When are minimum wage hikes most likely to boost unemployment?

by on December 3, 2013 at 9:12 am in Economics | Permalink

When the wage profile for low-skilled workers is sloping upward with time, minimum wage increases are less likely to increase unemployment (for the moment put aside your estimate of the absolute likelihood that minimum wage increases will boost unemployment, just ask the question in relative terms).  After all, the employer might feel that with rising wages and rising productivity, those low-skilled workers might “grow into” the higher and legally mandated new wage rate.  So maybe keep them, noting that the search costs of pulling in a good replacement will be higher too.  Furthermore, even if some of those workers are laid off they have a higher chance of being reemployed elsewhere, due to the relatively strong labor market.

What about when the wage profile for low-skilled workers is sloping downward over time?  One would expect the opposite result to hold, namely that employers are less likely to hold on to workers when confronted with a mandated wage increase.

For much of the 1990s, the labor market for less skilled workers was in decent shape.  Since 1999 or so often it has been in bad or declining shape, excepting the “bubbly” years of 2004-2006.  Therefore a minimum wage hike today would be more likely to boost unemployment than the minimum wage hikes of the past.  And that unemployment is more likely to be long-term, corrosive unemployment than in previous decades.

I do understand that a minimum wage hike, in the eyes of some, is more “needed” today, perhaps for distributional reasons.  But can we admit it is more likely than average to lead to additional unemployment?

Does anyone disagree with this logic?

Addendum: Scott Winship offers some relevant comments.

decklap December 3, 2013 at 9:24 am

How would that observation square with corporate profits? Its seems to me that the rise in profits among companies that tend to employer a large number of low wage workers suggests that their marginal value far exceeds their wage so there would be more than enough cushion to absorb an increase in the minimum wage in the short term and no reason whatsoever to think there would be significant long term issues.

ebase22 December 3, 2013 at 10:12 am

Is this actually true that companies that hire low wage workers have been seeing higher profit growth than other firms? If true, I’d be interested in seeing something on that.

Also, that’s probably not the important factor. A given company might be increasing in profitability, but that doesn’t say anything necessarily about the marginal value of employing additional low skill labor. Marginal increases in profitability may come by making capital investments or expanding in the areas that employ higher skill labor.

decklap December 3, 2013 at 10:40 am

Corporate profits in general are at an all time high while adjusted real wages continue to decline, not just in industries with low wages but across the board…. clearly that suggests that worker value far exceeds wages.

Pieta December 3, 2013 at 10:56 am

Decklap, you’re confusing a change with a level. Your original comment was about minimum wage workers.

If worker value hugely exceeded wages, we would see lots of hiring — is this what’s happening?

Austin December 3, 2013 at 7:01 pm

When aggregate demand is low, such as now, worker value can exceed wages without major hiring increases. Firms can still get more value out of each worker, but have no need to expand their productivity capacity beyond what the market can currently bare.

Brandon December 4, 2013 at 9:25 am

and, in fact, a glutted labor market will keep the cost of labor suppressed, meaning profits will be higher.

Spencer December 3, 2013 at 11:05 am

In regressions of the relatively performance of restaurant stocks — the S&P Index of restaurants — the coefficient on real average hourly earning is strongly positive.

This implies the stocks have two reactions to higher wages. One is the reaction of higher wages causing higher demand and that is strongly positive. The second is the negative impact of higher wages on costs or profits and that is insignificant.

Spencer December 3, 2013 at 11:11 am

When I showed this results to a restaurant analyst at Fidelity he said he was glad to see my results because his models came to the same conclusions.

He ran into so much opposition from managers when he showed this results he naturally questioned his results.

But seeing them confirmed by a second source made him feel better.

ebase22 December 3, 2013 at 11:19 am

Are you using the real hourly wage for the economy as whole or is this somehow picking up restaurant labor costs? If it’s the prior, this doesn’t tell us anything about minimum wage levels.

ebase22 December 3, 2013 at 11:23 am

It would just be saying that eating out is a relative luxury item that is disporportionaly what is consumed with high marginal incomes.

JWatts December 3, 2013 at 12:28 pm

The second is the negative impact of higher wages on costs or profits and that is insignificant.

But does that hold true when the legally mandated minimum wage rises above the market minimum wage?

I would expect that restaurant profits would be correlated with a booming economy, I would also expect higher wages to be correlated with a booming economy. That does not imply that higher wages lead to higher profits.

Urso December 3, 2013 at 12:45 pm

Maybe I’m misreading, but I think he’s comparing as between restaurants. ie, a restaurant that pays higher wages will make higher profits. I could be wrong though.

Spencer December 3, 2013 at 3:15 pm

I agree with you JWatts.

But the argument is that higher wages lead to lower profits.

That is one reason many oppose the minimum wage.

But the data contradicts the argument that higher wages leads to lower profits.

Béranger December 3, 2013 at 9:34 am

Sorry, you can delete my comment, but Scott Winship is eating shite. PCE, CPI-U-RS, or CPI-U, I sincerely don’t believe that ANY price index takes into account PROPERLY the HUGE increase in the health care costs. When in the US the costs for (i) health care (ii) higher education have increased MUCH MORE than any such averaging index, the country is going down the drain — and yes, higher wages are needed.

When health care insurance was an eccentric luxury, health care fees were closer to the actual costs. Now that the US is the only country on planet Earth were the medical bills are 20 times the actual costs, this is something totally out of control.

Try to live with the minimum wage in the US.

Ryan December 3, 2013 at 10:54 am

You should share some healthcare inflation data with us. I’ve seen data on expenditures going up, but that does not mean costs went up. The problem is that 2013 healthcare is not 1970s healthcare. There has been a dramatic change in technology. Has someone built a price index that holds quality constant over time?

Béranger December 3, 2013 at 12:54 pm

Obviously, you’re living on a different planet.

Obviously, you have not (at least) read “Why Medical Bills Are Killing Us” (TIME, March 4, 2013). Excerpts here: http://www.techdirt.com/articles/20130222/03254422068/healthcare-isnt-free-market-its-giant-economic-scam.shtml

They really charge you 20 TIMES THE COSTS! Do you know any business with 2,000% profit? (In theory, as not everyone can pay; and insured people can get their medical bills HALVED BEFORE the insurance plan acts and covers part of the expenses.)

