Friday, September 20, 2013

Robert J. Samuelson: The Minimum Wage Muddle

I dislike the notion of a "minimum wage" but recognize that it isn't about to be abolished. And, there is the sad reality that many companies don't recognize that employees are the value behind any business or non-profit. Organizations are their people.

My first problem with the national minimum wage is that any nationwide standard ignores the cost of living variations from region to region. Beyond that, we have issues of how to set a minimum wage, how to index it to inflation, and many other complicated issues. If you set rates by region, would you also have regional inflation indices? What about tiered minimums, based on age or other variables? There are already odd exemptions to the minimum wage, namely in the dining industry.

Should there be a full-time minimum wage apart from a part-time minimum? How many people working 40-hour weeks earn the minimum wage? If they do earn the minimum, for how long do they earn this before their first raises? How long before a full-time worker at the bottom does earn more than the poverty-line? And are we using a national or a regional measure of poverty?

But, there is pressure to raise the minimum wage. What would the results be? Probably insignificant if you consider the job market who is paid minimum wage. The following Robert Samuelson column is a good read. As usual, I'm including only excerpts, so follow the links and read the original column.
The Minimum Wage Muddle
By Robert J. Samuelson, Published: September 11, 2013

We're now engaged in another divisive debate over the minimum wage and its offspring, the "living wage." We've been here before, because both sides seem to have strong arguments. On the one hand, raising wages by government fiat seems a job-killer. Economics 101 teaches us that if you increase the price of something — including labor — people will buy less of it. On the other hand, guaranteeing that full-time work protects against poverty seems a decent standard. The present federal minimum ($7.25 an hour) [see] doesn't do this. At 40 hours a week, it amounts to $15,080 a year; that's above the government's poverty-line for a single person ($11,702 in 2011) [see] but not for a family of four ($22,811).
Raising the minimum wage causes employers to reconsider hiring new employees, expanding the hours of existing employees, and other decisions potentially helpful to workers. With the Affordable Care Act already causing some employers to cap hours (and benefits), increasing the minimum wage is likely to add another barrier to labor market growth.

Increasing the cost of each worker? Employers will automate what they can. They will find ways to have "exempt" (salaried) workers do more — since that's a fixed labor cost. You might not see an immediate increase in unemployment, but the labor market will stall.

Already, the poor are unemployed. There are many reasons for why someone might not be participating in the labor market, but the reality is that labor participation rates are falling, with the lowest participation rate in three decades already dragging the economy. When nearly two-thirds of adults living in poverty are not working, the minimum wage does not matter to a sizable population: non-workers. Not working at $10 an hour pays as much as not working at $2 an hour. Nothing.
Most of the poor don't have jobs, and even those who do typically don't work full time. In 2011, 46.2 million people were below the government's poverty line. Of these, 26.5 million were of working age (18 to 64), but fewer than 40 percent worked at all and only 10 percent had full-time, year-round jobs.
As Samuelson observes, only 10 percent of those below the poverty line work full-time, year-round jobs. That's a national average, though, and does not reflect the reality of our nation's largest state. California is a great example of how data on employment and income are best viewed regionally. I would encourage Samuelson to view this article and accompanying infographics:
California minimum wage hike would boost pay for more than 1 million full-time workers
By Phillip Reese
Last Modified: Friday, Sep. 13, 2013 − 10:40 am

The state legislature on Thursday voted to raise the minimum wage from $8 an hour to $10 an hour -- a change that would affect about 1.5 million full-time, year-round California workers, according to a Bee review of U.S. Census data. That's about 14 percent of the state's full-time workforce.
Of course, there is an important variable that seems to predict a low-wage existence. As Reese's column notes:
More than a third of California's full-time workers earning less than $10 an hour do not have a high school diploma. Another third have no college experience. Only about 10 percent have a high school degree.
The above is a bit confusing ("high school degree"), but many of the working poor receive equivalency diplomas, via the General Educational Development (GED) exams. So, though they do not have a diploma, but they do qualify to attend the state's open-enrollment community colleges. That's a great thing, since it gives people a second chance. Unfortunately, people who didn't graduate traditional high school have an even harder time completing college.

I've argued in previous posts that we need to encourage more personal responsibility. Public school is free, and few people have valid excuses for not completing high school. If we're going to complain about the widening gap between rich and poor, we should also admit that some pretty simple correlations exist.

Graduate, don't do drugs, work (even low-paying jobs), get married (and stay married), and wait to have children until you can afford the expenses. Again, I've written about these simple correlations in the past. The cultural gaps between the rich and the poor are significant; we must get children raised in poverty through our schools, and they must graduate with meaningful high school diplomas reflecting genuine skills and knowledge.

