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Guest Column: Minimum Wage Debate

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Wednesday, December 04, 2013

Each time a minimum wage hike is put on the table, the political debate spins on the question of whether such a move would cause business costs to increase so much that jobs are lost. To progress past this perennial debate, one key fact has to be pounded into the American psyche: Average minimum wage hikes impose small cost increases on businesses—so small that businesses can typically adjust by means other than closing their doors or laying off workers. Recent proposals to raise the $7.25 federal minimum present a welcome opportunity to take another whack at this.

Take, for example, the potential impact of a $10.50 federal minimum wage proposed by Florida Congressman Alan Grayson. My colleague Robert Pollin and I estimated that the average fast food restaurant could fully cover the costs of a $10.50 minimum by raising its prices 2.7 percent. This is equal to raising the price of a $4.50 Big Mac to $4.60. We presented this key finding in a petition supporting H.R. 1346, signed by over 100 professional economists. Why such a modest cost increase, even for fast food restaurants?

1) Workers will receive an average raise much smaller than 45 percent. Workers earning between $7.25 and $12.00 will likely get raises from a $10.50 minimum. (Employers give raises to workers earning a little above $10.50 in order to preserve their firms’ wage hierarchies.) But the lowest-wage workers, who get the largest raises, also work the fewest hours. As a result, a $10.50 minimum wage produces an average 16.4 percent raise per hour worked among workers earning between $7.25 and $12.

2) Lowest-paid workers take home a relatively small share of payroll. Because workers affected by minimum wage hikes get paid the least, work the fewest hours, and typically do not receive benefits, their overall share of the wage bill is smaller than their share of the total headcount of workers. Specifically, even though 84 percent of the 3.7 million fast food workers earn between $7.25 and $12 per hour, the $10.50 minimum will affect only 60 percent of the average fast food restaurant’s total payroll.

3) Payroll only represents 25 percent of total sales.

Now let’s do the math. The $10.50 minimum wage would generate an average per-hour raise of 16 percent for 60 percent of total payroll. Total payroll would therefore increase 10 percent (16 percent x 60 percent=10 percent). Since payroll represents only 25 percent of fast food restaurants’ total sales, a 10 percent payroll increase amounts to 2.5 percent of sales. Tacking on employers’ higher payroll taxes (7.65 percent) raises this figure to 2.7 percent (2.5 percent x 1.0765 = 2.7 percent).

Some of these costs are offset because higher wages cause workers to stay in their jobs longer. Employers can then spend less on recruiting and training workers, and their more experienced workers are more productive. The average fast food restaurant, therefore, could fully cover the costs of the $10.50 minimum wage by raising its prices less than 2.7 percent (Jeannette Wicks-Lim and Robert Pollin, “The Costs to Fast-Food Restaurants of a Minimum Wage Increase to $10.50 per Hour,” PERI Research Brief, September, 2013).

Let’s hope that the next round in the minimum wage debate can start here: Minimum wage hikes, in the range currently being debated, impose only modest cost increases to businesses, and therefore are unlikely to cause job losses.•

Dr. Jeannette Wicks-Lim is an assistant research professor with the Political Economy Research Institute at UMass-Amherst.

 

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There are many arguments against this but here is a particularly good one.

http://www.usnews.com/opinion/blogs/economic-intelligence/2013/10/21/raising-the-minimum-wage-kills-jobs-for-low-skill-workers

In part...

"According to the Bureau of Labor Statistics, fewer than 3 percent of U.S. workers earn the minimum wage... About one-third of [them] also earn tips, which, in many cases, actually puts them significantly above the minimum wage in reality, if not officially. In the end, the minimum wage affects very few workers."

"Raising the minimum wage does not increase the value of the worker's labor. It increases the cost of the worker's labor. And as everyone knows, the more something costs, the less of it we buy. This is as true of workers in the labor market as it is of anything else."

"The money for an increased minimum wage has got to come from somewhere, and there are only three places from which it can come: investors, in the form of lower profits; customers, in the form of higher prices; or workers, in the form of fewer jobs. Which group pays for the minimum wage hike depends on how competitive the marketplace is."

"If competition for investment funds is intense, as is often the case, businesses will resist cutting investors' profits. If competition for customers is fierce, as is nearly always the case, businesses will do almost anything not to raise prices. This leaves only the workers. There are always exceptions, but historically, firms have financed increases in the minimum wage by laying off minimum wage workers."

"The feel-good rhetoric of increasing the minimum wage outweighs the economic reality that there is no such thing as a free lunch. Every cost must be paid by someone, and those who will pay for a minimum wage hike are the very people we are trying to help."