It’s not that the medical costs have increased.
It’s not that the quality of the medical services has increased.
It’s that the THEFT they do has increased. How do you explain that the same medical services cost in Europe, OUT-OF-POCKET (for UNINSURED), several TIMES LESS than in the US?

You must be an ostrich. Do yo really know there are other countries on this planet, and they’re not all retarded?

Floccina December 3, 2013 at 9:08 pm

It seems that is the same for schooling as for healthcare in both industries administration costs have grown rapidly. Both are paid for indirectly and so I wonder if the who will watch the watchers problem is at the root of increasing administration costs. It also might be true that in a highly licensed market like healthcare you need price controls. The Gov. limits supply on behalf of healthcare providers which pushes up prices but in the other industrialized countries Government limits prices. This might lead to lesser qualified students becoming MD’s, PA’s, HP’s RN’s etc. but since school is not greatly analogous to practice and because systems more that the brilliance of personnel account for quality this has little negative effect.

Béranger December 3, 2013 at 2:29 pm
Ryan December 3, 2013 at 2:42 pm

Thanks for the reading material. Still waiting for that constant-quality price index.

XVO December 3, 2013 at 12:46 pm

Perhaps if we rationed and limited access to medical care like every other country on earth (and the US in your example of the past through the market) our costs would go down. Make it illegal to do anything to improve your health, costs would go towards 0!

Medical costs are a supply and demand issue. The supply is restricted by corruption and the demand is through the roof by corru….I mean, medicare, medicaid and the indomitable will to survive at all costs. The thing is we now have lots of new technologies that let people live longer but they are very expensive (not because of greed but because they take up time and money, lots of it) so that is what our limited supply produces instead of basic care for the poor because that is where the money is. And of course this raises the cost of basic care for the poor because it restricts the supply of medical care available to them.

Not too mention our aging population of people who refuse to die despite suffering chronic and previously fatal conditions. Grandma and Grandpas healthcare bills goes to 0 when they die.

I think we’ve stumbled upon something no one wants to talk about, peoples will to survive is what’s raising medical costs!!!

Therapsid December 3, 2013 at 12:52 pm

Good. The will to survive is more valuable than the will to buy more consumer goods, homes with more square footage, or fifth generation smart phones.

JWatts December 3, 2013 at 1:08 pm

Almost, anyone diagnosed with a terminal illness will prioritize medical spending over “more consumer goods, homes with more square footage, or fifth generation smart phones.”

The big question is how many consumer items everyone else is willing to forgo to subsidize the medical costs of others.

Therapsid December 3, 2013 at 1:18 pm

I’d say our priorities are out of wack if we’re willing to countenance decreasing life expectancy, even at the margins, in order to buy more consumer goods.

Because as far as I’m concerned, we’re much further along the road of diminishing marginal utility when it comes to consumer goods than to life expectancy, which has barely improved in our modern age.

We should be looking for more aggressive ways to ameliorate, slow down, or reverse aging, but instead we’re talking about cutting off life-spans for the sake of what, exactly? And for who?

mpowell December 3, 2013 at 1:41 pm

I think you have a good point in general Therapsid. But a lot of end-of-life spending is achieving pretty dubious benefits. If you really want to invest in increased life expectancies, look at funding basic research. That seems more useful than extending life at the cost of thousands of dollars a day for a terminally ill patient in a lot of pain and stuck in bed.

Engineer December 3, 2013 at 5:41 pm

Good. The will to survive is more valuable than the will to buy more consumer goods, homes with more square footage, or fifth generation smart phones.

Indeed. Why aren’t longer life spans regarded as a driver for labor-intensive employment and thus a good thing? Because old people are generally dependent on the state?

JWatts December 3, 2013 at 6:33 pm

Because of the fixed retirement age. The US has had close to the same retirement age (65-67) for 80 years. There are no labor force gains, because there hasn’t been an increase in the average years worked per person. Indeed, with the increase in schooling, the average years worked per life time has decreased. And of course the worker dependency ratio is plummeting and will lead to a substantial governmental budgetary issues in the next 10 years.

How many years before Medicare and SS crowd out all non-defense discretionary spending?

Ano December 3, 2013 at 9:34 am

I agree that you have identified one important factor pushing employment downward in the event of a minimum wage hike; perhaps the dominant factor.

However, there are two additional points in the “now more than ever” column that *to some extent* would mitigate the effect on employment. First in the current environment, the distributional effects of a minimum wage increase could increase aggregate demand somewhat, as minimum-wage-earner households will have significantly more money to spend. Second, to some extent and in some sectors a minimum wage hike could put upward pressure on prices; if this gets households saving less and spending more on the margin, then this increases aggregate demand as well. Of course, all of this only contributes to AD if we truly are in a “the natural rate of interest is negative right now” world (which you have questioned).

I do not claim that these effects would entirely offset the basic labor market supply and demand factors you identify.

Tyler Cowen December 3, 2013 at 9:38 am

You are treating AD as if it is “consumption” only, don’t forget about investment.

Ano December 3, 2013 at 10:42 am

Good point. However, investment is pushed in both directions too. Some of the jobs that are lost due to the hike in the minimum wage will be caused by investment in robots, kiosks, and other labor-saving business machinery. (Again, I do not claim that this completely makes up for a push in the other direction.)

derek December 3, 2013 at 9:54 am

You are assuming that at the higher wage levels the jobs will exist.

Ano December 3, 2013 at 10:45 am

I am assuming that *some* jobs will continue to exist at the higher wage levels. Would you claim that most fast food, big box retail, and other classic minimum wage employment will *completely* disappear? I do not claim to have enough information to sort out what the net effect is. I just want to point out that there is a “now more than ever” argument due to our current macroeconomic situation, wherein a minimum wage hike might not do as much damage now as it would have in, say, 1997 or 2007.

JWatts December 3, 2013 at 12:34 pm

a minimum wage hike might not do as much damage now as it would have in, say, 1997 or 2007.

That’s probably true, but also irrelevant. The relevant question is: What is the net cost of a hike in the minimum wage? If it would have been a large net loss in 2007, but is only a small net loss now, it’s still not worth doing.

