$15 Minimum Wage Fails As We Predicted It Would

July 7, 2017

— by Polydamas

Minimum wage legislation always begins with the enthusiasm of idealism and ends with the thud of reality. Even a college student, who had taken but a single undergraduate class in economics, would not be surprised by the economic failure of legislation to raise the minimum wage to $15 per hour. Thus, the astonishment in Max Ehrenfreund’s June 26, 2017 column in The Washington Post, titled “A ‘Very Credible’ New Study on Seattle’s $15 Minimum Wage Has Bad News For Liberals”, which is respectfully reproduced in full below (http://wapo.st/2tMwQZc), is nothing short of surprising.

Mr. Ehrenfreund relates that a credible study found that, as a result of the legislation in question, the average minimum wage worker in Seattle lost $125 per month. Employers responded by cutting their payrolls, eschewing hiring new employees, reducing their working hours, or simply firing them and making do with fewer people.

This was not unexpected to students of economics. We here at The Cassandra Times predicted the outcome of such legislation in our August 9, 2015 post titled “Economic Reality Dooms Minimum Salary Folly”. We reasoned:

Minimum wage laws and Price’s minimum salary of $70,000 are the product of economic ignorance. As pointed out by the great 19th century French economist and social commentator Frédéric Bastiat in his 1850 essay titled “What is Seen and What is Unseen”, the vast majority of people make their economic decisions based upon the benefits apparent to them while completely ignoring repercussions and hidden costs. Those who advocate doubling the minimum wage from the present $7.25 to $15.00 per hour mistakenly assume that it will give minimum wage earners more earning power and more money left over after paying for necessities. This assumption only works if all other prices and expenses stay the same, which cannot be.

For example, let us suppose that Bill and Mary are minimum wage earners and currently earn $7.25 per hour. Let us assume that Mary works at a store and receives a raise to $15.00 per hour because she is efficient and competent. Let us assume that Bill works at a sandwich shop and he is neither efficient nor competent at his existing minimum wage of $7.25 per hour. If Mary buys a sandwich prepared by Bill that costs $5.00, she has $10.00 remaining in buying power to spend elsewhere. She is rewarded for her efficiency and competence. If the minimum wage is increased to $15.00 per hour, Bill must be paid this wage regardless of his efficiency and competence. Since Bill’s labor costs nearly doubled, the sandwich shop must now charge at least double or $10.00 for its sandwich to break even. Mary’s efficiency and competence make no difference whatsoever because she is rewarded the same $15.00 per hour as Bill is rewarded for his inefficiency and incompetence. Now, instead of Mary’s sandwich costing 1/3 of her hourly wage, the new minimum wage caused Mary’s sandwich to increase to 2/3 of her hourly wage. With every minimum wage earner now receiving $15.00 per hour, the increases in labor costs will ripple throughout the economy. A gallon of gasoline will cost more because the labor costs will increase to account for the increase in the minimum wage. Groceries will cost more because the supermarket will have to pay its own employees the same increased minimum wage. Housing costs will increase because landlords will have to pay janitors and landscapers double the money. The increase in the minimum wage will permeate throughout the economy even to occupations that are paid much more than the minimum wage. Teachers and other government employees will need to be paid more to compensate for sandwiches costing double than before and babysitters who charge $15.00 per hour and groceries that cost at least twice than before. Businesses will forgo hiring teenagers for after-school jobs. Meanwhile, the elderly, retired, and handicapped who live on fixed income will fall into deep poverty. An increase in the minimum wage is nothing more than a “feel good” measure that will end up hurting its intended beneficiaries most of all and inevitably will result in a price inflation and erosion of the currency even further. In a few short years, the same economically ignorant activists and demagogues will wail that a $15.00 minimum wage is woefully insufficient and will clamor for a $30.00 minimum wage that will start the selfsame cycle of futility all over again.

Mr. Ehrenfreund’s article cites a previous study from the 1990s in which it was determined by economists David Card and Alan Krueger that raising the minimum wage does not always result in the deleterious economic consequences that classical and Austrian school economists predict. Card and Krueger had compared New Jersey which raised its minimum wage to Pennsylvania which did not, and found that employment in the restaurant sector in New Jersey had increased.

Drawing quick conclusions from these 1990s studies is fraught with error because they fail to exclude other alternative causes. The 1990s were a more prosperous decade than the past decade. Between President George W. Bush’s Afghanistan and Iraq wars and related nation-building and President Barack Hussein Obama’s massive spending which resulted in gargantuan increases in the national debt, the average American is poorer now in 2017 than in the mid 1990s. A hamburger costs more in 2017 than it did in 1995, both in dollars and as a percentage of one’s income. In other words, Americans in 2017 have less purchasing power than they did two decades ago.

