Raise the Wage!

Tragic Letters From the Outskirts of the New Economy

Dear Techconomist,

I heard that the minimum wage for federal workers just got raised to 15 dollars per hour, and they’re trying to raise the minimum wage to 15 dollars an hour nationwide. I currently make 11 dollars an hour. 15 would be a major improvement. I like the idea of making more money, but I am concerned I might lose my job. What does economics say on the issue?

Sincerely,

Making Ends

Dear Making Ends,

Yes, those greedy federal employees and contractors really are making 15 an hour at a minimum while the minimum wage for everyone else is lower. Clutch my pearls! Sarcasm, of course. I actually love federal employees, and I have no problem with higher minimum wage for them, but I hope it is passed through to the overall economy. This is one of the only issues in my lifetime where economists as a profession seem to have moved an inch. Really thrilling to see. I will start off by saying that this remains an open research question, and I expect we will get some nice time series and panel data before too long. The economics profession used to be really settled on this, but recently new research has re-opened the issue. The following arguments and thoughts are mine but are educated by research and economic thinking.

I am going to make an odd confession for an economist. I actually have no idea how much money I make per hour. Not a clue. I know it’s a lot, and I know the yearly number, but I actually have very little understanding of how my efforts on a day-to-day basis contribute to my actual earnings. Every friend of mine is in a similar situation. They got to work with a number in mind on a salary sheet, maybe they even figured the amount taken out by taxes and benefits, and when they got their first paycheck, it was smaller than they thought it would be. The opposite problem, of underestimating net earnings or earnings after taxes and benefits, is in fact very rare.

There’s nothing wrong or irrational with not understanding how your efforts contribute to your wages. If we all had to think all the time about how much money we were making with each individual minute and decide whether we should work based on that number, none of us would ever get anything done. Human cognitive power is amazing but limited. No one actually does a marginal benefit, marginal cost calculation when they work. Not even me. The number of all-nighters I have pulled only to find out that my efforts were not worth it is almost embarrassing.

How does that relate to the minimum wage? The “traditional” economic view supports the idea that minimum wage is bad because the minimum wage is an “effective price floor.” The argument goes that some people will not be able to find jobs because they do not have skills valued highly enough, and jobs will fire them or not hire them because of the higher wage. Theoretically, the minimum wage is an economic atrocity and empirically, many research studies say that it hurts employment.

The difference between theory and practice is nothing — in theory at least. In reality, most minimum wage studies done empirically only look at when minimum wage is raised in some states, and other states do not raise, so companies can move if they want, not the case if the federal wage is raised. Even among those studies, plenty of empirical evidence finds that minimum wage does not hurt employment. The truth is that wages are much more nebulous than anyone really believes. The traditional idea that high wages motivate workers and cause employers to not hire more of them and low wages keep workers out of the job market and lead employers to rush to post on Indeed is total BS.

The truth of the matter is that most people in the United States don’t think about the dollar value of income but about what they can buy and their relative societal position. Most people work because they find fulfillment or see it as something they cannot avoid, and very few people actually control their schedules or even can work more or less on a whim. They work based on what they feel is possible. Most workers only care that they make more than the person next to them or behind the McDonald’s counter and that their efforts are supported by their employers. Most employers see wages the same way and will pay employees a wage that feels right and seems fair. I have worked in small businesses where the number really mattered and was felt on the bottom line, but for most employers the number matters less than what it represents. People care about relative social standing, and Americans like to work. Very few Americans opt out of work if they can regardless of wage, so employment effects of higher minimum wage tend to be nominal, especially given that most large companies can pay higher wages anyways.

There probably is a minimum wage that would raise prices substantially, stop people from working, and shut down businesses. I don’t think the United States Federal Government has ever found it, and I think it’s probably well above $15 per hour. Currently, the federal minimum wage is $7.25 per hour and varies by state. According to the Bureau of Labor Statistics (BLS) as of 2017, the percentage of people working for the federal minimum wage was 2.3%, hardly a massive number. The number has likely risen with the pandemic but is still plenty low and well below the 13.4% of the workforce who made the federal minimum wage of $2.90 in 1979 when BLS started keeping track of that number.

As of May 2019, the percentage of employers paying less than 15 an hour was somewhere between 25 and 50 for the economy with a median wage of 19.14 and an average hourly wage of 25.72. In fact only 112 of the 789 detailed occupations have a median wage below 15 an hour. That’s still 46 million jobs out of 146.8 million with plenty of double counting for those who work multiple below 15 an hour wage jobs or mix and match, but if we take the average, these numbers fall still with only 73 detailed occupations or 36 million jobs in occupations with average wages below 15 dollars an hour. That’s certainly a lot of people and more than one fourth of jobs, but 18 million of those people make between 13 and 15, so I fail to see it as likely that massive layoffs are coming if we raise the federal minimum wage to 15 an hour, particularly because companies can no longer move states to escape higher wages.

In the past ten years, multiple research studies have come out saying that the minimum wage has negligible to positive impacts on employment if those effects even exist. Other studies have said the opposite, but the conclusion among most economists is that the minimum wage does not hurt employment too much, especially for workers who really are trying. The impacts differ some among economic and demographic groups, but on the whole the minimum wage means a raise for most employees with a few getting a pink slip.

Some employers, especially small businesses, are hit by the higher wages. Some go out of business because of it, but macroeconomic dynamics eventually lead to slightly lower profits for most businesses, slightly higher prices for labor-intensive goods, and higher wages across the board as everyone who sees people working minimum wage getting raised suddenly demands theirs as well.

I should caution that automation effects of the minimum wage are real. Some people will lose service jobs to robots if the minimum wage goes too high, but automation can only go so far and tends to lead to more jobs over time in other sectors. Personally (not tons of research here yet), I doubt these effects are huge because the sharing economy has allowed plenty of people to get jobs where robots cannot take their place currently, and most businesses paying minimum wage have a really hard time automating.

Thanks for reading, and I wish you luck!
-Techconomist

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