Pensans December 3, 2013 at 9:41 am

The problem with your analysis is that the unemployment of many voters is likely to increase from proposed immigration. The only way to separate the plutocrats from their goal of flooding the country with cheap and socially corrosive immigrants is to make it unprofitable for them by raising the min wage. Since raising the min wage is more politcally acceptable than directly addressing the social consequences of mass immigration, raising the minimum wage is the only politic way to stop the oligarchy from forcing mass immigration.

Axa December 3, 2013 at 10:34 am

…or making the burger flipping robot a reality, since off-shore manufacturing is already a reality.

JWatts December 3, 2013 at 12:35 pm

Forget burger flipping robots, I want one that will change a diaper.

Locke December 4, 2013 at 12:26 am

Amazon is working on one that will deliver a diaper. Some assembly required.

john personna December 3, 2013 at 10:07 am

I think the analysis is plausible, but not terribly relevant. I live in Orange County California, where no one can live as a self-supported adult on the minimum wage. If any singletons (or God help us, parents) are working for minimum wage, then they are likely also on some number of government support programs. So, in this environment at least, isn’t the old idea of “employment” vs “unemployment” a false dichotomy? At this low level of income, we are talking about degrees of pay, and degrees of assistance. The Walmart economy.

ebase22 December 3, 2013 at 10:20 am

well most people working at minimum wage currently are not heads of households. The large swath of HS and colleg kids, people getting second jobs, married mothers who work part time, etc make up a lot of that population and are willing to work for something below what is needed fully to run a household.

But also of relevence here is reginal variation. There are likely very few people making near the minimum wage in high cost areas. The market equilibrium is likely higher for most. But go to a low cost area and that won’t be true. Raising the min wage to $10 isnt likley to have a huge effect in Manhattan for instance where the market clearing wage is likely higher. Raise it to $10 in Greensville, MS, and that likely increases unemployment by a lot, relatively speaking as the market clearing wage is lower. Even if one agrees with a minimum wage as policy, there is a strong argument for allowing it to be set at the State level, because any given dollar amount with have different levels of impact based on the local labor markets.

john personna December 3, 2013 at 10:25 am

I’d feel better if I could believe that minimum wage workers were mostly teens and extra income for an otherwise solvent family, but “more than half of fast food workers have to rely on public assistance programs since their wages aren’t enough to support them, a new report found.” That’s pretty bad.

Mike December 3, 2013 at 1:24 pm

That said that their families receive such benefits, but how does that rule out the idea that many of the workers at minimum wage jobs are teens or second earners? If they want spending money, they’re a lot more likely to be working than the teens or potential second earners in higher-earning families.

Bill December 3, 2013 at 11:00 am

ebase, re teenager comment:

“It is a common misconception that the minimum wage workforce is comprised mostly of teenagers working part-time to make a little extra spending money. This is decidedly not the case; rather, the vast majority – 84.1 percent – of those benefitting from the proposed increase to $9.00 are at least 20 years old. This means that less than 16 percent of the workers impacted by the President’s proposal are teenagers. Additionally, about half (47.3 percent) of the 18 million affected workers are full-time employees, working at least 35 hours per week. Another 35.8 percent work between 20 and 34 hours per week, and only 16.9 percent work less than 20 hours a week. It is clear that the bulk of minimum wage workers are mid- or full-time adult employees, not teenagers or part-timers. (However, the fact that some of these workers are teens and part-timers who are working only to make some additional disposable income is not justification for paying them subpoverty wages.) ….

http://www.epi.org/blog/affected-president-obamas-proposed-minimum/

ebase22 December 3, 2013 at 11:21 am

These numbers include everyone under $9 dollars currently, not the people currently at the min wage. These are different things. And the groups of suplimental income are not only teenagers as mentioned before. All I’m saying is there are reasons why one would be willing to work a low wage job for purposes other than to be the primary income producer for a household.

Bill December 3, 2013 at 12:51 pm

ebase22, Wouldn’t you expect the effect to be on those making the minimum wage currently AND those making between the current minimum wage and the proposed wage? Why would you just look at the composition of the current group AT the minimum wage? By the way, the data is for those at or below, not at the proposed wage, which would include those who are at the current minimum wage.

Brian Donohue December 3, 2013 at 12:57 pm

2% of workers older than 24 work for the minimum wage.

john personna December 3, 2013 at 1:08 pm

I looked for but could not find the broadest measure: percentage of workers receiving public assistance. Perhaps someone has that number.

Bill December 3, 2013 at 1:40 pm

Brian, Of the persons making at or below the minimum wage, the 16-19 year old category acounts for 24.1 percent of the persons making at or below the minimum wage. http://www.bls.gov/cps/minwage2012tbls.htm#1

Brian Donohue December 3, 2013 at 3:49 pm

Bill, your fact and my fact are both true. Mine is more relevant.

Bill December 3, 2013 at 4:56 pm

Brian, I am sorry, you are not correct.

Go to table 7, which breaks out the distribution by age of those making at or below the minimum wage.

16-19 year olds: 24.1% at of those making the minimum wage
20-24 year olds: 26.5 %
25-and over : 49.4%

Brian Donohue December 3, 2013 at 5:57 pm

Bill, If you can’t see how my fact and your fact can both be correct, I cannot help you.

Bill December 3, 2013 at 9:17 pm

Brian, if you cannot explain how what you said is relevant, I don’t know how to help you. This discussion is about the composition of minimum wage workers, whether the increase in wages will reduce employment, etc. IF you are simply saying that, hey, they are a small part of the overall workforce, and therefore there will be no effect, then I agree with you. If you are hiding the ball, and saying: ignore them, they are a small part of the workforce, then I feel free to ignore your comment.

There are many poorly educated people who read this blog who think when someone says that the majority of minimum wage workers are people in high school. Misleading characterizations…such as stating that 2% of workers over 24 are at minimum wages….misleads. It misleads those who are unaware that 49.5 percent of minimum wage workers are over 49.4%.