Another big problem with Card and Krueger’s comparison of New Jersey and Pennsylvania is that an appreciable percentage of people who live in New Jersey work in New York. They earn higher incomes than the people who live in Pennsylvania and who do not have the opportunity to commute to New York. Consequently, the people who live in New Jersey have higher disposable incomes and can afford to devote a higher percentage of their disposable incomes to dining out. It is quite possible that the results of Card and Krueger’s study occurred despite the increase in New Jersey’s minimum wage and not because of it.

The folly of minimum wage legislation can be proven in precisely the same way as 19th century French economist Frédéric Bastiat brilliantly disproved the economic “fallacy of the broken window” in his 1848 essay “What Is Seen and What Is Not Seen”. In this marvelous essay, Bastiat demolished the oft-held notion that a child who breaks a shopkeeper’s window creates an economic boon for everyone. The fallacy posits that the child who breaks a shopkeeper’s window causes the shopkeeper to pay the glass maker money that the latter would not have otherwise earned. The glass maker can then spend or invest the newfound money and everyone who receives extra money from dealing with the glass maker prospers.

Instead, Bastiat showed that the shopkeeper was forced to expend his savings on a window that he previously had and could not spend it on a suit, thus depriving the tailor of work, and money from everyone who would have exchanged products and services with the tailor. Only the economically ignorant would consider the value of a shopkeeper’s unbroken window and the tailor’s new suit to be less than a shopkeeper’s broken window which has been repaired. The shopkeeper paid more for something he already had. The tailor’s foregone income was transferred to the glass maker. Only economic ignorance, on the level of Voltaire’s Dr. Pangloss, considers a mob of hooligans smashing all the windows in the city or a hurricane demolishing an entire city to be an overall economic boon.

The folly of minimum wage legislation is undone by almost precisely the same method that Bastiat refuted the “broken window fallacy”. The shopkeeper, who employs a minimum wage-level cashier, is forced to increase the pay of the latter from $8.00 to $15.00 per hour because of legal diktat and not due to an increase in the latter’s productivity or efficiency. The shopkeeper is commanded by law to buy the same labor for more money just as he was forced to pay twice for the same window. The shopkeeper has four choices: he can either: 1) increase prices to compensate for the increase in labor costs and hope that his customers will continue to patronize his shop, 2) reduce the hours of the cashier to the match the same cash outflow as before, 3) fire the cashier and do the job himself, or 4) go out of business.

From the point of view of the minimum wage cashier, under the previous wage scale, she could work 40 hours per week at $8.00 per hour and make $320.00 per week before tax. Under the new wage scale, the shopkeeper could decide to fire her at which point she loses $320.00 per week and is now unemployed. The shopkeeper could close his store, thus dimming everyone’s economic outlook and forcing customers to go elsewhere. He could reduce her hours to part-time employment and pay her as he did before. Finally, he could raise his prices to absorb the additional $280.00 per week plus added employee social security costs and hope that his customers will be relatively insensitive to the price increase.

More importantly, however, the ripple effects of the minimum wage increase will be inescapable and will negatively impact the minimum wage cashier, whether or not she is employed at the shop. Her grocery bills will be more expensive because the cashier and the busboy at the supermarket must be paid the higher minimum wage and the supermarket will seek to recoup the expense. Her housing expense will increase because her landlord must pay more for repair people, gardeners, and custodians. Gasoline for her vehicle or public transportation will cost more because the attendant at the gas station must be paid more than before. Her fast food hamburger will cost her more because its labor input will be more expensive.

The ripple effects of the new minimum wage increase will make life more expensive for everyone, not just minimum wage workers. Every participant in the economy must pay in direct and indirect ways for the unintended consequences of increases in the minimum wage. Non minimum wage workers will need their wages and salaries increased to compensate them for their higher living expenses. Managers, clerical workers, mechanics, government workers, and just about everyone in the workforce will eventually receive an increase in pay to cover the greater living expenses.

This erosion in purchasing power, needing more dollars and digits with more trailing zeros to buy the same things, is the curse of inflation. Consequently, the retired, elderly, and the disabled, who live on fixed income, will experience a dramatic increase in expenses without the ability to offset them with higher earnings, and their standard of living will plummet into abject poverty. On the other hand, fewer employers will be willing to take a chance on teenagers and give them their first paying job, skills, and discipline if this means paying them the new minimum wage, which is substantially more than their labor is really worth. More teenagers will be unemployed and in poverty or, at best, live with and remain dependent upon their parents for longer stretches of time.