As a native Californian, I do support expanding the community college network — but that's unlikely as the state now caps enrollments and even how many units students can complete. The system is top-heavy and fees are increasing, but the college system remains more affordable than in most states. [Tangent: I would kill the high-speed rail project and move the funds into education and existing infrastructure. California is a prime example of government misallocating funds… by popular vote!]

Basically, the places with better outlooks economically have more high school and college graduates. Remember, the Reese column in the Sacramento Bee addresses only California, yet we know education is key to success, period.

One of the interesting facts about the minimum wage is that many people earning low wages are in school, working towards better wages. It's interesting that the people going to school are working jobs, while the school dropouts are doing… who knows what they're doing. It's not work, and it's not school.

I've had people say they don't think it is "fair" to be a student, trying to go through school, while not earning a "living" wage. I'm sorry, but it is perfectly fair. Students earning minimum wage do not bother me; they are neither experts nor are they usually the heads of households.

Returning to Samuelson, we are reminded that a third of the low-wage earners are members of families well above the poverty line:
[All] low-wage workers aren't poor. "There's a big distinction between low-wage workers and low-income families," says economist David Neumark of the University of California at Irvine. About a third of minimum-wage workers, he says, come from families in the top half of the income distribution, with annual incomes of $50,000 or more.
Most of my friends in college worked at low-wage jobs. They parked cars, waited tables, took movie tickets, and stocked store shelves. They weren't from poor families, and many were not from the middle class. Yet, the majority of my friends worked, and worked a lot of hours. They were learning in the classroom and in the workforce.

If you increase the minimum wage, employers will gravitate even more towards those excellent students as entry-level employees. If I have to pay employees more, I'm going to hire better employees. That might increase productivity, allowing me to hire fewer new employees while growing a business.

Although employees won't be fired because of the higher minimum wage, don't expect any job growth. Instead, expect increases in productivity.
…[Economists] disagree whether past increases in the minimum wage destroyed jobs. One group of studies finds little or no effect; these studies usually compare employment levels in states that have raised their minimums above the federal level with nearby states that haven't changed their minimums. Without job loss, it's a no-brainer to raise the minimum, argue Sylvia Allegretto and Steven Pitts in a paper for the Economic Policy Institute, a left-leaning think tank. Adjusted for inflation, it's now 23 percent lower than in 1968, they say [see]. By contrast, Neumark and others find that minimum-wage increases have reduced employment. Every 10 percent increase may cut teen jobs by 1.5 percent; a 30 percent wage increase implies job reductions of almost 5 percent. A higher minimum involves a "trade-off of higher wages for some against job losses for others," says Neumark.

Not surprisingly, a study by two economists at Texas A&M finds that the minimum wage's biggest adverse effects are on future job growth, not current employment [see].
The Los Angeles Times offered a simple defense of increasing the minimum wage, a view the EPI has advanced: fast food has to be prepared locally. Yes, it does, but does it need to be prepared by as many people as are currently working in a McDonald's or Burger King?

My wife and I order sandwiches at "GetGo" ( once a month or so. You walk up to a screen, not a person, and use photos of ingredients to assemble your virtual sandwich. Once you approve of the items, you can pay and the sandwich is made-to-order. One person works behind the counter in most GetGo Kitchen areas. The ingredients are pre-measured and the oven is pre-timed for any toasting.

McDonald's has adopted similar kiosks for ordering in Europe. Automation of the burger assembly process is being tested. That would remove the one person at a GetGo. Imagine a conveyor system creating a sandwich or burger? Well, it can already be done.

See this video for how fast food will respond to higher wages:

Only academic economists and editorial writers cannot see the future after the wages are increased. Didn't these people see the "Jetsons" as children? The machines are rising, and they'll rise faster if wages jump suddenly.
…[Large] abrupt increases in the minimum would almost certainly kill lots of jobs. That's the danger of "living wage" proposals, which often involve steep increases. Striking fast-food workers want $15 an hour. In Washington, the D.C. Council has passed legislation (the mayor must still approve or veto it) that would require Wal-Mart to pay $12.50 an hour, roughly 50 percent higher than the city's existing minimum, $8.25.
Our local Wal-Mart (or Walmart, as the signs now read) features eight self-checkout lanes. Self-service propane dispensers, water refills, and movie rentals are also available in the store. The remaining workers might earn more, but fewer of them will be necessary. In the end, Walmart will save money and pass along only a portion of that savings to employees. You could pay the "cashier" at the front of the self-checkout twice as much as he or she earned, and Walmart still comes out ahead: eight employees replaced with one is a winning strategy.

After the minimum wage increases, I expect the scholars and politicians supporting the idea will find a way to blame businesses for the lack of job growth. It's always the fault of business… always.
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