MINIMUM WAGE LEGISLATION1938-2011

Six Telling Questions

Roger W. Garrison

January 12, 2011

$7.25/hr x 40 hrs/wk x 52 wks/yr $7.25/hr x 40 hrs/wk

PERSONS IN HOUSEHOLD

POVERTY LINE

1 $10,830

2 $14,570

3 $18,3104 $22,050

Minimum wage = $5.15 (from 1997 until 2007) $5.15/hr x 40 hrs/wk x 52 wks/yr = $10,712/yr

2007 – 1997 = 10 years

$5.15/hr x 40 hrs/wk x 52 wks/yr $5.15/hr x 40 hrs/wk $5.15/hr

Isn’t it about time that we raised the minimum wage?

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$7.25/hr x 40 hrs/wk x 52 wks/yr = $15,080/yr $7.25/hr

WHAT ARE THE ISSUES?

Intentions vs Consequences

Rhetoric vs Reality

Caring vs Thinking

Politics vs Economics

“It is past time to stand up for working families and raise the minimum wage.”

“We will honor hard work by raising the minimum wage.”

"If we can have trillions of dollars of tax cuts for the wealthiest people, we can fight for a raise in the minimum wage."

“Raising the minimum wage [to $9.50 by 2012] is one of the most important steps we can take to lift working families out of poverty and into the middle class.”

“Increasing the minimum wage to $7.25 per hour [brings] a pay raise for up to 13 million Americans.”

And with the new minimum wage, “we are also stimulating the economy by giving hardworking Americans the income they need to buy groceries, fill up their gas tanks, and get their children ready to head back-to-school.”

Gregory MankiwFormer ChairmanCouncil of Economic AdvisorsGeorge W. Bush Administration

“We believe that a legislated minimum wage is a poorly targeted anti-poverty device.” “Linda Chavez does not believe

in the minimum wage.”

DOLLAR-DENOMINATED MINIMUM WAGE

INFLATION-ADJUSTED MINIMUM WAGE (BASE YEAR = 2000)

FEDERAL MINIMUM WAGE RATE

The inflation-adjusted minimum wage rate rises with acts of Congress and falls as rising prices erode its purchasing power.

$0.25

$5.15Between 1938 and 2000, prices on average roseby a factor of 12.

Minimum wage legislation applies to the market for unskilled labor.

WORKER HOURS

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INCOME Y = Weq x Neq

MARKET FOR UNSKILLED LABOR

Worker-hours supplied depend positively on the wage rate.

Worker-hours demanded depend negatively on the wage rate.

Market equilibrium is brought about by adjustments in the market wage rate.

Total income earned by unskilled labor is represented by the area of the rectangle bounded by the axes and the equilibrium point.

Letting “Y” represent income, we can write: Y = Weq x Neq.

$5.00

Rather, it simply outlaws employment agreements that entail wage rates less than the minimum wage.

How many worker-hours are both supplied and demanded?

What does the difference between demand and supply represent?

Establishing a price floor in the market for labor eliminates many entry-level jobs. In the words of economist Thomas Sowell, author of Race and Economics, the minimum wage cuts off the bottom rungs of the economic ladder.

WORKER HOURS

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MARKET FOR UNSKILLED LABOR

Now let a legislated minimum wage of $7.25 be imposed.

Minimum-wage legislation does not stipulate that everyone who wants to work for the minimum wage is guaranteed a job at that wage rate.

Suppose that the labor market’s equilibrium wage rate is $5.00.

$7.25

How many worker-hours would firms demand at a price of $7.25?

How many worker-hours would be willingly supplied at $7.25?

unemploymentsurplus

Marshall’s Dictum: Trade is governed by the short side of the market.

Minimum wage legislation hurts most where it is intended to help, as suggested by patterns in the “employed” and “unemployed” categories. Some subgroups in each category are tellingly over-represented.

$5.00

MARKET FOR UNSKILLED LABOR

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$7.25

unemployment

Minimum wage is an inverseRobin Hood: It redistributes income from the lowest-income families to higher-income families.

Secondary and part-time workers in multi-in

come families.

Entry-level worker with clear potential for advancement.

Young workers from working-class households.

Would-be workers from the lowest-income families.

Victims of gender, race, and age discrimination.

Single parents with young children.

Minimum wage legislation hurts most where it is intended to help, as suggested by patterns in the “employed” and “unemployed” categories. Some subgroups in each category are tellingly over-represented.

$5.00

MARKET FOR UNSKILLED LABOR

NeqWORKER HOURS

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$7.25

unemployment

For those most in need of getting a foothold in the marketplace, the minimum wage cuts off a few rungs of the labor-market ladder.

Entry-level market wage

Minimum wage

Semi-skilled wage thru on-the-job training

Minimum wage legislation hurts most where it is intended to help, as suggested by patterns in the “employed” and “unemployed” categories. Some subgroups in each category are tellingly over-represented.

