History News Network puts current events into historical perspective. Subscribe to our newsletter for new perspectives on the ways history continues to resonate in the present. Explore our archive of thousands of original op-eds and curated stories from around the web. Join us to learn more about the past, now.
Newspaper stories about raising the minimum wage often quote people who say the employment effects of an increase will be held down because sellers will raise prices and pass the extra cost on to their customers. (See this story on the effects of Arkansas's increase last October.)
But not so fast. If prices rise, where will we consumers get the extra money to maintain our present buying patterns? (I didn't get a raise.) If prices go up at my favorite restaurant, I'll have two choices: eat there less often or spend less elsewhere. Either way, jobs are in jeopardy.
Thanks for the elaboration. I'm not sure we disagree.
Andrew D. Todd -
1/16/2007
Well, I know a bit about rural West Virginia. The economic history is one long litany of closed mines and factories. Economic growth comes from things like hospitals, mostly funded by the federal government. The state sets up one kind of health insurance program after another, as private insurers refuse to play.
Note the qualification: I was talking about manufacturing jobs. Manufacturing generates products which are portable. That is important. For about twenty years, Mississippi has been losing manufacturing jobs to Mexico. And Mexico has been subsequently losing the jobs to China. Go and look in your kitchen cupboard. Look at the canned goods, which have the place of origin marked on them. You may find some surprises. Tuna fish, for example. It all seems to come from Southeast Asia, now. Ditto for canned fruit. Recently, I found some convenience noodles in thick gravy in the local convenience store, which turned out to have been prepared in Thailand. When a manufacturing firm making consumer goods manages to stay in the United States, it is quite often so automated that the typical employee is an industrial engineer. The computer chipmakers, for example. An employee in that kind of factory does not do labor-- he does mathematics, statistical quality control, trying to figure out why the machine does not work better, in order to fix it. Another alternative is a mighty and feared union, such as the UAW, only the UAW isn't so feared, anymore.
Over forty years, the minimum wage crashed, relative to personal income per capita.
=========================================================
[World Almanac, 2002]
Year 1960 | 2000
minimum wage, per hour 1.00 | 5.15 (2.13 for workers getting tips)
annual rate (2000 hours) 2000 | 10,300
personal income (billions) 409.4 | 8319.2
population (millions) 179.3 | 281.4
personal income per capita 2283 | 29,564
annual minimum wage
as a percentage of
personal income
per capita 88% | 35%
==============================================
This is a large enough drop that we need not worry about fine shades of meaning. Now, what actually happened to the restaurant industry in that time? The answer, I suggest, is that "Diners" and "Drive-ins" were systematically replaced with fast food restaurants, using much less labor. The ultimate development, the drive-up window, is literally an assembly line. You place your order at one station, drive to the next, pay your money, and pick up your food at a third station. Contact with the restaurant staff is de minimus. The next step will no doubt be to place your order on a website accessed from a cellphone, paying for it via Sprint. If you call to mind a business street you have known long enough to have a sense of local history, you can probably list off the changes. In those bygone days, the social norm was that, in a diner, which is to say, in an ordinary day-to-day eatery, a man tipped twenty percent, and a woman tipped ten percent, for an average of fifteen percent. The waitress got her money off the top, so to speak. It was surely a golden age of the food server.
Comparing gasoline with restaurant meals is an exercise in comparing apples with oranges. Gasoline is a much more homogeneous commodity than food, and interacts much less closely with the customer. Would you care to describe to me a gasoline-related event comparable to the recent spinach E. Coli scare? Food choices are driven, to a certain undetermined extent, by the fear of being poisoned. The human tongue can detect chemical constituents down to part-per-billion levels. It treats, let us say, tap water as information. Certain chemical nerve receptors are or are not triggered, and link to memories, etc., etc., I was walking past the local hospital, downwind from the local medevac helicopter's pad, and the smell of aviation gas turbine exhaust (kerosene) conjured up all kind of associations, very different from those conjured up by No. 2 diesel oil exhaust. By contrast, an automobile engine does not analyze gasoline to the nth degree, it just burns it. The retailer mark-up on gasoline is modest, ten percent or less, and in many states, there are minimum mark-up laws, rightly or wrongly intended to keep gas stations from engaging in "price wars." OPEC gets most of the money paid for gasoline at present prices, and OPEC does combine and collude, etc. OPEC does so overtly, to the sound of Hugo Chavez's voice, taking the radical position, and the Arabs trying to conciliate him. By contrast, the central fact about the major employers of minimum-wage labor is that their labor costs are comparatively tiny. The fixed overheads dominate. Additionally, these kinds of firms are generally "impulse purchase" oriented, which is another way of saying that they are a kind of show business. The extreme form of show business is "busking," that performing as a street minstrel on the street corner, with one's instrument case lying open on the ground for people to throw money into. You cannot simply sweep away all salient details and find truth thereby.