In conclusion, minimum wage increases do nothing but hurt every participant in the economy, both workers and consumers, including and especially the minimum wage workers that liberals profess their desire to help. If die-hard liberals truly want to help people, they should first study in earnest classical and Austrian school economics. Once these passionate liberals become thoroughly knowledgeable in classical and Austrian school economics, they learn that the “invisible hand” of free market economics actually works very well at allocating resources without government interference and the “back seat driving” of meddling bureaucrats and policy wonks. Soon enough, these bleeding heart liberals become free market libertarians, just like us.

A ‘Very Credible’ New Study on Seattle’s $15 Minimum Wage Has Bad News For Liberals

Max Ehrenfreund

Washington Post

June 26, 2017

When Seattle officials voted three years ago to incrementally boost the city’s minimum wage up to $15 an hour, they’d hoped to improve the lives of low-income workers. Yet according to a major new study that could force economists to reassess past research on the issue, the hike has had the opposite effect.

The city is gradually increasing the hourly minimum to $15 over several years. Already, though, some employers have not been able to afford the increased minimums. They’ve cut their payrolls, putting off new hiring, reducing hours or letting their workers go, the study found.

The costs to low-wage workers in Seattle outweighed the benefits by a ratio of three to one, according to the study, conducted by a group of economists at the University of Washington who were commissioned by the city. The study, published as a working paper Monday by the National Bureau of Economic Research, has not yet been peer reviewed.

On the whole, the study estimates, the average low-wage worker in the city lost $125 a month because of the hike in the minimum.

The paper’s conclusions contradict years of research on the minimum wage. Many past studies, by contrast, have found that the benefits of increases for low-wage workers exceed the costs in terms of reduced employment — often by a factor of four or five to one.

“This strikes me as a study that is likely to influence people,” said David Autor, an economist at the Massachusetts Institute of Technology who was not involved in the research. He called the work “very credible” and “sufficiently compelling in its design and statistical power that it can change minds.”

Yet the study will not put an end to the dispute. Experts cautioned that the effects of the minimum wage may vary according to the industries dominant in the cities where they are implemented along with overall economic conditions in the country as a whole.

And critics of the research pointed out what they saw as serious shortcomings. In particular, to avoid confusing establishments that were subject to the minimum with those that were not, the authors did not include large employers with locations both inside and outside of Seattle in their calculations. Skeptics argued that omission could explain the unusual results.

“Like, whoa, what? Where did you get this?” asked Ben Zipperer, an economist at the left-leaning Economic Policy Institute (EPI) in Washington.

“My view of the research is that it seems to work,” he said. “The minimum wage in general seems to do exactly what it’s intended to do, and that’s to raise wages for low-wage workers, with little negative consequence in terms of job loss.”

Economists might not readily dismiss the new study as an outlier, however. The paper published Monday makes use of more detailed data than have been available in past research, drawing on state records of wages and hours for individual employees.

As a result, the paper is likely to upend a debate that has continued among economists, politicians, businesses and labor organizers for decades. In particular, the results could exacerbate divisions among Democrats, who are seeking an economic agenda to counter President Trump’s pitches for protectionism, reduced taxes and restrictions on immigration.

Meanwhile, states and cities around the country are continuing to implement increases in the minimum wage. In November, voters in Washington approved an increase in the statewide minimum to $13.50 an hour by 2020. The idea is popular in conservative states as well. In Arizona, for instance, the minimum wage will be $12 an hour in 2020 after voters there cast ballots in favor of a hike.

“If I were a Seattle lawmaker, I would be thinking hard about the $15 an hour phase-in,” Autor said.

What makes this study different

Economists have long argued that increasing the minimum wage will force some employers to let workers go. In 1994, however, economists David Card and Alan Krueger published research on minimum wages in Pennsylvania and New Jersey that contradicted this theory, motivating dozens of studies into the issue over the coming years.

Card and Krueger conducted a survey of fast-food restaurants in the two states while New Jersey was implementing an increase in the minimum wage. They found that restaurants in New Jersey had, in fact, added more workers to their payrolls more than restaurants in neighboring Pennsylvania, where the minimum wage remained constant.

Since then, economists have brought better data and more sophisticated statistical methods to bear on the question of the minimum wage, but without resolving the debate.

Their studies examined the overall numbers of workers or their annual incomes, but lacked precise information on how much workers were being paid by the hour. As a result, past research might be less reliable because the results might reflect many workers who are not paid low wages, said Jacob Vigdor, an economist at the University of Washington and one of the authors of the new study.

Their research, using detailed records from the state of Washington, addresses that problem.

“That’s really a step beyond what essentially any past studies of the minimum wage have been able to use,” said Jeffrey Clemens, an economist at the University of California, San Diego who was not involved in the research.