Bill December 3, 2013 at 9:19 pm

49.4% over 24

Brandon December 4, 2013 at 9:29 am

The median age of a front-line fast-food worker is slightly over 29 years old these days. The median age was 22 or 23 as far back as 2002. It hasn’t been a high school starter job for quite a while. Given the expansion of most of these restaurants to 24-hour or near-24-hour operations, they pretty much can’t be.

A lot of people working these jobs get second jobs out of necessity. They might even be another fast-food job, or maybe a minimum wage retail job.

mavery December 5, 2013 at 11:08 am

The regional thing is a huge issue that’s generally ignored. A national minimum wage designed to give folks in California or New York or DC a “living wage” would be absurd for folks in rural areas with lower cost of living. If you support a minimum wage, it should be at the local level.

Michael December 3, 2013 at 10:21 am

Where is the requirement that every job can provide the ability of an adult to “self-support”? Nearly every single minimum wage earner out there uses it to supplement to income, either as a second job (for the family or as an individual), or as a student.

You are also ignoring the time-dependance that Tyler alludes to. My personal experience with the minimum wage was that you earned it for exactly three months, until you validated to your employer that you were a valuable employee. Short term raises are de rigueur.

One of the most important functions of a minimum wage job is to build a reputation, a work history, almost never as a permanent state for supporting a family. By getting rid of this important function, you harm the prospects of the un-educated and low-skilled.

john personna December 3, 2013 at 10:26 am

The obvious answer is that I am not in a position to “require” anything. I simply observe billions of taxpayer dollars going to support low end workers.

Now, given that observation, is the rest of your comment really a justification? Are you actually choosing to spend those billions?

john personna December 3, 2013 at 10:28 am

(But certainly given the statistic above, the “employment” vs “unemployment” argument should be dead. As I say, it is about degrees of pay, and degrees of assistance.)

Brian Donohue December 3, 2013 at 12:26 pm

Given your frame, it sounds like you’d prefer (a) some employees get pay increases and decreased government assistance, and (b) others no longer have jobs and now need 100% government assistance, plus they don’t learn the basics of having a job, any job.

How about no minimum wage, more government assistance, and young people learn what having a job means?

Better still – give everyone a minimum income and get rid of the whole government assistance edifice.

JWatts December 3, 2013 at 12:41 pm

Better still – give everyone a minimum income and get rid of the whole government assistance edifice.

I lean more towards supporting a minimum income every year. To paraphrase Churchill: It’s the worst idea, except all the others that have been tried.

john personna December 3, 2013 at 1:05 pm

I don’t have such a strong preference about what method we use to provide maintenance to low marginal utility workers. My complaint is really that people should real about aid to workers in our society. This isn’t as simple as employment vs unemployment.

And I’d hope that once we got over the “partial view” arguments and look at the full accounting, we’d do better.

Brian Donohue December 3, 2013 at 3:52 pm

JP, so you don’t have a strong preference for young people having jobs vs. getting handouts. Good for you.

mulp December 3, 2013 at 9:00 pm

Another option is higher wages lead to higher prices for goods and services which means a “transfer of wealth” from the top 50% of income classes in marginally higher costs of living which will be redistributed in wages to the bottom 50% who have higher wages to pay for the somewhat more expensive goods and services, but with increased income remaining to buy more of their needs.

Why should Warren Buffett get the benefit of low wage labor for a few of the goods he buys they produce, say salad greens and even dinner, saving him a few dollars a day? And why should he want so many people to be working poor to save him a few dollars a day when they won’t be able to buy auto insurance from Geico because they can’t afford a car, nor buy a living room set from Jordans Furniture when they can’t afford a house because of their low wages? How is Warren Buffett better off with fewer customers because of increases in income inequality pricing larger and larger proportions of the population out of his marketplace?

ebase22 December 3, 2013 at 11:14 am

The time variance point is also key. When hiring base entry level people without an record, there is a risk premium built into the wage to account for the chance that you arent going to work out. Once you have proved you can show up to work on time and be productive, you usually get a bump up. It’s not living large, but it’s not literally minimum wage either. I can’t find the source but i recall reading something that 65-75%% of so of people who make minimum wage are making more within a year time.

This is consistant with my own anecdotal experience as well. When I worked at a grocery store pretty much every young person starting out began as a bagger making min wage. If you survived the first 6 months, you got a raise and usually you were moved to a cashier or a grocery department which itself was a 20% -30% bump. If you lasted 3-4 years and had a decent amount of people skills, you were inline to become a department assistant manager.

Time component of this is important. And to the extent that a minimum wage does create unemployment, it’s going to tend to do so for the least skilled and least experienced people and prevent these types from really ever developing any kind of work experience skil. It may be a small total, but minimum wage probably helps to create a perminant very poor idle class.

john personna December 3, 2013 at 12:09 pm

We might have a split between groups then, with some in organizations that give them a path to higher wages, and some others in those fast food jobs and with public assistance. (If even 75% of minimum wage workers make more in a year, a lot can still accumulate from the 25% over time.)

JWatts December 3, 2013 at 12:45 pm

There’s no split. The fast food industry follows the same pattern. Indeed, the fast food industry median wage is around $8.90 an hour.

john personna December 3, 2013 at 1:06 pm

Seriously? If most people move past minimum wage, why is anyone bothering to apply for assistance?

Or do you mean that they are non-minimum in wage, but still below minimum for maintenance, and so still rely on public assistance?

JWatts December 3, 2013 at 1:12 pm

Or do you mean that they are non-minimum in wage, but still below minimum for maintenance, and so still rely on public assistance?

LOL, feel free to lobby your state to provide as much public assistance as your heart desires. Just stay away from my wallet.

john personna December 3, 2013 at 1:16 pm

JWatts, there are the 47%. I didn’t lobby anyone to create them.

Now, there are two ways to reduce that 47%, right? Get them jobs, or let them live under bridges.

Michael December 3, 2013 at 2:13 pm

If most people move past minimum wage, why is anyone bothering to apply for assistance?

Because our levels of assistance are way too high, and have become the root cause of the Poverty Trap. The market will lift you up, while the government beats you back down.

http://swingrightrudie.blogspot.com/2012/12/john-cochrane-runs-down-how-well.html

JWatts December 3, 2013 at 4:47 pm

JWatts, there are the 47%. I didn’t lobby anyone to create them.