By the way, I'm not a lawyer. I think you are using "lawyer" as a kind of generic swear word for anyone who is not sufficiently impressed by economics. I'm an engineer and historian, and I used to be an anthropologist. The historian side of me looks for particulars, and finds it incredible that economists simply don't seem to want to know the details of how economic processes work. Once, an American economist (a recently minted Ph.D.), commenting on a piece I had shown him about the implications of certain kinds of skilled labor emigration, said something that made me realize that he made no distinction between the act of moving to Canada and the act of moving to Russia. To him, they were just names on a map, nothing more. Alexander Nevsky, Ivan the Terrible, Peter the Great, Stalin? Pushkin, Tolstoy, Bulgakov? The Great Russian Soul? All irrelevant, it seems. Do I really need to say that one does not move to Winnipeg in the same spirit that one moves to Yaroslavl? How do you economists manage to mentally anesthetize yourselves to such a degree? The engineer side of me tends to dismiss the scientific pretensions of economics. In particular, my teeth grate at the way economists use statistics. They don't seem to have any sense of underlying mathematical assumptions, things like that.
If you want to discuss the case on its merits, you have to learn all the various details of things like price regulations. You cannot just trot out supposedly universal economic laws. Parenthetically, have you read Jane Smiley's _Moo_, in particular the bit in which the farmer's daughter takes freshman economics from "Dr. Lionel Gift" (Gift is German for poison, a play on words), and becomes very confused. When I hear the term "Economic Science," I instinctively think of "Soviet Socialist Marxist-Leninist Historical Science." Does that mean anything to you?
==============================================================================
Here is a short bibliography, not by any means definitive:
Louise Kapp Howe, _Pink Collar Workers: Inside the World of Women's Work_, 1977.
Note the chapter on waitresses, though the rest of the book is equally relevant.
William M. Adler, _Mollie's Job, A Story of Life and Work on the Global Assembly Line_, 2000.
An account of how a job moved from New Jersey to Mississippi to Mexico. At last account, the job was heading off somewhere else, and the Mexican worker asked in some exasperation: "What Then? Do I chase my job all over the world?" (p. 313)... Yes.
Tom Schachtman, _Around the Block: The Business of a Neighborhood_, 1997.
This is an exquisite book, an account in lapidary detail of the business climate of small to medium-sized retail businesses.
Greta Foff Paules, _Dishing It Out: Power and Resistance Among Waitresses in a New Jersey Restaurant_, 1991
The "Route" restaurant is in fact a thinly disguised Denny's.
Barbara Garson, _All the Livelong Day: The Meaning and Demeaning of Routine Work_ (1975)
----------------, _The Electronic Sweatshop: How Computers are Transforming the Office of the Future into the Factory of the Past_, 1988
Garson is, I suppose one might say, the Henry Mayhew of our own time. One of the things she captures is the sheer extent to which management emotionally wants workers to be machines, and treats them so even if it is uneconomic.
Ray Kroc, with Robert Anderson, _Grinding it Out: The Making of McDonalds_, 1977, 1987.
The official autobiography, naturally to be taken with a grain of salt.
Bill Woolsey -
1/16/2007
Sorry for the dismissive tone.
Imagine a horrible plague concentrated in poor neighborhoods leaves many unskilled workers completely disabled (but living.)
This disaster reduces output and income.
Part of the market response will be both higher wages for unskilled labor and higher prices for the products of unskilled labor.
Both of these adjustments mitigate the decrease in income and output caused by the disaster.
Suppose the price adjustments just didn't occur (though wage adjustments could occur.) The disaster would have worse consequences for production and income than if the price adjustments did occur.
While there may be exceptions, price adjustments mitigate the consequences of unfortunate economic events.
Well, the man-made disaster of a higher minimum wage is the same. The market adjustment of raising prices _mitigates_ the harmful effects.
While I suppose it is true that one cannot say that these price adjustments raise total utility (if utility is just a way of describing individual preference orderings,) I don't think that leaves us in a position to say nothing about it.
The "austrian" "shut up" argument of "subjective utility" is always irritating, but it really is poorly applied here.
