lawmakers have once again proposed to substantially raise the minimum wage employers may pay workers” - could be a headline from any recent newspaper, but it’s from 1988. The year before that, Sen. Edward Kennedy was pushing for an increase in the minimum wage because the current rate did “not permit full-time workers to provide the bare necessities for their families.” In 1938 Congress wrote the Fair Labor Standards Act, which mandated a minimum wage for only the few ‘low wage workers’ (i.e. less than 50% of all workers). By 1990, the Fair Labor Standards Act had encompassed over 90% of American workers. If the minimum wage is a tide, it is not one that “lifts all our boats,” but rather a neap tide leaving all our boats wallowing in shallows.

The concept of a minimum wage seems laudable: provide the low-paid workers with a liveable wage. But, what is a liveable wage? How do we determine what that should be? A liveable wage is a highly subjective thing, it’s based on a myriad of choices a person can make. The current figure from Washington is $5.15, while in Vermont it’s $7 per hour. A McDonald’s hamburger is just under a dollar or about 10 minutes work. A movie will cost you over an hour’s pay, if you don’t get any popcorn (which will set you back half an hour). A nice, but not extravagant, dinner for two (depending on your tastes) will take you at least 6 hours to pay for if you work for minimum wage in Vermont. Who can afford to live at $7 an hour? Well, no one of course, so why is the minimum wage not set at $15 or 20$ an hour? If the idea is to assist low-wage workers, why the reticence to really do it, why the half-measure? Clearly, because no one would accept a realistic minimum “liveable” wage, except those who would earn it.

Of course, it’s clear that $7 isn’t a liveable wage, so the talk in Montpelier is to raise the minimum incrementally to $8 within 2 years and (hopefully) bind future increases to inflation, creating a ‘self-adjusting system.’ Not coincidentally, both Florida and Nevada have already initiated a similar system and Michigan is the current battleground. On January 24, the Associated Press reported “labor unions pushing for an increase in the state’s minimum wage” in Lansing, Michigan. The AFL-CIO and the Service Employees International Union are pressing the legislature to raise the minimum wage and are threatening to engage in a grass-roots effort to put the issue on the 2006 ballot. It’s curious that labor unions would be pushing the minimum wage issue. With their legally guaranteed and protected bargaining practices, labor union members don’t work for minimum wage. It’s curious until you consider that the unionized pay rates are tied to the free market pay scales: a raise in the minimum wage means the base unionized wage increases with the raises rising up the union ladder. But that couldn’t be why unions push raises in the minimum wage, they do it because the really care about low-wage workers.

David Card and Alan Krueger, both Princeton University economists, wrote Myth and Measurement: The New Economics of the Minimum Wage in which they challenge the conventional economic wisdom on the minimum wage. That economic wisdom is that a minimum wage is a bad thing and that it stifles the job market and the economy. President Bill Clinton and his Secretary of Labor Robert Reich used the book’s conclusions as the basis for raising the federal minimum wage. Not a great surprise, considering that Reich’s chief economist within the Department of Labor was, none other than, Alan Krueger. (It should also come as no surprise that the greatest supporters of Bill Clinton were labor unions.) Since it’s release, Myth and Measurement has been carefully studied and debunked. Card and Krueger focused on aspects of the research which promoted their theory and disregarded results or neglected to analyze aspects that challenged their theory. In one part they did phone surveys of fast food restaurants in New Jersey and Pennsylvania, establishing that the increase in minimum wage would not affect employment, but they never looked at the actual numbers after the minimum wage increases which clearly showed a dramatic effect. The minimum wage increased in 1991, in 1990 teenage employment was 33.8% and in 1992 it was 29.1%. The effect is more dramatic when compared to neighboring Pennsylvania. Both states have parity in 1988 at about 40.5% teenage employment. By 1992, New Jersey was down to 29.1% while Pennsylvania fell to 36.8%. The difference being that New Jersey raised it’s own minimum wage on top of the Federal mandate and Pennsylvania held to the Federal rate.

Economic theory suggests that demand and supply are linked by price. Real life confirms the economic theory. When Florida suffers a cold spell, orange trees are damaged, fruit production is diminished, and the cost of oranges at the market goes up. Now, if the growers simply raised the price of the oranges to increase profit, shoppers would buy fewer oranges. In the same way, when the price of a job is artificially raised by governmental fiat, employers will provide fewer jobs. Life really can be that simple. “Employment is lower than it would have been if no minimum wage existed. This is the case even in periods of substantial economic growth...” according to the 1983 Report to the U.S. Senate Committee on Labor and Human Resources of the General Accounting Office. Minimum wage rose 46% between 1977 and 1981 and 644,000 jobs were lost in the teenage bracket alone as reported by the 1981 Minimum Wage Study Commission. In 1988 the Congressional Budget Office was chastised by the House Democratic leadership and had to rewrite a study because the report, as a Democratic staffer put it, “provided information that was not requested.” The information not requested was a CBO prediction that the minimum wage increase being proposed would result in a loss of 250,000 to 500,000 jobs.

Here’s a simplistic, but accurate, way to view the “wage environment.” The “wage envrionment” is the pool of all workers across the entire spectrum of an economy. Nothing exists in a vacuum. The beat of a butterfly’s wings in Thailand might very well contribute to the hurricane in Bermuda. Toss a pebble into the pond and the ripples encompass the whole of it. When McDonald’s gives the hamburger-flipper a raise, the increase in the cost of doing business needs to come from somewhere, either the flipper produces more, or the cost of the hamburger goes up. If the flipper’s production increases, it’s all good. If the flipper’s production remains constant (i.e. his wage is increased by fiat), the offset of increased wage must be met by other means, usually an increase in the cost of the burger. The cashier, who’s been on the job longer than the flipper, sees his raise and expects one too. The secretary eating her lunch at McD’s notices lunch costs more and asks her employer (an accountant, let’s say) for a raise. The accountant gladly gives her a raise, because she’s worth it (and he can’t run the office without her, so he can’t let her quit). The accountant raises his fee to his clients. His clients own businesses and they pass on the increase in accounting fees to their customers, not to mention the raises they give to their employees who eat more expensive hamburgers at McDonalds. The ripple of raises spreads through every sector.

Aside from the simple issue of raises and cost of living (because that’s what COLA is - thus-and-such costs more, so the wage-earner needs more to simply keep up), there’s the issue of non-linear increases. The accountant pays more to his secretary and becomes more attuned his finances, so he might go out to dinner less frequently. The other business owners whose employees eat at McDs do the same. Now the waiter at his favorite restaurant has fewer tips and the restaurant owner has less income. The owner of the restaurant lays off a waiter or two. The waiters still working would like to see that new movie, but movies are expensive, so they wait for Blockbuster to get it. The folks at the theater feel the pinch. One less candy counter person or projectionist. The reverberations truly are felt around the world in a global economy such as we have today.

Contrary to the claim that employers would rather have government programs for low-wage earners than pay a “fair” wage, employers realize that the government is US (including them). Employers balance fair pay with fair production. They fire (when the law permits) low producers and hire the best producers available. Low wages are an issue of the nature of the work involved or lack of education/skill-set and that’s where we as a society need to focus to resolve low wages. As a humanitarian tool to raise the standard of living for the downtrodden, the minimum wage is another abject failure of ‘The Great Society’ and America can ill afford it.


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