Musings on Minimum Wage

For conservatives protesting the idea of a nationwide minimum wage, I offer a few thoughts on the matter mostly arguing in favor of the imperfect idea.

Imperfect? Sure, economics demands that providing for extra hourly wages for an appropriate worker has to be paid for by something. It’s a fair, rational point to make in and of itself. If the same pool of money available for an employer to spend is regulated to go to an hourly rate, then that has to come out of either total hours, total employees, or price of goods sold in order to make the arithmetic work out. Revenue did not spontaneously change with the new rule, after all, and so the pool of money available to spend did not just all of a sudden change.

The catch is in two common misplaced assumptions by conservatives on such economic and fiscal matters.

First, for partisan reasons as much as any other, the reflex is to go for the most dramatic consequence possible: people losing their jobs. Living in Seattle and the surrounding area of Washington through corresponding minimum wage hikes, I can assure you anecdotally at least that not only were not many firings experienced, if anything I saw many many cases of employers trying to hire more, not less. In fact, instead the consequence is much more borne out in reduced hours maybe, but mostly increased prices. I would appreciate any quality empirical correction to this.

Second, conservative ideology in particular on these issues seems to directly associate the economic notions of efficiency and inefficiency with good and bad, respectively. In fact, notions of efficiency are only some of the tools available for economic analysis: which, like all good science, simply tells you what will happen given some starting conditions. It assigns no inherent value to any outcome. If you decide to associate “good” with “efficient,” then so be it, but make no pretense about the fact that you chose to do so, that this was for you a value judgment. It is perfectly possible to construct a system of values in which there are multitudinous exceptions to that particular system. For example, an environmentalist may ascribe positive value to a policy which is economically inefficient. There’s nothing wrong with that.

(Another way of thinking about this is that all economics can do is tell you how to make more money, or in the macro case how more people can make more money. It can’t tell you whether more people making more money in a particular case is necessarily the desirable outcome.)

Certainly, in no case are absolute assertions like doomsday employment scenarios in the vocabulary of economics. Its vernacular is in the margins, in other words what comparatively changes only. You can have scenarios where employment is marginally decreased by a policy, only to discover that what that ends up meaning is that you have eighty fewer jobs out of ten million. Then again, maybe you have two million fewer jobs out of ten million instead! The English part of economics without the math or data doesn’t do you any good in knowing the difference ahead of time.

The main objection that you could raise to minimum wage in my experience is that a poorer area has greater trouble locally paying for it. This is well motivated. The main mechanisms are lowering worker hours, reducing number of workers (layoffs), or raising prices.

Again, anecdotally in the Seattle area I have specific (empirical) reason to believe that the former two are mostly overblown phantoms and in fact the third is what ends up taking effect. From a theoretical perspective instead, I think I can motivate why this should be expected. Employers need workers to do their business. There’s always a minimum number of employees needed to ensure efficient operation. Layoffs should thus be treated as a last-resort in any case including in response to a minimum wage hike. Reducing hours is more likely, but this amounts to from a single digit to a double digit decrease in expenditure per hour depending on how much expected business dictates labor levels. In other words, it’s proportional to sales. Ideal? No, but “not ideal” has never necessarily equaled outright “bad.” This is a good demonstration of what I mean by people exaggerating what it means that there are marginal impacts of an action or policy. All we can say is what is versus what would have otherwise happened. Sometimes that’s, for example, $50 instead $52 in profit: neither ideal nor the end of the world.

Even so, for similar reasons as why layoffs are unlikely, while employers may use the opportunity to trim inefficient labor allocations, they are also not incentivized to significantly, excessively do this due to resulting losses in productivity. The final option then is to increase the price of sold goods. (Again, this in my experience is what typically what ends up happening.) This puts the financial burden on customers, yes, but necessarily not entirely minimum wage workers affected by the wage increase, so the money is available to pay for the increase without a one-for-one drop off in demand. So this seems like it should be the favored option.

(Unfortunately, many corporate franchises actually have less flexibility here than they may seem, since while technically independent small businesses they effectively must frequently honor corporate requirements such as honoring certain nationwide price levels, coupons, etc., while local politics in particular dictate certain wage levels. In a perfect world, we’d thus have a more nuanced discussion involving them.)

Therefore the economic aspect of this argument we have in polite partisan society (ha!) wraps around the axle of economic good or bad done by increasing goods prices to pay for wage hikes.

This is what complicates a national minimum wage hike like what is being proposed by President Biden: to fifteen dollars an hour. The feasibility of a given increase hinges on the local economy having sufficient people of high enough income to afford the resulting price increase without killing demand, which in turn generally requires having a strong local economy.

The most nuanced answer is to “peg” or figuratively strap the hourly wage to a set of conditions determined by how well the local economy is doing. The advocate idea is that the better the economy, the more it can afford the increase.

Again, though, “better” is a relative not absolute term. The question then about Biden’s proposal, and especially that about more radical leftists, is whether the resulting disadvantages matter enough to warrant sinking the prospect out of the gate particularly for lower income economies in the Midwest, the South, etc.

My argument from here on out will be pretty much theoretical. If anyone has an empirical side that either supports or disproves this, please speak up! Or for that matter, bring better theoretical arguments than my own.

Minimum wage increases do carry higher risk in lower income areas. However it’s not all doom and gloom.

First, focus particularly on the observed fact that much of the minimum wage increase is locally paid for by individual business price increases. Many if not most of these are paid out by people who didn’t see any change to income from the minimum wage hike: who were already making more money. In a sense, wealthier people are subsidizing much of the pay hike. The rest is spread out such that the net extra an average minimum wage worker pays is less than the boost they saw.

That just covers the cost, and why it’s not necessarily true that minimum wage workers are just robbing Peter to pay Paul to afford themselves an hourly wage hike. The next point is that the hike meaningfully benefits the economy by spiking a surge in bottom-up spending, so stimulating commerce. One of the great insights made by Keynesian economics is also almost rather obvious. Poorer people spend more of their income than richer people do, so it implicitly makes sense to have some of the wealthy’s unspent income (thus benefitting no one) be allocated — through investment, taxes, or spending from minimum-wage induced price hikes on consumed goods — to people who will spend it more.

The entire economy will profit from this. If prices on goods consumed by the wealthy go up, then some of that otherwise unspent money will have to be spent. The well-off pay for the minimum wage hike which will then in turn also increase the amount poorer people had available to disproportionately spend. Unused money is injected into the economy, benefitting society as a whole.

Does this do enough by that to offset difficulties imposed by lower income local economies? Maybe, maybe not. I’d just like to suggest that we are well motivated to think that this may actually be possible before outright dismissing the scenario.

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Christopher Sharp

Christopher Sharp

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This effort has evolved to primarily be for clearly communicating technical subject matter to the public: largely my two passions astrophysics and space travel.