Back to the minimum wage...
I took your argument to be that the higher prices may mitigate the negative employment effects in the markets using unskilled labor, but they just reduce employment elsewhere. Your reasoning was loosely based upon scarcity (which is important,) though I don't know if funds are what we should be thinking about.
Because of the wage floor, there is a loss of employment in the markets subject to the minimum wage.
For the most part, any reduction in labor demand in other markets (where the wages are well above the minimum)should result in lower wages. To the degree that people don't want to work as much at lower wages, then there may be a reduction in employment, of course. This is the usual assumption about labor supply, and appears consistent with reality.
If prices failed to adjust, you end up with shortages...to some degree having money income is just not as desirable...why work as much...
It is unclear to me that the failure of prices to adjust will have less negative impact on equilibrium employment in other markets.
How price increases in the markets for the products of unskilled labor impact spending on other markets depends on elasticity. If the demand for those products is inelastic, then spending rises in those markets (and falls somewhere else?) If it is elastic, then spending falls in the markets for the products for unskilled labor (and rises elsewhere?)
I don't think that the "mitigation" impact of higher prices requires that spending on the products of unskilled labor rise (and fall elsewhere.) Looking at some diagrams suggests to me that the degree of mitigation in the markets for unskilled labor is greater the more inelastic the demand for the products. But there remains some mitigation as long as the demand is less than perfectly elastic (and there is no price increase then either!)
The loss of employment reduces total output and total income in the economy. (So rather than treating funds as constant, I think the proper way to look at it is that they fall.)
In general, then, the impact of thie higher minimum wage is that the real demands for various things fall. While it is possible that all the decrease occurs in the markets for products of unskilled labor, (whose relative prices have increased making it a decrease in "quantity demanded,") it seems unlikely. So I grant that there is likely going to be reductions in demand in other markets.
Further, the reduction in total income implies that real income drops for various people. The most obvious path by which this occurs is that the prices of the products of unskilled labor rise, and the nominal incomes of everyone else hardly change, lowering their real incomes. That would include real wages for all sorts of people.
The least skilled workers are made unemployed, workers that were at or near the old minimum wage who remain empoyed earn a higher income. Everyone else has a lower income. That is the rough rule of thumb of what happens.
Those benefiting (the employed workers) get a bigger share of a smaller pie. The rest of us get a smaller share of a smaller pie.
There are exceptions--basically markets closely related to those for unskilled labor might gain as well, though this would exacerbate the losses to others.
It is almost certain that the way the losses spread through the economy would be different if product prices remained fixed. But the losses exist. And they are greater if prices cannot adjust.
To me, that is a key reason why price ceilings are a bad idea.
The disruption of oil production by Katrina imposed losses on people. They were made poorer. If the price of gasoline hadn't increased, the loses would have been even greater. The price increases mitigated the losses.
Sure, some people may have lost more in the price hike scenario than in the price freeze scenario. So we cannot say that the price hike scenario is better. There was a transfer and we can't compare utilities...
No, I don't think so.
Sheldon Richman -
1/16/2007
"Whatever" has a dismissive tone. I'm trying to see the line of reasoning here. It may all be in the word "mitigation." If higher prices preserve some minimum-wage jobs (that would have been lost otherwise) but cause the loss of other jobs as consumers rearrange their buying, that sounds like a shift, not a mitigation, of harm. What am I missing?
Bill Woolsey -
1/15/2007
A higher minimum wage reduces employment. The "mitigation" resulting from the increase in product prices involves a smaller decrease in employment than would otherwise occur.
I wasn't making any claims about aggregate utility.
All I can recommend is trying to draw some supply and demand diagrams and consider the impact of imposing a price ceiling on the products (so the mitigation doesn't occur.) Convince yourself that it makes no difference because utility cannot be compared. Whatever.
Sheldon Richman -
1/15/2007
I suspect an implicit interpersonal comparison of subjective utility here. To conclude a mitigation seems to involve a netting out of effects.
Bill Woolsey -
1/15/2007
A careful analysis of the impact of the minimum wage market by market would be great.
What you have done above isn't even close! People get $100k a year or the work can be sent overseas for $1000 per year. Nothing in between except retail and fast food? What about rural Missippi? Been there?
Still, I must point out that the claim that restaurants would have already increased prices if they could is simply false.
An increase in the price of a resource impacting the entire industry reduces the profit maximzing output for all of the competing firms and the market clearing price increases for all of them. Of course firms can always raise prices, they just will sell less. And what they must pay for labor is one factor amongst many that influences how much it is most beneficial for them to sell at any given price.
