20 February, 2013

Raising Federal Minimum Wage May Hurt Growth

I was induced to write this article by several factors. In decreasing order of importance, they are my annoyance with the POTUS' State of the Union address (which fell prey to the usual bane of good rhetoric- politics), some macroeconomic studying that I have been doing, and the fact that I am myself a doubly-minimum-wage laborer (I am, at present, holding two minimum wage jobs while I am in school). Let me up-front and clear from the start:
I am opposed to a minimum wage on principle, yet my opposition to raising it does not in totality stem from this fundamental opposition to the existence of a minimum wage in the first place. 
I hope that, in this somewhat brief and informal format, I am able to at least arm you with another side to this issue you may not have considered, or to at best convince you that raising the federal minimum wage might be an economically poor decision, regardless of how politically savvy it may be.

Minimum Wage? You mean 'Price Floor'

As somebody who has studied economics to no small degree, I think of minimum wages differently than the way in which I imagine most people think of them. To me, wages represent a price for labor; more specifically, it is the price which I command for my labor, and the cost a business must pay to have my labor. When thought of this way, our thinking about wages becomes much easier to objectively analyze.
Just like any producer, I wish to sell my product (my labor) at the highest rate that I can. I cannot, however, force people to accept my price. I must sell my labor at a price with entices buyers. Conversely, firms who purchase labor cannot arbitrarily assign a price which I must accept, low though it may be. They must offer a price that I am willing to sell at, or I reserve the right to refuse to sell. These ideas, working in tandem, create both a supply for labor (on my side) and a demand for labor (on their side) at any give price (wage). Where these two factors intersect represents the equilibrium price for labor in a given market- they will go no higher, and I will go no lower. We meet in the middle.
If any of this sounds pedantic and familiar, it is because you've heard it before in any intro to economics course you've ever taken. The supply and demand of labor functions nearly identically to the supply and demand of price, because wages are simply a price for labor!
This means that, just as how price floors set above the equilibrium price cause a surplus of a good, or more prosaically a shortage of demand for a good, so does a price floor above the equilibrium wage. A minimum wage is just like a minimum price- it is a price floor. When set above the equilibrium, a price floor like minimum wages means that there will be, ceteris paribus, less demand for labor, which in turn means that there will be either fewer labor hours offered to existing employees, or fewer jobs available for new employees.
But who does this principally affect? It doesn't affect those who currently work above the minimum wage; in other words, it doesn't affect those whose careers or job markets have an equilibrium wage already above the minimum wage. Doctors, in short, are not effected by minimum wage. Nor are construction workers, fior that matter, who I know for a fact already receive compensation well above the minimum wage in most areas. Changing the minimum wage upwards principally affects those at the bottom of the pyramid, so to speak: unskilled or inexperienced workers in jobs where there is an almost perfect substitution for labor.
Raising the minimum wage causes increased costs for those businesses who employ unskilled or inexperienced workers, which means that in order to remain in business at all, they must either reduce their labor costs by giving each employee fewer hours or laying off some employees, or they must increase their income by raising prices. Either way, those at the bottom of the heap are the most impacted, since a 1% change in goods prices means more to you if you make $15,000/year than if you make $150,000/year, and since they are the ones who stand the greatest chance of losing hours or even their jobs.
There may also be another effect of minimum wages: preventing good wage negotiation. Think about jobs you commonly perceive as being 'minimum wage' jobs. Burger flipping comes to mind. Perhaps the minimum wage prevents those businesses from paying more than the minimum wage, simply because they perceive that job as being a 'minimum wage job!' If they had to negotiate wages with their employees more freely, the wage demanded by those skilled and/or experienced with burger flipping may well be above the minimum wage, but as it stands, there is little incentive to pay these employees more than the minimum wage, given that they're doing a 'minimum wage job.'

But What About Falling Real Wages?

We've all heard (okay, so maybe we haven't all heard) about the declining real wages in the United States recently. What is less often understood is just what real wages mean. Real wages are simply inflation-adjusted wages, which means that they are a more accurate measure of purchasing power than nominal (non-inflation-adjusted) wages. Why? Because if you make 5% more, but the price of goods has gone up 5%, you can't buy more. Your real wage has stayed the same. If, as has been the case lately, inflation is rising higher than nominal wages are, real wage will decline, and one can purchase fewer goods.
On the face of it, raising minimum wage might seem to address the problem. In fact, it makes it worse. By raising the minimum wage, one feeds into a cost-push inflation which drives consumer prices up (because the cost of labor, one of the factors of production in consumer goods, goes up), erasing any benefits to the real wage.
In fact, if one accepts anecdotal evidence (and I don't), minimum wage was last increased in 2009 (to the current value of $7.25/hr) and since then, median real wage has declined.
One might argue that increasing the minimum wage redistributes real wealth downward toward those making minimum wage and away from those at the very top. Even if this were desirable (something I'm not going to get into here), there seems to me to be little evidence that minimum wage does so.

Minimum Wage and Growth

In order to discuss, very briefly, the effects I believe an increase in the minimum wage would have on growth, we must first, even more briefly, discuss what economic growth actually is, and what causes it to occur.
Economic growth is not caused by increased consumer spending, or my increased government spending. While each of these may increase GDP in the short run (they can hardly avoid doing so, as GDP counts them as inputs), in the long run neither of them tends to represent meaningful growth.
What matters in economic growth is the improvement of productivity (being able to make more stuff). This can only occur in two ways:
1. we get better at making stuff more efficiently out of the resources we have, and/or
2. we find more resources to use in making stuff
What matters, then, in generating economic growth is investment spending, not consumption spending. Investment, of course, being spending on more or better factors of production (including improving the quality of our labor through education/training), spending on finding new sources of a resource, or spending money on research and development to invent new ways to put resources together.
So, to return to minimum wages: even if an increase in minimum wage represents an increase in the real wage, that means that (all else held equal) there will be less investment spending, simply because there is less to be spent! Slowing our investment spending at a time when our economy is in critical need of greater capital accumulation seems, to me, to be absurd.
Besides, even if wages stay the same, the rising tide lifts all boats: a more efficient, growing economy means that all things will be relatively cheaper. For proof, look at how improvements in manufacturing and technology have made computers vastly less expensive and vastly more available than they once were. The standard of living enjoyed by those on the brink of poverty today is much higher than it was only 50 years ago. The access to luxuries is higher now that it has ever been. Improving the economy as a whole does more for the poor than a minimum wage ever could.

Alternative to a Minimum Wage

Some might argue, and I might be in some cases inclined to agree, that something still needs to be done to address income disparity between the very poor and the middle or upper classes. As I have argued above, minimum wage doesn't help; at least, not enough. So, then, what should we do?
I personally support the idea of setting the Earned Income Tax Credit at the poverty level. If we deduct from taxable income all income up to what is considered the poverty line, then there will be more income available for essential purchases for those at or near that line. This would help to ensure that every family received a minimum level of income to purchase their basic needs (food, housing, etc) without needless interference in the job market.
I also support tax reductions aimed at invigorating economic investment, such as eliminating taxes on the purchases of capital stock, education or training expenses, and providing greater incentive for innovation into more efficient production methods by eliminating any taxes associated with expenditures on legitimate research and development. By growing the economy and making it more efficient, we can provide more goods and services at a lower cost, meaning those on the brink of poverty, or in it, can purchase more and enjoy a higher standard of living than they do today (even if they are still, relatively, poorer than their contemporaries).

In conclusion,

I do not support an increase in the federal minimum wage because it further distorts the labor market unnecessarily, fails to help those who need it most, and may stifle economic growth.

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