Monday, April 1, 2013

Defining a Minimum Wage: Economics or Social Philosophy?

When a country decides to raise or lower its minimum wage, it is essentially decreeing that money will be transferred from one set of pockets to another set of pockets. This movement of funds will change spending patterns for all people involved. These changes will ripple through the economy causing widespread secondary effects. The spending decisions made will depend on economic, political, and emotional considerations that need not have a rational underpinning, and will certainly be a function of the precise conditions at the time they are made. There are no fundamental laws at work here.

The response that economists are trained to give is that raising wages will always eliminate jobs. However, when economists actually try to extract data that might prove that contention, they arrive at a variety of conclusions: some predict jobs are actually created, some predict jobs are lost, and some see no effect. One suspects that if one works at it one can always find data to support whatever conclusion one wishes to reach. The problem seems to be too complicated for economists to figure out. That is fortunate because the definition of a minimum wage is, in fact, too important to be left in the hands of the economists.

President Obama proposed raising the minimum wage to $9 per hour over a few years from its current value of $7.25. Let’s put this proposal in perspective and evaluate it in light of other countries’ experiences.

An article in The Economist provides this data from the OECD:

"Mr Obama’s proposal would boost the nominal wage to $9 per hour by 2015, restoring it, in real terms, to its 1979 level, though relative to median wages it would still be lower than in many other rich countries. Thereafter, it would be indexed to inflation. He would also raise the minimum wage for workers who receive tips for the first time in over 20 years."

If raising the minimum wage is such a job killer, why do other countries seem to do quite well with a value much larger relative to their median income? Japan has a minimum wage equal, relative to median, to that of the United States at 0.38 (2011). The OECD data indicate that only the Czech Republic at 0.35 and perhaps Mexico for whom data is not provided have a lower value. France is not the country most generous to its lowest wage workers; that honor goes to Turkey at 0.71. It also has a relatively healthy economy.

Usually the United States and the other English-speaking countries follow similar logic when it comes to social and economic positions. In this case, the United States is a definite outlier: Australia, 0.54; Canada, 0.45; Ireland, 0.48; New Zealand, 0.59; United Kingdom, 0.47.

If there are economic laws, they seem to behave differently in the United States.

This source provides added insight.

If the current value for the minimum wage is projected back in time in current dollars, one determines that the value of the minimum wage was actually highest in the1960s at the equivalent of about $10 per hour. There were a lot of problems in the 1960s, but it is difficult to recall a too-high minimum wage being one of them.

An article in Bloomberg Businessweek by Karen E. Klein and Nick Leiber provides additional background.

A number of states have already raised their own minimum wage above that set by the federal government.

The states of Washington and Oregon are already at the value proposed by Obama. They seem to have escaped economic calamity.

The authors indicate that there is now significant support from within the business community for raising the minimum wage.

"Now, with public anger over income inequality deepening and economic research challenging the notion that higher wages suppress employment, a growing number of small business advocates support a hike."

"That includes dozens of business groups and networks composed primarily of small business owners such as the Main Street Alliance, the National Latino Farmers & Ranchers Trade Association, and the Greater New York Chamber of Commerce. ‘Our women [business owners] who pay a living wage have an advantage over their larger counterparts who don’t,’ says Margot Dorfman, chief executive officer of the U.S. Women’s Chamber of Commerce, an organization with 500,000 members, three-quarters of whom are small business owners. ‘Whether Obama’s proposal is high enough or the time frame is fast enough is the question’."

The traditional view persists.

"Two of the nation’s biggest small business groups, the National Federation of Independent Business and the National Small Business Association, oppose any increase. ‘Ben Bernanke isn’t printing the money. It has to come from somewhere,’ says Jack Mozloom, a spokesman at the NFIB. ‘If you artificially increase demand in the form of minimum wages, you’re going to suppress demand elsewhere, and that’s going to come directly from the employer’s side’."

In spite of what these spokespersons might be saying, business owners have essentially decided the matter already. Most are already paying a higher wage than the federal minimum because they find it a more efficient way to run their businesses; they attract better workers and suffer less employee turnover. This owner states the case nicely.

"John Schall, whose Mongolian barbecue restaurant Fire + Ice in Harvard Square employs around 40, starts his workers at $10 an hour. The argument about a minimum wage hike imperiling small business ‘never rings true,’ says the longtime restaurateur. ‘If somebody came to you with a business plan and said, ‘If I can pay $8 an hour, this is a great business and you should invest in it, but if I have to pay $9 an hour, I’m screwed,’ nobody would take the business seriously, he says. ‘It would be way better if the minimum wage was higher across the board for everybody, and everybody had to pay an entry-level position at a living wage’."

The responses to a proposed rise in the minimum wage are predictable. Those who worry about the health of society are in favor; those who worry about the income of employers are opposed. Economics is not the issue. One’s view of society is what is being disputed, with politics being the vehicle for waging the argument.

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