If one firm faced an increase in the minimum wage (or say was unionized) in a perfectly competitive industry, then it couldn't raise its price. It would still seek to produce less, which must have some impact on the market price.
In a market with monopolistic comeptition, the single firm would raise their prices and sell less, this would increase demand for the competitng firms, and they would raise their prices too.
This abstract supply and demand business does have some value. While there are no doubt complications, you can at least avoid making foolish erros like the notion that higher resources prices can't be passed on because of competition.
To take another timely situation--
Oil prices rise. Why do the gas stations all raise gasoline prices? If they were competitive, the could not. If they could, they would have already increased their prices. The fact that they do increase gas prices when oil prices rise, proves that they are not competitive. There must be a conspiracy in restratint of trade.
I'm sure that the lawyer types who believe something like this excuse their nonsense by pointing out that economics is so abstract.
Bill Woolsey -
1/15/2007
It will almost certainly reduce the real wages of many people making above the minimum. It will presumably reduce the real returns to capital as well.
Those minimum wage earners who keep their jobs earn a bigger share of a smaller pie. Those workers who are not employed are the key source of the smaller pie and get nothing. However, everyone else is in the position of getting a smaller share of a smaller pie.
It is almost certainly true, however, that there are going to be some nonminimum wage earners who benefit as well. Leaving a even larger loss for everyone else.
Still, if the prices of the products of unskilled labor didn't increase, it would all be worse. The higher prices reduce the negative effects of the increase in the minimum wage.
Sheldon Richman -
1/15/2007
Perhaps price rises will shift the harm without mitigating it "overall." An adjustment in spending could cost the jobs of people making above minimum wage. It would depend on subjective consumer preferences after the wage increase.
Andrew D. Todd -
1/15/2007
I think there's a danger of over-abstracting the issue of minimum wage. One has to talk fairly specifically about what kinds of jobs are minimum wage. Manufacturing of consumer goods is not usually minimum wage. Depending on circumstances, it is either very high wage ($50/hr), or offshore, at fifty cents an hour or less. The factors which prevent offshoring a job also tend to dictate a pay scale comparable to the federal civil service. If you pay minimum wage, your congressman is not going to be interested in doing the political wire-pulling necessary to protect you from overseas competition. He works for the voters, and the voters are only interested in jobs which pay quite a lot better than minimum wage. The principal exception to the high-wage rule that I can think of is chicken packing, where there are a lot of illegal immigrants receiving minimum wage. In this case, minimum wage is the wage the employer has to pay to remain in official ignorance that he is employing illegals. He could have gotten them to work for less, but then there would have been a paper trail. Even here, a likely trend is for chicken raising/packing operations to move to Mexico. What we are actually talking about in respect of minimum wage is retail services. The curious thing about retail services is the extent to which they are immobile, because they have to be close to the customer, and, on merely logistic grounds, are not subject to global competition.
As a general rule, fast-food restaurants and convenience stores, the most common kinds of firms which pay minimum wage, do not spend more than ten percent of their receipts on labor. If you time the workers, you find that they spend minutes filling an order, not hours. Typically, the firm do not spend more than ten percent of the price of food items on ingredients and supplies, either. The single big-ticket item is economic rent in one form or another, either on the location or the trademark, including things like fees paid to politically well-connected lawyers for zoning variances. Your cheeseburger is really a rentburger-- the actual food and labor are peripheral. Thus, an increase in the minimum wage of about twenty or thirty percent would be more like two or three percent of revenues. It might, however, be as much as ten percent of the rents. The market value of the rent-privilege (typically land) would be adjusted down accordingly. A corollary implication is that if you are willing to go a mile or two, you can often find much lower prices, simply by virtue of getting out of a high-rent business district, and finding a small but good restaurant in one of the residential neighborhoods, which is, for practical purposes, worker-owned. Thus, I think the rentier is likely to bear the load of minimum wage increases. If he could have raised prices without driving away customers, he would have already done so.
Firms of this type tend to competitively chase after the customer's convenience, as far as their manpower will go, and it is not possible to reduce labor around the edges by small increments when there are only a handful of employees in one place. You cannot send half of a pizza deliveryman to my door-- at least not half of a live and functioning pizza deliveryman. Let's leave Don Corleone out of this discussion, eh? What a firm can do is to decide not to be open at all during certain hours, and the rent clock goes on ticking during those hours. If the owner/rentier can subdivide labor sufficiently finely that a twenty percent differences in wages is the difference between profitability and unprofitability, then it seems likely that the owner/rentier would be subdividing labor to make a marginal gross profit of about five hundred percent on variable expenses. Of course, one would have to build detailed models of business premises staffed by one, two, or four employees at any given time, but it is rather a stretch to believe that either price increases or layoffs would ensue. The most probable outcome would be that the rent-value would drop a bit.