What the heck does the figure 47% have to do with the minimum wage? You aren’t making any sense.

Urso December 3, 2013 at 12:29 pm

In Orange County (and all of CA) the minimum wage is already higher than federal base levels. In some places (SF maybe?) it’s even higher than that.

California should make a good case study on raising the minimum wage nationwide. Not so much in Orange County, but in Tulare County and other places which are economically closer to Greenville, MS, than to Newport Beach. Is the unemployment rate in the desert counties bordering NV higher than it is in NV itself?

john personna December 3, 2013 at 12:38 pm

(IIRC, the Orange County Register calculated that a $40K income was required to be a renter in Orange County.)

john personna December 3, 2013 at 12:42 pm

Here we go:

The federal commitment to affordable rental housing grew to include vouchers that low-income renters can use in the private market, subsidies for private owners that rent to low- and moderate-income households, and financing that helps create and preserve affordable rental units. Orange County has over 25,800 rental homes supported through these programs.

Federal rental assistance now enables 5 million low-income households – encompassing more than 10 million people, including 4 million children – to afford modest homes. One-third are families with children, another third are seniors, and the remaining third are disabled, childless adults, disabled adults with children and seniors with children.
While 10 million sounds like a lot, it represents just a quarter of the renters eligible for assistance. There is simply not enough public funding.

Housing is expensive, especially for low-income people. In Orange County, households need to earn $31.17 an hour – three times California’s new minimum wage – to afford a typical two-bedroom apartment in the county, according to the National Low Income Housing Coalition.

Not that national policy needs to make every region livable by minimum wage … but wider OC isn’t just Newport Beach. This is a pretty big area where living costs are not quite meeting low end jobs.

Urso December 3, 2013 at 2:06 pm

OK, but that has nothing to do with what I posted. Frankly I’m not convinced that we should be subsidizing people to live in a high-demand area just because they want to. If you can only get a job paying $9 an hour, isn’t one of the consequences that you have to live in Tulare County instead of the OC (don’t call it that)? On the list of ineqities suffered by the bottom 10%, that one doesn’t even move the needle. Which is a mixed metaphor but whatever.

Max Factor December 3, 2013 at 8:55 pm

Doesn’t TC speculate that in the future we will marvel at how poor people used to be able to live in the same cities as the 85%? Maybe there will be a trade-off – less affordable housing in cities but more public transportation to get the low wage earners into the cities so their can get to their restaurant and nanny jobs. Major cities have robust transportation so poor people can live far out where it’s cheaper but rural areas and small cities force the poor to buy cars and auto insurance.

john personna December 3, 2013 at 10:40 am

Perhaps Tyler, in our “Walmart economy” a useful analysis would conclude “the optimum ratio of private pay to public assistance for low marginal utility workers is x.”

Sebastian H December 3, 2013 at 10:44 am

Doesn’t the research disagreement about the disemployment effect suggest that at the very most the effect (at the minimum wage levels we are contemplating) is vanishingly tiny? If researchers are finding at most an effect that flirts with statistical significance, aren’t the practical disemployment effects likely to be negligible? Or am I missing something?

ebase22 December 3, 2013 at 11:34 am

Agreed the marginal effects or increases are probably tiny. But part of that is because most minimum wage changes are also pretty tiny, say 25 -50 cents or something along those lines. And larger changes have historically usually been phased in. So trying to emperically detect these really small changes when everything else is moving is tough. What makes it even tougher is that there are likely signifigant time lags to the effects as well. Capital substitution for instance doesn’t happen instantly. It might take a couple of years after the law goes into effect.

Ryan December 3, 2013 at 11:05 am

The empirical debate is clearly far from settled (as Winship shows). At best, we have some linear estimates that may be dependent on the then-level of the minimum wage, and we’re using them to justify any increase we want. The notion that a hike from $6 to $6.50 in one county in New Jersey did not reduce employment does not imply that a hike from $7.25 to $8, or whatever, applying in both Peoria, Alabama and New York City will not reduce employment. The empirical literature has a long way to go before it can inform national policy.

The theoretical debate is even worse, because there is none. How likely is it that a model exists that accounts for regional, industrial, and firm heterogeneity yet still produces a single optimal wage that can be identified and applied at the national level? For example, suppose we use the monopsonist employer model that these people like. Sure, many firms may be below the employment-maximizing wage. Others may be above it. Regardless, what are the odds that the optimal wage is the same for all 5 million US firms? And if you set it too high, that monopsonist employer model comes back to bite you. Are advocates acknowledging any uncertainty about how far this thing can be pushed? How should we go about determining this magical wage that will solve all problems? Is there no cost to getting it wrong?

And what model are these people using when they compare the minimum wage to various benchmarks over time (eg, top 1% income)? Is there a model in which the optimal minimum wage moves in lockstep with that benchmark?

This debate is a mess. There is no empirical consensus. There is no consistent model. It’s not ready for prime time.

dstraws December 3, 2013 at 11:26 am

So that suggests an experiment is called for–Raise the minimum wage and track the changes in minimum wage employment in specifically selected localities. There are economists with graduate students all over the country so the Labor Department should make grants available to support the research. A multicenter study using a common methodology. Eureaka, data to answer the question instead of all the hand wringing that accompanies any discussion of raising the minimum wage. In fact all those employers of lots of minimum wage workers should be willing to kick in a few bucks to demonstrate that an increase in the minimum wage actually does cause a decrease in employment.

Yancey Ward December 3, 2013 at 11:45 am

It wouldn’t matter. If it showed employment decreasing, people like you would return to blame it on some other factor, or will actually claim that things would have been worse without the min wage increase. This is a debate that will never be settled for certain people.

john personna December 3, 2013 at 12:36 pm

As opposed to people who want a no to low minimum wage, and then complain about the 47%?

The harsh reality seems to be that we do it by a minimum wage or by a minimum national income. You can give those things various names but they add up the same way. Someone pays.

