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Increasing Federal Minimum Wage: Who does it benefit?
ege02
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Certainly not the low-income families that it targets, finds a California study done by economists Margaret O’Brien-Strain and Thomas MaCurdy, both Ph.Ds of Economics from Stanford U. and Adjunct Fellows at the Public Policy Institute of California (PPIC).
The study, titled Increasing the Minimum Wage: California's Winners and Losers, suggested that the assumptions behind public policy do not always hold up to critical scrutiny. "For example," David Lyon, president of PPIC, writes, "those in favor of an increase in minimum wage assume that the additional earnings will benefit low-income families; yet even under broad definitions of poverty, poor and near-poor families received less than half of the earnings stemming from the 1996 federal increase."
I'm going to go ahead and copy/paste the key findings of the study below, for those of you who can't access it for whatever reason. Emphasis mine.
Its conclusions for the (then) current policy debate:
The conventional wisdom behind the minimum wage has always been that an increase in minimum wage would result in lower employment, as employers lay off workers (or hire less) to cut labor costs. Recent studies however - most notably by Card and Krueger - have put this logic in question. This study that I linked above says that, even if an increase in minimum wage doesn't lead to lower employment, a federal wage increase is still bad.
Basically the idea is that increasing the minimum wage at the federal level is not optimal; it fails to produce the desired effect of helping low-income families because most of them are actually worse off following an FMWI. If your family is below the poverty threshold but doesn't have a low-wage worker - perhaps because people are working part-time, or are simply not working due to conditions or being unable to find work - you get screwed. Then there is the fact that high-income families benefit from a minimum wage increase almost as much as low-income families, which is clearly an unintended consequence, and not desired.
The paper's main finding is that in order to reach the desired outcome of helping poor families, any increase in minimum-wage should happen at the state level, rather than federal.
The study, titled Increasing the Minimum Wage: California's Winners and Losers, suggested that the assumptions behind public policy do not always hold up to critical scrutiny. "For example," David Lyon, president of PPIC, writes, "those in favor of an increase in minimum wage assume that the additional earnings will benefit low-income families; yet even under broad definitions of poverty, poor and near-poor families received less than half of the earnings stemming from the 1996 federal increase."
I'm going to go ahead and copy/paste the key findings of the study below, for those of you who can't access it for whatever reason. Emphasis mine.
1. Families in poverty receive only a fraction of the benefits of a minimum wage increase; even under broader definitions, poor and near-poor families get less than half of the additional earnings. Although the minimum wage is frequently compared to the poverty level for a family of three or four, only 11 percent of the additional earnings from the minimum wage go to families with children living in poverty. Less than 10 percent of the additional earnings go to families supporting children primarily on minimum wage earnings. In fact, higher-income families are nearly as likely as low-income families to benefit from the minimum wage. The 40 percent of families with the lowest incomes receive only 43 percent of the extra earnings from the increase in the minimum wage. The 40 percent of families with the highest income receive 34 percent of the additional earnings. Because minimum wage earnings, unlike most income supports, are taxable, 22 percent of the additional earnings are collected in taxes.
2. As the minimum wage drives up prices, low-income families face a larger percentage increase than high-income families in the price of the goods they buy. If there are no employment losses following a minimum wage increase, employers are likely to pass along their higher labor costs as higher prices for the goods they produce. In fact, because employers pay taxes on the wages, their additional labor costs are higher than the additional earnings paid to workers. When translated into prices, the federal increase from $4.25 to $5.15 costs California families an average of $133 more per year for the goods they normally purchase. Since higher-income families spend more, they would pay more in absolute terms than lower-income families: up to $234 per year compared to $84 per year. However, this price increase represents a smaller share of expenditures for higher-income families, because fewer of their purchases are produced by low-wage workers.
3. On net, the minimum wage increase redistributes income to families with low-wage workers from families without, regardless of the income level. At all income levels, about one in five families benefits from a minimum wage increase because there is a low-wage worker in the family. Families with low-wage workers are clearly better off following the wage increase, assuming that there are no employment losses. Although they lose some of their additional earnings to taxes and to higher prices for the goods they purchase, these costs do not offset the
extra income from the higher wage. However, most families at all income levels do not include a low-wage worker. For example, among the poorest 20 percent of families in California, three out of four families do not include a low-wage worker, either because no one is working in the household or because they earn higher wages but do not work many hours. These families without low-wage workers pay higher prices without receiving any additional income, so the main redistribution of income is from families without low-wage workers to families with low-wage workers, rather than from rich to poor families. Averaging across all families, however, Californians are slightly worse off following a minimum wage increase because taxes reduce the value of the earnings while increasing the labor costs.