For the upper strata of restaurants, the minimum wage is irrelevant. What is relevant is the tip, and waitresses hide tips from their employers in order to avoid having to yield up a percentage. I have in front of me, Daniel Miller's _Starting a Small Restaurant_ (1978, 1983), a handbook for the upscale bistro, which contains a discussion of whether it is legal to hire only blonde waitresses. Of course, this is probably code for "the N word." Miller's larger point is that in his line of work, any customer-serving employee who the customer feels uncomfortable with, however unreasonably, is an economic liability. By extension, if a fast-food restaurant cannot get a counter worker whom customers enjoy talking to, it may be just as well off with a computer terminal, which costs practically nothing.
Bill Woolsey -
1/14/2007
Imagine that a price ceiling is placed upon the products of unskilled labor at the same time the minimum wage is increased.
Would the negative impact on employment be more or less?
I think it would be more.
The way I use the term "mitigate," the absence of the price ceiling (the ability of firms to raise prices,) _mitigates_ the impact of the higher minimum wage for the employment of unskilled labor.
Think of the product market. The higher minimum wage increases costs and shifts the supply curve to the left. At the initial price, quantity supplied decreases, causing a shortage. This lower quantity supplied implies a lower demand (or quantity demanded really) for the varous resources used for producing the product. That includes unskilled labor.
If the market for the product is unhampered, then the price of the product will increase. This reduces quantity demanded and raises quantity supplied. The shortage disappears.
But there is an increase in quantity supplied due to the increase in price.
That increase in quantity supplied requires an increase in the demand (or really quantity demanded) for various resources--including unskilled labor.
The new equlibrium quantity of these products is less than the intial one. And so, even if there is no change in production methods, the quantity demanded of unskilled labor (and other resources used to produce the product) decrease. However, the decrease is smaller than what would have occured if there had been no increase in the price of the product.
And, of course, there maybe a shift away from unskilled labor in production methods. While that increases the impact on unskilled labor, it lessens the impact on costs, supply, and product price.
I use the term "mitigate" to mean "lessen" not to mean "prevent there from being any impact at all."
I think that your argument assumes "mitigate" means "has no negative effect." Perhaps some of those making this claim really believe that the law of demand doesn't apply to the products of unskilled labor. I admit that I find that laughable, but if it _were_ true, the demands for other things would fall instead--which I think is the argument you are making.
There are various secondary effects.
The increase the prices of the products of unskilled labor should increase the demand for other products (substitutes.)
The reduction in total production and income (because of the reduced employment) reduces demand for normal goods (and raises them for inferior goods, but the net effect must be negative.)
If the prices of the products of unskilled labor didn't increase, the demand for other products would still increase (those who cannot buy the products in shortage would buy other things instead.)
But the reduction in output, income and decrease in the demand for normal goods would be greater. (And I guess the increase in demand for inferior goods would be greater too.)
Finally, the lower income reduces the demand for money, and that reduces its purchasing power. That lowers the real minimum wage, creating another avenue for mitigation.
None of this makes raising the minimum wage a good idea.
And the rather common notion that the higher minimum wage will lead to a proportional increase in the price level, leaving the minimum wage recepients earning the same real wage (and presumably with only transitional real effects on output and employment) is wrong. I hear it every semester from some student. It only happens if the quantity of money is increased an appropriate amount. (ceteris paribus--in proportion to the increase in the minimum wage.)
Unfortuntately, it is false to simply say that prices don't rise at all( other things being equal) or that any price increase has no impact on the consequences of the minimum wage for production and employment.
To sum up, if the prices of the products of unskilled labor failed to adjust, the impact of an increase in the minimum wage would be worse. The price increases do mitigate the negative effects.
Sheldon Richman -
1/13/2007
Why should it mitigate the effects if we have to cut back spending on some things in order to continue spending on others?
Bill Woolsey -
1/13/2007
The increase in prices will almost certainly mitigate the negative employment effects of a higher minimum wage (along with preventing shortages of goods produced with unskilled labor!) But, mitigation doesn't mean that there is no negative effect.