$5.00

MARKET FOR UNSKILLED LABOR

NeqWORKER HOURS

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$7.25

unemployment

For those most in need of getting a foothold in the marketplace, the minimum wage cuts off a few rungs of the labor-market ladder.

INTENTIONS

CONSEQUENCES

…the voter is (or wants to appear to be) a compassionate person.

…the voter has no inkling of the legislation’s actual consequences.

…the voter believes or imagines himself or herself to benefit directly or indirectly from the legal minimum.

…he/she is (or wants to appear to be) a compassionate person.

…he/she has no inkling of the legislation’s actual consequences.

…he/she has many politically active constituents who actually will benefit.

…he/she knows what the typical voter believes, imagines, and doesn’t know.

The typical voter supports minimum-wage legislation because…

The typical politician supports minimum-wage legislation because…

$5.00

WORKER HOURS

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MARKET FOR UNSKILLED LABOR

The old minimum wage, which had been in effect since 1997, was $5.15.

Old minimum (since 1997): $5.15

The initial 70-cent increase raised the minimum to $5.85.

First increase (July 24, 2007): $5.85

The next 70-cent increase raised the minimum to $6.55.

In 1968, the all-time-high minimum wage (with its value of $1.60 adjusted for today’s purchasing power) would be $10.00.

All-time-high minimum wage (1968): $10.00

Second increase (July 24, 2008): $6.55Third increase (July 24, 2009): $7.25

The final 70-cent increase raised the minimum to $7.25.

TELLING QUESTION #1:

If raising the minimum wage to $7.25 is a good thing, then why wouldn’t raising it to $10.00 be better?

And why wouldn’t $20.00 or $50.00 be better still?

$5.00

WORKER HOURS

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MARKET FOR UNSKILLED LABOR

Old minimum (since 1997): $5.15First increase (July 24, 2007): $5.85

Second increase (July 24, 2008): $6.55Third increase (July 24, 2009): $7.25

Independent of the past levels of the minimum wage rate, any current minimum above the equilibrium (i.e. market clearing) wage rate will be accompanied by unemployment, the higher the minimum, the greater the unemployment.

All-time-high minimum wage (1968): $10.00

Between mid-2008 and mid-2009, the CPI actually fell by about 2.2%. Hence, in real terms, the final nominal 70 cent increase in the minimum wage rate amounted to a 13% raise.

8.00 $8.00

$7.50

$7.00

$6.50

$6.00

$5.50

$5.00

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Minimum wage legislation

A. creates a balance between supply and demand in the market for unskilled labor.

B. facilitates the absorption of first-time job seekers into the labor force.

C. guarantees a living wage to all able-bodied people who want to be a member of this country’s labor force.

D. reduces job opportunities for unskilled workers.

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TELLING QUESTION #2:

Why doesn’t minimum wage legislation specify a minimum total annual income for minimum wage workers in addition to the minimum hourly wage rate?

$5.00

WORKER HOURS

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$7.25

unemployment

INCOME INCOME

Total income to minimum-wage workers may rise above or fall below the market-determined income, depending on whether the demand for unskilled labor is elastic or inelastic.

Y = Weq x Neq. And as Weq rises, Neq falls. Y can go either way.

The government can’t repeal the laws of supply and demand. It can enforce a minimum wage rate, but (barring an outright socialization of labor markets) it has no way of controlling how many (if any) minimum-wage workers are actually hired---or whether they’re hired on full-time or part-time basis.

$5.00

WORKER HOURS

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$7.25

unemployment

INCOME

As time goes by, the demand for unskilled labor becomes more elastic---as firms substitute capital and/or skilled labor for unskilled labor.

As a consequence, the total income to minimum wage workers falls further.

The government can’t repeal the laws of supply and demand. It can enforce a minimum wage rate, but (barring an outright socialization of labor markets) it has no way of controlling how many (if any) minimum-wage workers are actually hired---or whether they’re hired on full-time or part-time basis.

An increase in the minimum wage rate from $5.15 to $7.25

A. will lead to a proportional increase in the total income received by unskilled workers.

B. will necessarily increase the total income received by unskilled workers.

C. will actually decrease the total income received by unskilled workers if the demand for unskilled labor is elastic.

D. will permanently increase the purchasing power of this country’s lowest-paid workers. S

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TELLING QUESTION #3:

Why doesn’t the minimum wage legislation apply to farm labor as well as to non-farm labor?

If we raise the minimum wage to “honor hard work,” shouldn’t we make sure to honor the hard work done on this country’s farms?

$5.00

NeqWORKER HOURS

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$7.25

unemployment

$2.75

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$7.25

unemployment

NON-FARM LABORFARM LABOR

The market wage rate for farm workers is low. Extending minimum wage legislation to all farm workers would cause a politically unacceptable level of unemployment.

But with the exemption for farm workers, the unemployed in the non-farm sector find jobs on the farm, adding to the supply of farm workers and further depressing farm wages.