Yancey Ward December 3, 2013 at 12:47 pm

You were the one complaining about the 47% above, John. This is why it is painful to read anything you write- you bitch and moan about Walmart/fast food employees being on government aid, but I don’t see you advocating changing those government programs.

john personna December 3, 2013 at 1:10 pm

You are misreading me, sir. My theme today is that employment vs unemployment is not a terribly useful contrast when employed people are also on insurance.

(I have no idea in a future society what percentage would need assistance. If we reach robo-socialism, with AI slaves doing everything, maybe 100%)

john personna December 3, 2013 at 1:14 pm

Sorry, spell check converted “assistance” to “insurance.”

dstraws December 3, 2013 at 1:33 pm

Actually, I would love an answer or some tendency one way or another. If no minimum wage has better economic outcomes for the people its meant to help why would we not get rid of the minimum wage? The problem of course is you might be wrong, having a minimum wage is good for individuals, at least, and maybe for the overall economy as well. But we’ll never know because we don’t want to, resources are finite with respect to the number of people trying to get them so on with the competition!

ummm December 3, 2013 at 11:59 am

boris johnson’s comments ring true and judging by the response most people cannot handle the truth that we’re becoming a smartist nation and the relationship between IQ and outcome in life are becoming inseparable. Retraining the workforce is painstakingly slow and companies don’t want to waste money on domestic labor that can otherwise be outsourced or automated. Whie there are a lot of strong opinions on this issue and a dearth of practical solutions

Max Factor December 3, 2013 at 8:50 pm

“the relationship between IQ and outcome in life are becoming inseparable”

You nailed it. While those who read these posts favor this system it may be difficult to embrace in the long run, when humans mesh with hardware and software. In the short run, smart people have to compete against average people who are using smart drugs like Provigil. When the costs of Provigil go down at some point you’re going to hear a lot more stories of high school and college kids abusing this magic pill to get ahead academically.

We live in interesting times December 3, 2013 at 12:14 pm

It’s not just IQ, it’s also connections. We are defaulting back to Old World ways/norms.

I like to read the minimum wage posts because I always hope someone would discuss the ripple effect of raising the minimum wage on/in certain industries. I thought some union contracts have a provision that if the minimum wage increases, so do their wages. How would that affect certain industries like automotive? If that’s a provision in AFSCME contracts, what about the effect at federal, state and local level?

JWatts December 3, 2013 at 12:52 pm

It’s not just IQ, it’s also connections. We are defaulting back to Old World ways/norms –

The Old World ways were almost all based upon connections, the new way is almost all based upon IQ and skill level. So, we are headed in the opposite direction.

The biggest change is that the minimum skill level to be worthy of employment at a given pay range may have been trending upward over the last 15 to 20 years. Or maybe we are still just in the process of wage equalization on a world wide basis?

Max Factor December 3, 2013 at 8:46 pm

Connections are as important today as they were in years past. My organization gets 1,000 resumes per job opening, my wife’s organization recently received 500 resumes for a job opening. Who gets the job? The person with the most connections to employees currently working at our organizations. Your resume and skills may be gold but you’re typically not going to get a job if a similar candidate has a friend or associate on the inside.

Internships in financial services frequently go to the sons and daughters of wealthy clients. Jobs go to fraternity brothers.

It’s important to be good but it is as important to be well connected. To have an advocate on the inside.

Brian Donohue December 3, 2013 at 1:04 pm

Interesting, if true. Does anyone have a handle on how many ‘non-minimum wage’ workers would get a bump if the minimum wage were increased? It’s so much nicer when compassion comes with a nice dollop of self-interest.

JWatts December 3, 2013 at 1:16 pm

“The Labor Department’s collective-bargaining agreements file has a limited number of contracts available, so we were unable to determine how widespread the practice is. But the United Food and Commercial Workers International Union says that pegging its wages to the federal minimum is commonplace. On its website, the UFCW notes that “oftentimes, union contracts are triggered to implement wage hikes in the case of minimum wage increases.” Such increases, the UFCW says, are “one of the many advantages of being a union member.”"

http://online.wsj.com/news/articles/SB10001424127887324048904578318541000422454

dstraws December 3, 2013 at 1:36 pm

How many people are in unions-10% so that is the upper limit.

Brian Donohue December 3, 2013 at 3:56 pm

That’s not a small number. Does it include public sector unions?

Mogden December 3, 2013 at 1:47 pm

If you like kicking black teenagers in the teeth, then supporting a higher minimum wage is an excellent method of doing so.

The Robot Employment and Black Teenager Unemployment Act of 2014

JWatts December 3, 2013 at 4:50 pm

It’s intentions that matter, not results. Surely you understand that by now. ;)

mulp December 3, 2013 at 7:57 pm

Well, the minimum wage today is lower in all measures than in the 50s and 60s, but black unemployment is dramatically higher today.

Black kids are considered unreliable workers by many, but most people don’t consider that to be related to the distances between where black kids live and where good jobs are, and the almost universal need for a car to get between the two places reliably, especially as the work schedules have increasingly become irregular so that not even buses work to get to work – if the bus stops running at night but you are supposed to work at night, getting to work becomes a lot more expensive, and that’s just to get a low amount of income.

JWatts December 4, 2013 at 12:36 am

No, black unemployment has remained about twice the level of whites since 1963 according to the US Census Bureau.

Randall December 3, 2013 at 1:58 pm

The cost of reproduction has risen by a factor of nearly 4 since the 50s, fertilizing the portfolios of the elites with the decomposing marriages, fetuses and sometimes bodies of the bulk of the baby boom generation, leaving a demographic hole being filled with imported slaves* by those same landlords.

The elites calls this “progress”, even as as the price of homes was removed from the consumer price index while introducing CPI factors like “hedonic value” and “imputed rent” to make it appear “real” earnings have increased over the time period of demographic collapse and loss of ethnic enfranchisement to imported laborers for the baronage.

I call it genocide.

*It is really being too kind to the elites to call the imported laborers “slaves” since they don’t have to pay for their human capital upkeep—the rest of us do via social programs. Southern plantation owners were far more moral than these sorry excuses for human beings.