......

The bottom line is that in a competitive private sector companies will try to avoid lowering profits for investors or raising pricing for customers. That leaves the third option which hurts unskilled workers looking for a job. Best intentions not withstanding.

Posted by Ben on 12.4.13 at 12:31

If we accepted that logic every time it's been brought out, the minimum wage would still be 37 cents.

It's certainly true that paying for a hike must come from somewhere, but the article you quote clearly says ' fewer than 3 percent of U.S. workers earn the minimum wage... About one-third of [them] also earn tips, which, in many cases, actually puts them significantly above the minimum wage in reality, if not officially. In the end, the minimum wage affects very few workers'.

Very few workers.

Businesses that employ minimum wage employees tend to actually need those employees, so it's hard to believe the result would be the huge drop in jobs that's predicted every time (but doesn't seem to happen.) We ought to pay people enough to live on in the place where they live. Otherwise, they are permanently under-employed and often living below the poverty line. Hard to get anywhere that way. Should we really go on preserving that situation?

Posted by SDudgens on 12.4.13 at 14:55

Artificially allowing people to live comfortably on minimum wage sounds like a terrible idea. I'm totally fine with people having to struggle if their skill set only allows them to earn the minimum. It's supposed to be the first rung on a ladder, not a hammock. Good feelings and groovy vibes aside, big jumps in min wage make less jobs available to unskilled people who need them. This is a simple (and all too common) case of liberal good intentions not jiving with economic reality. It's nothing more than a political football kicked by a fledgeling Obama admin trying to avert attention from a host of their messes. To the ignorant masses anyone who opposes an increase is mean. (No offense)

Posted by Ben on 12.5.13 at 10:33

So your answer is yes, we should go on preserving underemployment. At least you'll own up to your social Darwinism.

The minimum wage job used to be the first rung, but now it is often the only rung available and jobs that used to be 'for kids' now go to chief wage-earners. But you and your ilk would tell them they just aren't skilled enough. Nice broad brush you've got there. It is not about bleeding hearts, it is about economic realities that regular people face all the time.

Still though thanks for your clear embrace of your position. It does make the futility of arguing clear!

Posted by SDudgens on 12.5.13 at 12:02

I think you overestimate the amount of work ethic required to take a minimum wage job and earn a bump up. This world you imagine where good hard working people are earning minimum wage in perpetuity doesn't exist. Also, if what you say is true and it's often the only rung available to former middle-managers, why would you support an action that makes less of them available? See, your position kind of falls apart as soon as we get beyond the "it's nice to give people more money" idea.

Oh, and thank you for proving my point. I'm a big old meanie to disagree with your view.

Posted by Ben on 12.5.13 at 12:57

Tell you what- you show me where I said this- "if what you say is true and it's often the only rung available to former middle-managers"- and I'll keep yackin with you. Otherwise, you pretty much only get an epic eye-roll for your efforts to change the subject. You're not mean-- just a flamethrower.

Posted by SDudgens on 12.5.13 at 14:08

Really? You need to get a sense of humor. I was playing off of this statement where you infer that people worth much more than minimum wage are settling for minimum wage...

"but now it is often the only rung available and jobs that used to be 'for kids' now go to chief wage-earners"

Since you want to do a second round on this point, please tell me where a skilled person has settled for a minimum wage job and worked an extended period of time without a merit increase.

Posted by Ben on 12.5.13 at 14:53

Ben, it is not about 'settling.' It's about a bad economy and the difficulties people face in terms of getting jobs in a bad economy. If you are right that 'merit increases' are so common, then employers can pay more than they do. That leaves a gaping hole in your original argument.

It is certainly interesting that you embrace social Darwinism but decry the shortcomings of biological Darwinism.

I will leave the rest of the yacking to you. Happy holidays to you.

Posted by SDudgens on 12.6.13 at 9:11

The gaping hole is in your logic. You have conveniently removed the link between productivity and pay (something that is always necessary for socialist ideas). You earn a merit increase because your skills make the company more money and/or become more valuable to mainaining current profits. You don't seem to like such a link because you propose an increase "just because" ... Once again these "good vibes" logic doesn't translate to economics. And you and your ilk refuse to acknowledge the razor thin profit margins in highly competitive industries. A good tip for you would be to stop taking economic lessons from Elizabeth Warren.

Posted by Ben on 12.7.13 at 9:57

The min wage jobs haven't changed and shouldn't have to change because of demographics.

Posted by Cry Me a River on 12.10.13 at 11:23
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