Minimum wage legislation

A. makes supply-and-demand analysis irrelevant to the question of work and pay.

B. raises wage rates both on and off the farm.

C. gives unskilled workers more flexibility by taking the question of pay off the table.

D. increases the supply of farm labor by restricting off-the-farm employment opportunities.

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TELLING QUESTION #4:

Given all the perverse consequences of minimum wage legislation, why do most all workers, skilled and unskilled (and especially labor unions), support raising the minimum wage?

Union members already earn a lot more than the minimum wage, don’t they?

WORKER HOURS

The minimum wage rate has no direct effect on the market for skilled labor. But skilled and unskilled labor can be substitute inputs, which means that the imposition of a minimum wage shifts the demand for skilled labor rightward, causing both employment and the wage rate to rise.

Unambiguously, the total income to skilled workers increases, as both the wage rate and the level of employment increase.

$5.00

NeqWORKER HOURS

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$7.25

unemployment $10.00

Neq

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$7.25

UNSKILLED LABORSKILLED LABOR

In effect, skilled labor, much of it unionized, gains substantially while unskilled labor gains little or even suffers a net loss.

Increases in the minimum wage are accompanied by

A. unambiguous gains for both skilled and unskilled labor.

B. unambiguous gains for skilled labor with mixed consequences for unskilled labor.

C. An overall leveling of the playing field for labor markets.

D. lasting gains for politicians who opposed minimum-wage increases on the basis of principles-level economics.

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TELLING QUESTION #5:

Why is there no allowance for regional differences in the cost of living—so that a minimum-wage income has the same purchasing power for Northern workers as it has for Southern workers?

Wouldn’t regional minimum wages create a more level playing field?

But geographical location is the only distinction between these two labor markets. Predictably, then, unemployed Southerners will migrate northward. The supply of labor shifts leftward in the South and rightward in the North.In effect, Northern workers gain by imposing increased labor costs on Southern producers.

Still, the wage rate and total income for Northern labor is higher than it would be without the minimum wage

$5.00

NeqWORKER HOURS

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$7.25

unemployment $10.00

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$7.25

SOUTHERN LABORNORTHERN LABOR

The analysis of the North-South distinction parallels the analysis of the skilled-unskilled distinction.

With higher labor costs in the South, the demand for Northern labor is increased.

Increases in the federal minimum wage are typically supported by

A. Northern politicians who want to help eradicate poverty on a nationwide basis.

B. Southern politicians who are interested in leveling the purchasing-power playing field.

C. Northern politicians who want to give Northern manufacturers a competitive edge.

D. Southern politicians who are most interested in eradicating rural poverty. S

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TELLING QUESTION #6:

Why don’t the legislated increases in the minimum wage provide for automatic cost-of-living adjustments--so that the minimum is specified in real terms and isn’t eroded by inflation?

The law specifies the minimum wage in nominal terms. Thus, the real value of an hour’s worth of labor declines during periods of inflation. (There is no built-in cost-of-living adjustment to compensate for inflation.)

In the eight years since Congress mandated the last increase, inflation has wiped out any gains.

The current minimum wage "is lower in value than at any time since 1949--when Harry Truman was president."

2004 1949

If the minimum wage increased automatically with inflation, it would cease to be a political issue.

What? If the minimum wage increased automatically with inflation, it would cease to be a political issue?

Yes, as things now stand, the real minimum wage falls with inflation and rises with legislative acts.

What plausible reason can explain the failure to include automatic cost-of-living adjustments in minimum-wage legislation?

A. Supporters of the minimum wage didn’t know that inflation might be a problem.

B. Legislators didn’t know that cost-of-living adjustments were an option.

C. Drafters of the legislation simply forgot to include a cost-of living adjustment.

D. Politicians don’t want to lose the minimum wage as an issue in future election years.

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The question is: Can Congress put politics aside long enough to raise the minimum wage?

What are the premises that underlie Lou Dobbs’ question?

MEDIA BIAS???

--that the minimum wage should be raised (and everybody knows it).

--that the consequences are as advertised by its proponents.

--that political opposition can only stem from narrow, private interests.

--that principled opposition reflects a slavish adherence to ideology.

--that market-determined wage rates are indefensible.

--that basic supply and demand analysis has no bearing on the issue.

Linda Chavez does not believe in the minimum wage.

“We believe that a legislated minimum wage is a poorly targeted anti-

poverty device.”

The economics and politics of minimum wage legislation carries a broader lesson.

In many instance, economically sound policy and politically advantages policy are in serious conflict.

Economics is about dealing with tradeoffs that reality foists upon us. Politics is about promising it all to the voting public.

MINIMUM WAGE LEGISLATION

This economic/political conflict carries over from microeconomics to macroeconomics.

“Stimulant packages” (to fight unemployment) and “price-and-wage freezes” (to fight inflation) are heavy on political appeal and light on economic justification. The battleground here is between economists who believe that markets work and economists who believe that the market system is fundamentally flawed.

MINIMUM WAGE LEGISLATION1938-2010

Six Telling Questions

Roger W. Garrison