Randall December 3, 2013 at 2:04 pm

The two big ticket necessities: 3 bedroom house price increase: 22 times 1954 $ 10,250 2006 $219,375

car price increase: 18 times 1954 $ 1,567 2006 $28,000

Even if we grant that the quality/cost ratio of manufactured goods has gone up so much during the last half century that $1,567 for a used car in 2006 is as good as a new car was in 1954, it doesn’t bring down the sum of the 2 major debt-service items much:

house+car increase: 19 times 1954 $ 11,817 =$1,567+$10,250 2006 $220942 =$1,567+$219,375

So the debt-service load in a family household has gone up nearly a factor of 20 in the last 52 years.

And don’t kid yourself that it didn’t hit hardest at the peak child-bearing potential of the mid-to-late boomers who were paying 20% mortgage rates when they were trying to form families in the early 1980s.

Has household income kept up? Hardly…

average household income increase: 13 times 1954 $ 4,137 (one wage earner) 2006 $54,000 (two wage earners)

So household income has gone up only about 70% as much as the essential household debt service in the last half century.

Oh, but wait—that “household” in 1954 was one income and the income was relatively stable—the woman stayed at home and raised the kids.

How can we factor not only that both parents must work in 2006 and not only are each of their jobs less secure, but the effective income of the household, adjusting for risk of not being able to meet debt payments for a substantial period of time?

Here’s a realistic option: We can reasonably say that the odds of both parents being out of work at any given point of time in 2006 is comparable to the odds of the father being out of work in 1954. Hence the reliable household income—the income stream that can service debt without foreclosure—is approximately 1/2 of the household income. Certainly we can say that there will be “fat” times when both parents are working and they can save money for the lean times—but then one of the two parents is likely to be making substantially less money than the other, so we can say the savings during the times they are both working can be put toward bringing the lower-earning working parent up to par with the average of the two in terms of making a reliable payment to the mortgage lender.

Hence, making appropriate adjustments we have a household income increase of approximately 7 times since 1954—and we haven’t taken into account the loss of value of having the full time housekeeper. So let’s take that into account as well. What are the real costs to a family with children of having both parents working rather than one dedicated to staying at home? Is it another factor of 2? Probably not. But we can say the income increase is actually only a factor of 5 rather than 7.

Since the cost of the two major debt items has gone up a factor of 19, it looks to me like the real cost of reproduction has gone up by about a factor of 19/5, or nearly a factor of 4.

Our authorities—nearly to the person—call this “progress”.

Given the demographic collapse followed by mass immigration that ensued, under anti-nationalist ideologies designed to dissolve the demography of the US, I call it genocide.

mulp December 3, 2013 at 2:49 pm

You don’t take into account the 3 bedroom was for 5 people typically in 1200 to 1500 square feet while today the 3 three bedroom is for 3 people at 2000-2500.

If a house is a productive asset, then housing productivity has fallen by more than 50%

Cars on the other hand, with all their bells and whistles are more productive – the fins and chrome have been replaced with A/C and car electronics, but the mileage is much better and cars are reliable for easily twice as many miles and years. Not to mention being able to drive twice as fast for the same safety – in the past three decades, speeds have been fixed so safety has increased. 1952 the top speeds were about 55mph except the miles where that was possible was limited so 30-40mph was often the speed, while today most miles are driven on highway designed for 75mph and traffic actually runs 65-75 routinely

Cars are not seen as assets, but they have become increasingly critical capital assets to employment – without a reliable car, you can’t get a job.

Houses are touted as capital asset investments, but they have switched to consumption liabilities marketed like paintings and pop art with the logic “this weird art that is very expensive will certainly double in price in five years” except its the 3 bedroom with media room, pool, 6 bathroom on 5 acres in a planned development conveniently 20 miles outside the business center.

The idea that real estate always doubles in price because real estate become twice as valuable is used to convince people to buy a house two, three, five times the size you need. Your house becomes a boat anchor.

Then the idea of the 50s and 60s that the one thing you must do to be successful is pay off the mortgage faster than your neighbor has been replaced by buying more from your cash out refi than your neighbor – the big boat that requires the big truck, or the RV, or the cruise or month in Spain.

Benny Lava December 3, 2013 at 7:16 pm

So housing increased 100% in size but 2000% in cost? Seems like a bad deal to me.

JWatts December 4, 2013 at 10:07 am

Well if they were still paying you in 1950′s wages it probably would be.

mulp December 3, 2013 at 2:10 pm

“Does anyone disagree with this logic?”

Yes, Ron Unz, who sees you arguing for what sounds to me like communism, with corporations being the state:
http://www.ronunz.org/2013/02/26/undoing-the-minimization-of-wages-in-america/

“Now my historical expertise in this field is rather limited, but I believe the roots of the EITC trace back to the “Negative Income Tax” originally proposed by President Richard Nixon at the urging of free market icon Milton Friedman, and later implemented and expanded under various subsequent Democratic and (especially) Republican presidents. This means of addressing the poverty of low-wage workers involves the government sending them checks, thereby making them somewhat less poor. Free market advocates, always harshly critical of “big government” and the social-welfare system, seem to find these cash subsidies a quite congenial solution.

“But let’s give a little thought to who actually benefits from this policy. Haven’t low-wage employers merely followed the classic strategy of using their political influence to privatize their gains while socializing their expenses, retaining the full output-value of their workers but foisting a huge share of the costs unto ordinary taxpayers via the EITC, as well as housing and medical subsidies, school expenses, and social welfare benefits in general, none of which are remotely covered by the net taxes (if any) paid by the working-poor?

“The obvious endpoint of this approach would be for businesses to pay their workers nothing, and have all salaries and social benefits covered by the government as an “anti-poverty measure,” a proposal which would surely seem very attractive to employers and their influential lobbyists.”

To the corporation the fruits of labor according to their greed, to the workers a pittance of welfare according to their dire need.

If all the welfare system were eliminated, and that ended up with the working poor homeless with their children, would their unreliable attendance at work in unkempt and smelly attire increase their rate of employment?

mulp December 3, 2013 at 7:41 pm

I’m listening to a rebroadcast of “On Point” from this morning and just heard the representative from a “conservative” think tank that gets money from the Koch’s et al say that:

Instead of raising the minimum wage, the better solution is to increase the EITC, child care subsidies, etc., and provide government support for advanced education which will cause employers to create jobs for better educated workers.