When the authors of the study took the same approach as Card and Krueger, measuring overall employment in the restaurant industry, they found similar results. The minimum wage did not substantially affect how many people were working in the industry or how many hours they were working.

The data, however, shows that about seven in 10 workers in Seattle restaurants make more than $13 an hour, suggesting that the overall level of employment in the industry might not be a reliable guide to how the minimum wage affects workers with low pay.

Indeed, while employment overall did not change, that was because employers replaced low-paying jobs with high-paying jobs. The number of workers making over $19 an hour increased abruptly, while the number making less than that amount declined, Vigdor and his colleagues found.

Vigdor said that restaurateurs in Seattle — along with other employers — responded to the minimum wage by hiring more skilled and experienced workers, who might be able to produce more revenue for their firms in the same amount of time.

That hypothesis has worrisome implications for less skilled workers. While there those with more ability might be paid more, junior workers might be losing an opportunity to work their way up. “Basically, what we’re doing is we’re removing the bottom rung of the ladder,” Vigdor said.

Large businesses

There could be another explanation for the results, however: the fact that large employers are not included. It could be that even if employers with only a single location cut payrolls, large firms expanded at the same time, giving low-wage workers other opportunities to earn money.

Other researchers have found that large employers are better able to raise wages in response to changes in the minimum. Liberal economists often argue workers have less bargaining power when negotiating their contracts at larger firms, and that as a result, employees at those companies are often underpaid in the absence of a wage floor.

“I think they underestimate hugely the wage gains, and they overestimate hugely the employment loss,” said Michael Reich, an economist at the University of California, Berkeley who was part of a group that published its own study of the minimum wage in Seattle last week.

Reich’s study uses more conventional methods in research on the minimum wage, relying on a publicly available federal survey. His group’s data did not allow the researchers to distinguish between high- and low-wage workers at a given firm, but they were able to separate large firms’ locations in Seattle from those outside the city.

Their results from the University of California accorded with past research. The minimum wage increased wages for workers in the restaurant industry, without reducing employment overall — in contrast to the findings from the University of Washington.

“Their results are so out of the range,” Reich said.

One way of explaining the disagreement could be that small businesses in Seattle have been forced to downsize in response to the increased minimum wage, while larger firms have expanded.

Yet when Vigdor and his colleagues examined the overall number of workers at small firms with a single location, they did not find that employment had decreased. That fact could could suggest that small businesses have responded to the increase not by downsizing but instead by hiring more experienced workers.

Another big question

There’s another explanation for the growth in high-paid jobs and the decrease in lower-paid ones. The authors of the study argue that that’s occurring because employers are focusing on high-paid workers and leaving low-paid workers out, but it’s possible that something far more positive is happening.

Seattle’s economy is booming, and in a booming economy, more workers are likely to get raises or find jobs that pay better, and it may be that phenomenon — of workers getting raises, promotions or better paying jobs — that explains the shifts in the labor market the researchers see in Seattle.

Vigdor and his colleagues sought to address this problem, in essence, by constructing an index based on data from other parts of the state of Washington where local economies performed similarly to Seattle’s before the increases in the hourly minimum.

Low-wage employment declined in Seattle relative to this benchmark. Even compared to parts of the state with similar economies, there was less low-wage work in Seattle, suggesting that the minimum wage might have forced employers to cut some of those positions.

The method Vigdor’s group used to develop this index is on the cutting edge of economic research, but it is not perfect. It is possible that Seattle’s economy simply took a different direction at the same time as the minimum wage began to increase — even compared to economies in other places that seemed similar to Seattle’s before the vote.

EPI’s Zipperer argued that was the best explanation, given how pronounced the gains were for workers making more than $19 an hour.

“You’re just seeing an independent shift in the Seattle labor market toward higher wage employment,” he said, calling the figures for better-paid workers “a red flag.”

The broader national economy could have an effect on the results as well. In the past, noted San Diego’s Clemens, increases in the minimum wage have occurred when the economy was expanding rapidly and prices are going up. Employers could expect to ask consumers to pay more and to give their workers wages anyway. Increases in the minimum wage might just have been part of the cost of doing business.

Currently, though, inflation is at historically low levels, and the minimum wage in Seattle will be indexed to inflation after it reaches $15 an hour, forcing firms to plan for the long term.

Vigdor agreed that the effects of increasing the minimum wage could differ by time and place.

“The effect of the minimum wage depends on a lot of things. It depends on where you’re starting form. It depends on what kind of economy you’re raising it in,” Vigdor said. “There is no one ‘the effect of the minimum wage.’ ”

That means that future research on the question could come to different conclusions. Vigdor said he looks forward to receiving criticisms of his group’s paper and suggestions for improving their approach.

“It’s really important to emphasize it’s a work in progress,” he said.

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