4. Overall, California families are better off with a state-only minimum wage increase and worse off with a federal minimum wage increase. Under a federal minimum wage increase, Californians must pay higher prices for goods produced by minimum wage workers both within and outside the state. Unfortunately, the total additional labor costs exceed the extra income families receive, since the earnings incur both income and payroll taxes. If the increase had occurred only at the state level, consumers outside California would have paid as much as a third of
the higher costs through their purchase of goods exported from California. (If they are unwilling to pay higher prices for these goods, the assumption of no employment loss cannot hold.) In the alternative scenario of a state-only increase, therefore, the benefits to Californians exceed the costs overall, although the majority of families still pay more without receiving higher earnings. On the other hand, the fact that a state-only wage increase makes goods produced in California more expensive than goods produced outside the state increases the likelihood that the minimum wage will cause employment losses.
5. The wage increase from $4.25 to $5.15 raised labor costs by approximately $1.5 billion in California and by $13 billion nationwide. The 90¢ increase in the minimum wage that went into effect between 1996 and 1997 increased the gross earnings of low-wage workers by about $12 billion in the United States, with $1.4 billion
going to higher wages for Californians. However, the total labor costs were higher, primarily because of payroll taxes, whereas the actual increase in take-home pay was lower than the increase in gross earnings. Thus, the increased minimum raised labor costs in California by $1.53 billion, but workers kept only $1.11 billion. The remaining $421 million went to payroll and income taxes collected on the higher wages.
Its conclusions for the (then) current policy debate:
This report focuses on the federal minimum wage increase from $4.25 to $5.15. Since this increase was passed, California increased its own minimum wage to $5.75, and Congress is now calling for an additional increase to $6.15. We expect a new increase to have distributional effects that are very similar to the last federal increase, with one important exception. Given our $5.75 minimum, a new minimum $6.15 represents a $1 increase for minimum wage workers outside California, but only a 40¢ increase for minimum wage workers within California. This acts in the opposite direction of a state-only increase: Californians would pay more for this additional increment in the form of higher prices for goods from both inside and outside California than they would receive through higher earnings.
The conventional wisdom behind the minimum wage has always been that an increase in minimum wage would result in lower employment, as employers lay off workers (or hire less) to cut labor costs. Recent studies however - most notably by Card and Krueger - have put this logic in question. This study that I linked above says that, even if an increase in minimum wage doesn't lead to lower employment, a federal wage increase is still bad.
Basically the idea is that increasing the minimum wage at the federal level is not optimal; it fails to produce the desired effect of helping low-income families because most of them are actually worse off following an FMWI. If your family is below the poverty threshold but doesn't have a low-wage worker - perhaps because people are working part-time, or are simply not working due to conditions or being unable to find work - you get screwed. Then there is the fact that high-income families benefit from a minimum wage increase almost as much as low-income families, which is clearly an unintended consequence, and not desired.
The paper's main finding is that in order to reach the desired outcome of helping poor families, any increase in minimum-wage should happen at the state level, rather than federal.
ege02 on
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Did you even read the findings?
Because they are saying the exact opposite of what you just said here.
The study isn't saying anything about the "globe." It is comparing the effects of a federal level minimum wage increase and a state-level.
California State has the highest population and the largest economy in the United States. This is precisely why the findings of this study are very important, and they would probably be very similar for other states, maybe just with different numbers.
The findings within California are unlikely to translate well to anywhere else.
But, again, low-income work is kind of a shitty situation because the labor force is now global, meaning there is a fucking MASSIVE unskilled labor surplus. Labor surplus is horrible for low-income workers, especially with different wage minimums, because you lose negotiating ground.
This was an interesting point, though. I didn't think of the effect that higher wages would have on the cost of goods from outside of the state. Aside from getting our goods from developing nations where the costs are REALLY low, how can this be offset?
something like that; and in that case, it seems to me that it is not unreasonable that it would provide a quite valid sample size for other large economies
but they're listening to every word I say
Yes. China and California, totally comparable.
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RedX: Yep. Federal just keeps states from going -wacky- low.
there are plenty that are near its size; citing one extra-large economy doesn't prove anything
The point of the study is that the effect of a federal minimum wage increase in California is to hurt poor families, largely because the price of products from other states will increase more (due to lower state minimum wages in those states).