That sounds like communism to me where the corporations use government to provide for the needs of their workers so the corporations get what they need lower wage workers and an increased supply of educated workers who will also get lower wages than corporations must pay today, allowing the corporations to hire more educated workers because the supply lower wages..

Max Factor December 3, 2013 at 8:41 pm

“But let’s give a little thought to who actually benefits from this policy. Haven’t low-wage employers merely followed the classic strategy of using their political influence to privatize their gains while socializing their expenses, retaining the full output-value of their workers but foisting a huge share of the costs unto ordinary taxpayers via the EITC, as well as housing and medical subsidies, school expenses, and social welfare benefits in general, none of which are remotely covered by the net taxes (if any) paid by the working-poor?”

That’s the kitchen sink, right there. Corporations want to shift costs to taxpayers and keep all of the profits.

Spencer December 3, 2013 at 3:07 pm

Since employment bottomed in February, 2010

total payroll employment is up7.3 %

while restaurant employment is up 11.9%.

This data strongly contradicts your thesis.

Do you have any actual data to support your thesis?

David C December 3, 2013 at 3:16 pm

I think it depends on why wages are downward sloping. Your analysis assumes that wages are purely dependent on the marginal value of workers. If it is instead primarily dependent on, say, bargaining power, then the slope of wages demonstrates little about the effect of a minimum wage on unemployment.

Alan December 3, 2013 at 4:24 pm

A minimum wage means someone somewhere is paying workers more than they would have done without the cold clammy hand of regulation. I don’t care what theory says: I *want* a minimum wage to increase unemployment.

bill reeves December 3, 2013 at 7:17 pm

For the life of me I do not understand how the US can set a national minimum wage. Presumably the national minimum is set relative to the average cost of living in the US which has an index value of 100. Manhattan has a cost of living just above 200, while Harlingen TX has one of 80. Many millions of people live in rural or small town communities with even lower costs of living. Why should their wage floor be dictated by a remote bureaucracy that is stupidly imposing a single answer on a wildly diverse nation. Stop arguing about whether and how much higher minimums affect employment and instead argue that there is and cannot be a ‘national’ minimum wage-except in Averagville, Average state, USA The people who propose these things need to be mocked out of the room.

Max Factor December 3, 2013 at 9:04 pm

“52 percent of fast-food workers, or their spouses or dependents, must enroll in public assistance programs because they make so little”

http://www.cleveland.com/business/index.ssf/2013/11/walmart_could_raise_wages_with.html

Taxpayers subsidize business owners who rely on cheap labor. Moving the minimum wage lower increases profits and government dependence. Moving the minimum wage higher decreases profits and government dependence. I’ll take the latter even though I’m wealthy and own a lot of stawks.

Nobody mentioned offsetting a higher minimum wage with higher prices. McDonalds sells 20 McNuggets for $5. When I was a kid in the 1990s you needed a coupon to get 20 tasty McNuggets for $5. The marginal utility of McNuggets drops heavily after the 4th one but that’s another story. The point is that McDonalds can bang up its prices a couple of ticks because the prices have been stagnant for years. The prices don’t represent reality – McDonalds is squeezing the suppliers and employees to enrich themselves and the customers. As a customer and guy who owns stawks I would still rather pay higher prices and eat fewer McNuggets.

Yadira Mejia December 4, 2013 at 2:22 am

I believed that a hike in economy would only benefit low skill workers for a short period of time, since prices in other goods may increase after a while. Furthermore I believed low skill workers might increase profitability to companies, because they form a great part of a company’s structure. If the company is profitable enough then there should be not problem to cushion the increase in the minimum wage. But shouldn’t it be more realistic to increase the wage of higher skill works, because they can make more capital investment that would bring marginal increase in profitability.

Larry December 4, 2013 at 3:39 am

Positing that there is some minimum wage that has only a marginal effect on employment, it’s clear that other minimum wages that would have huge effects. So my question is: has anyone proposed a minimum wage based on maximizing utility? I.e., where the benefits that accrue to society and workers do not discourage investors to the point that it doesn’t materially restrict ongoing job creation. My guess is that such an output wouldn’t end in multiple zeros.

Valerie Keefe December 4, 2013 at 8:58 am

I suppose I shouldn’t be surprised that the same person who argues that income mobility is too high in the United States (and thus simply dizzying in the rest of the developed world) fails to consider the oligopsony-ameliorating effects of the minimum wage. In minimum-wage workers we have a group which tends to have very low leverage and little ability to sit-out an unfair contract. Of course, there have been some economists who recognize the existence of market power in the labour market in almost all cases, such as Adam Smith:

What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

When data on inter-state differences in the minimum wage yield little-to-no disemployment effects, when Canada and the United States spend the first decade of the 20th century conducting a significant experiment in minimum wages and employment, and Canada, which increases its minimum wage about 40% in productivity terms (GDP/hour), sees a significant increase in 15-64 employment and no significant widening in the spread between 15-24 U3 and 25-54 U3, while the United States sees the minimum wage fall more than 20% in productivity terms, and manages to see its 15-64 employment ratio fall 3.2% during the Bush Expansion, and 7% over the last 12 years, it begins to become evident that low wage shares and high employment are not as synonymous as the neoclassical set would have us believe. Anyone with a basic understanding of how monopolists make economic profit, creating deadweight loss in the process, would find this self-evident.

A monopolist, or in this case, monopsonist, would seek to pay their suppliers what they are willing to receive, so they would likely impose information asymmetry on applicants by barring employees from sharing wage data. Now, there’s more than one buyer of labour, but that’s not the test of market power. In an oligopolistic market, buyers of labour would seek to reduce competition among one-another…

http://online.wsj.com/news/articles/SB10001424052748703440604575496182527552678

Collusion is certainly a disruptive technology, but not one that’s good for output or total utility.

Nathan W December 4, 2013 at 3:44 pm

I would agree with the statement is preceding it with a major qualifier, such as … “although it has been frustratingly difficult to empirically demonstrate that an increase in minimum wage actually has any negative on employment, we believe it stands to reason that the hypothetical unemployment-raising effect of minimum wages will be stronger when low term low-skilled wage trends are downwards because …”

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