* Re: Minimum Wage
Topics: Welfare, Subsidy
28 Jan 1995
From: "DG Ervan Darnell"
Vincent E. Kargatis wrote:
>> Really from: ervan@cs.rice.edu (Ervan Darnell)
>> Furthermore, the people who get raises don't actually get raises.
>> Instead they borrow against the future. [...]
>I find this hard to believe. What minimum wage jobs have practical
>advancement possibilities? How many minimum wage workers stay with their
>job long enough to get raises? My guess: very few.
Most minimum wage jobs do have advancement possibilities (in wage, simply
for learning the ropes, if not necessarily position advancement). Employers
usually view minimum wage as a training wage with that in mind. As for the
second question, I'm interested in any real data on the matter.
However, my analysis still holds because the cost merely gets spread across
all min wage people. Let me throw out some hypothetical numbers to explain
the case:
1) New hires produce $4/hour of goods
2) Two month veterans produce $4.50/hour
3) One year veterans produce $6/hour
4) Min wage is $4.25
5) 50% stay two years (A)
6) 50% of new hires stay two months (B)
7) Ignore NPV for the purpose of this example
Class A employees produce an average of :
$5.21/hour=($4*2 months+$4.5*10 months+$6*12 months)/24 months
Class B employees produce:
$4/hour
The expected value produced for an average hire is:
(50% * 24 months * $5.21 + 50% * 2 months * $4)/(50% * 24 + 50% * 2)=$5.12/hour
Now, the new hires must be paid $4.25. The average pay has to work out to
$5.12 per hour. The new hires are overpaid $0.25/hour for two months. The
employer makes up the difference by cutting $4.50 to $4.45 for 10 months.
This saves $0.05/hour for 10 months divided by 2 for the half that quit
early. That's equivalent to $0.125/hour for two months for everyone. The
employer scrapes another nickel off of $6.00 to make it $5.95 for 10 months.
Now, he is still paying the same amount, $5.12/hour, but the result is that
people are receiving more up front and less later. The new hires who quit
early get subsidized at the cost of those who stay on. Within reason, it
does not matter how many people quit early. Those who stay on have their
own pay raises deferred twice, once for their up front min wage and again
for the people who quit early.
Of course, there is a limit to this. The people making $5.95 are really
worth $6. But there is some frictional cost, e.g. being worth $6/hour at
McDonald's may only be worth $5.50/hour at Wendy's until new procedures are
learned. So long as that difference is below the frictional cost, it is
possible to 'overpay' new hires. When the gap widens too much, it becomes
impossible to keep people and therefore impossible to hire them at minimum
wage. So, at best, minimum wage transfers money from one group of poor
people to another.
Why doesn't the same mechanism apply to other higher paid employees?
Because when they are hired they directly compare a salary offer for their
real worth of $20/hour versus a subsidizing-someone-else-minimum-wage salary
of $19/hour, and choose the former. Unlike minimum wage hires, they can
avoid being part of the subsidy game.
There is another way in which minimum wage appears to work (i.e. when it is
raised, not everyone making minimum wage loses their job), but does not
really: benefits are cut. While the nominal wage goes up, the real wage
stays the same as some of the perks go away. This may be something explicit
like health insurance or something less readily measurable like free food on
the job.
There is one particularly insidious way this happens: short work weeks.
Many mandated benefits apply only to full time employees. All things being
equal, employers usually prefer full time employees, but if they have to
raise the nominal wage, there is an incentive to hire twice as many people
half time because the benefit package can be slashed. As a side note,
Reagan's term is always panned by liberals for having created part-time jobs
and this is taken as some evidence of what's wrong with capitalism. Not at
all, the truth is just the opposite, it is a symptom of what is wrong with
the government tinkering with employment relations and forcing people to
accept lower wages and purchase 'benefits' they don't really want.
>What would the average wage be for your average present minimum wage job
>without minimum wage? (I had to say that. :-) Assuming that you're talking
>McDonald's caliber jobs, I'd guess that the wages would drop [very low]
$4.25/hour, of course.
Why are people who are paid $4.50/hour not paid $4.25 (min wage) instead?
It is because they produce $4.50/hour of goods. If someone paid them only
$4.25, someone else would want to pay them more and hire them away. Why is
anyone paid anything? Because it is an employer's interest to pay people
what they are worth. If min wage people are only producing $4/hour (delta
the above argument), they would not be working now. If the min wage were
repealed and min wage people had their wage lowered to $4/hour, they would
simply go somewhere else that paid them the value of their productivity.
>What happens to the 25% non-teens that can't afford to
>keep the new low-paying job? I.e. they have to spend their time looking
>for a job that they can live on, meanwhile probably earning more on welfare
>than in the new McDonald's job. (Can you dump minimum wage and keep
>welfare/unemployment? Gotta think practically, y'know.)
Huh? Min wage causes unemployment. Dumping it would strictly lower the
costs of unemployment insurance. You are trying to argue that lowering the
minimum wage would cause unemployment. That's a claim requring some
extraordinary justification. Furthermore, unemployment payments are tied to
your salary, even in your model of lower real wages, unemployment insurance
costs would drop because the base line would drop.
Your welfare model is not the right one either. AFDC goes to mothers who
stay home with young children. Their benefit package is typically such that
min wage jobs are already a bad deal. They are not in the job market. So,
even if it really were the case that lowering the minimum wage would lower
salaries, it would have little or no impact here. Food stamps go to people
earning min wage and people without jobs (based on number of children, where
you live, etc.). So, that's a wash too.
Besides that, the welfare problem can, of course, be fixed.
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