What do you think California is?
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Matrijs: Yeah. California is comparably fucking rich. Those other states are fricking paupers. If you pay the paupers better the princes don't get to grow their purse as much.
Really? In minnesota the federal is about a dollar more than the state. Some people only fall under the state because of business size. It allows loopholes in the wage law.
but they're listening to every word I say
yep.
I retract my former statement as stupid. I must have read the wage chart backwards.
but they're listening to every word I say
I'm not trying to be a smartass here, I'm asking honestly. Seems like our economy has changed a lot in 8 years. Also, that statements like:
...could be addressed just by, you know, looking up what actually happened.
It's likely I'm missing something here, though, I just don't know what it is.
Except that the increase to $6.15 didn't actually happen at that time. I think we just increased it last year.
Edit: Oh, never mind, I see what you meant. *shrug* I don't actually know much about the history of minimum wage in California, particulary in the first several years of this decade, considering I was 13-17 at the time and not working. I just thought I should bring up the age of the paper in question.
There's no humane way to live off of it as primary income.
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Frankly, the dollars don't mean much except in how much your in-pocket income is versus the cost of living.
If you're shitting gold nuggets but it costs a gold nugget to get a spoonful of cheerios you're still fucked.
Well, the conclusion is that a state-level minimum wage is good, but a federal-level minimum wage is bad.
This is assuming, of course, that all states have some sort of minimum wage. For those that don't, a federal level one is necessary to make sure people there don't get fucked.
The "issue" is simply that if people make more money then someone has to pay for it.
The closest thing to a real issue is that the more money you make, the higher your tax bracket, but I doubt this is much of a factor for anyone earning a livable wage.
Unemployment goes up, prices go up, economic clusterfuck all around. Given California's dependence on illegal immigrant labor i would also be hesistant to use it as an example. Were that pool of labor to dry up, say due to our government getting its head out of its ass, you would see a huge effect on California's economy. Most of it for the worst due to now having to pay minimum wage for jobs currently being done for much less.
More seriously, until the rest of the world catches up with us economically and shares the same ideals about what jobs are fit to have, and until we find a way to direct more of the top-end profits back down to the rest of the work force, we're going to be in this horrible little catch-22 where we generally end up doing our best to demote the middle class to being a lower class so they can compete with the global masses of lower class people.
(I think the aim of the paper may have partially been to readjust the tax brackets and/or we collect taxes, or at least to prod policy makers into reconsidering the effect of taxes on families.)
I am just going to throw out some funny little facts here.
Denmark have under 2% unemployment and a minimum wage of around 45kr/h for minors and 90kr/h for adults, this is equals $10/h for minors and $20/h for adults.
Now I am not saying that the situations are the same, just throwing it out there. Also we have practically nobody living under the poverty line, a few people are serious fuckups and thats really it.
EDIT: Its unfair to call them fuckups, there are some people caught in pit falls in the system where they have crappy lives, but they are rare.
In regards to jobs, we are actually having problems with to few people for everything, if you need another job in todays Denmark you can get one in a few hours, if you aren't a retard and that is my experience as a 20 year old high school dropout with no real skills and a depression.
Denmark is an extremely different case. You guys are far more socialist. Your population is 5.5 million. Everything from your culture to your politics to the size and composition of your economy to your administrative details are different.
In other words, your "funny little facts" are pretty much irrelevant.
Relax dude, you're overreacting, I did state that the situation wasn't the same, not by a long shot. All I was saying is that higher minimum wages don't automatically ruin your entire economy, as his statement was a bit too dark in my eyes.
I agree with you though on the fact that everything about us is different, but I don't think it makes what I was trying to say any less valid, which is simply, raising minimum wage isn't automatically economy ruining, it may not be the best solution for you, I wouldn't know I am not an economist.
EDIT: Although, considering the fact that I AM a socialist my personal knee-jerk reaction would be to raise minimum wages and taxes and then start handing out money to the poor in order to raise their buying capability, I would never suggest it to an american though, as I know you guys go into collective allergic reaction to any of those suggestions.
Thats because from an economic standpoint your shooting yourself in the face.
Look at it this way. Lets say i own a fruit store. I have two employees Biggs, and wedge. I pay each of them 5 dollars an hour to work there. Now the minimum wage goes up. I know if i raise my prices to cover both their wage increases less people are going to buy my fruit. So i fire biggs and raise the prices to cover wedges extra dollar. Now i make him do the work of 2 guys, because if he doesnt ill just fire him and find someone else. Also people currently not working may decide with the minimum wage being higher to enter the job market.
What happens is the supply of jobs decreases, the demand for jobs increases, and the people your trying to help get to deal with more unemployment and higher prices. I used to be all for a higher minimum wage, then i got a couple econ classes under my belt and realized just how fucked up our economy really is.
And thats where the differences in our two economic situations arrive, in Denmark it is much harder to threaten the employee with firing him, because he actually have a better chance of finding a new job then you have of hiring someone new, due to shortage of workers.
Which is why I agreed with Ege that it might not be the best for you guys given that it would take a major restructuring of your system or it would have to wait until a time where you are running out of workers for those jobs, which has been the case here for over a decade, which has pushed our wages through the roof and into some of the highest minimum wages in the world.
Even then it wouldnt happen with you guys due to the each man for himself mentality, whereas we turn to unions to get our wages decided, this means you cant hire someone else like that as the union controls the workforce and can force the employers to accept the wages.
All in all, I would agree that in itself a minimum wage increase on its own is probably not going to do a lot to help, you would need to control a bunch of other factors aswell and your aversion to control makes that difficult at best.
You're assuming that minimum wage labor (or labor costs in general) accounts for the bulk of the overall expenses, and that increasing the minimum wage will result in a proportional increase in expenses. In reality, labor costs account for merely one chunk of overall expenses, and minimum wage labor accounts for a tiny fraction of that.
You're assuming that the demand for minimum wage labor is completely elastic. It's not. Businesses aren't going to hire superfluous employees just because they can afford to. If they hire someone, it's probably because that person fulfills a necessary role within the company. After all, superfluous employees represent potential liability.
Just out of curiosity, how much fruit do you sell per hour, if it's enough to warrant hiring two separate employees to hock it? Because if you sell $10 worth of fruit per hour and the MW goes up $2 per employee, then you would need to increase prices by 40% to cover costs, discouraging consumers. Of course, if you only sold $10 worth of fruit per hour, you probably didn't need both of them employed in the first place.
So how much do you sell?
Just out of curiosity, are you familiar with the Giffen Paradox? The Giffen paradox is a counter-example to the law of demand. Basically, if the price of inexpensive staples goes up, then the demand for inexpensive staples goes up, because you still have basic nutritional demands that need to be met, and because you have less money to spend on luxury goods (which are still more expensive.). So if you're used to buying rice and steak and the price of rice doubles, then you will probably buy more rice and less steak.
Now, let's apply the Giffen paradox to labor. You have the inexpensive staples (blue collar laborers), and you have the luxury item (CEO salaries.). What happens when you increase the price of your blue collar workers? Well, then you have less money to spend on your CEO salaries. Which means that they might have to cut back on their solid gold back scratchers, but they probably didn't need that anyway. After all, just because the cost of labor goes up doesn't mean that your demand for workers stays the same. Yes, there's outsourcing, but chances are that if you're working minimum wage, then you're working a job where you have to be physically present in the actual business, rather than something like tech support.
Also to address NATIK unions in this country are causing there own batch of problems. Including making it difficult to join the union, and demanding wages the market has a problem bearing. Also stifling those who are skillful at their jobs because if they work to hard they make everyone else look bad. Revealing the fact they are working slowly to guarantee more hours worked, and thus a paycheck. Some union work is very seasonal so they drag it out.
Its alot more complicated than that, but currently unions are doing both good, and bad in the US.
First off while labor itself does not, their are alot of additional taxes and fees that go into each employee. Also jobs would rather be understaffed than overstaffed. Take a look at our increases in the minimum wage and correlate them with our unemployment. Pretty much every study done on this subjects indicates a increase in the minimum wage hurts the unskilled or minority workers.
Businesses dont necessarily higher extra employees, but nor do they hire all the employees they need. They may limp along understaffed because they cant get someone to do the job, or have people working longer hours peforming double duty because paying them a little more for overtime avoids them having to pay for a completely seperate person.
My fruit sellage per hour is not really in question. Im not about to pull numbers out of my ass to justify what studies have shown. However your more than welcome to do a bit of research, or even check with those with degrees in economics. If your wanting to start juggling numbers im afraid my expertise lies in other areas.