The recent Amazon decision to raise their workers’ base pay to $15/hour got me thinking about the federal minimum wage, which is currently $7.25 an hour. How many workers are paid this wage?
BLS data shows that in 2017, 0.7% of workers were paid $7.25/hour and another 1.6% of workers earned less than the minimum wage. Most of these workers were employed by restaurants, and when tips are included they generally make more than the minimum wage. Interestingly, whites are the racial group most likely to earn sub-minimum wages, while blacks are most likely to earn right at the minimum. Perhaps the jobs right at the minimum wage are actually worse than the sub-minimum jobs, if the latter are more likely to earn tips. But the problem with this theory is that Hispanics are equally likely as whites to earn right at the minimum (0.6% of white and Hispanic workers, as compared to 1.2% of blacks.) So I’m puzzled. Overall, my hunch is that when tips are factored in, almost everyone earns more than the federal minimum wage. (And even more so today than in 2017, when this data was collected.)
But that’s not why I want to abolish the federal minimum wage. Rather, having states set the minimum wage makes it less likely that the rate will be set too high, distorting the labor market. For instance, California’s minimum is currently $10.50/hour, scheduled to go up to $15/hour in 2023. In Texas, the minimum wage is $7.25/hour. Both states currently have fairly low unemployment rates, which suggests the minimum wage is not having a big effect on employment. Now suppose the California minimum wage goes to $15, while the Texas minimum wage stays at $7.25. Here are several possibilities:
A. Hotel maids in both San Antonio and Bakersfield earn $15/hour, because that’s the market wage in 2023.
B. Hotel maids earn $10 in San Antonio and $15 in Bakersfield.
It seems to me that case B is not a stable equilibrium. In that case, either lots of maids would move from Texas to California to earn the high wages, or lots of maids would move from California to Texas to find jobs unavailable in California. If they were moving on mass to Texas, then California would know that it set the wage too high. If they were moving to California, then Texas employers would have to clean up their act to hold on to their employees.
Isn’t this the whole point of federalism, to have competition among states to see which public policies work best? I can’t even imagine any argument for a federal minimum wage—what would be the point? Avoiding a race to the bottom? How can there be a race to the bottom if minimum wage laws make workers better off? And if they don’t make workers better off, why have a minimum wage?
I’d love to hear from proponents of a federal minimum wage. What’s the theory that justifies your policy preference? The famous Card and Krueger study comparing minimum wages in Pennsylvania and New Jersey is actually a powerful argument for abolishing the federal minimum wage. It showed that New Jersey’s higher minimum did not cost jobs, and hence there is no need for the Federal government to step in. In contrast, it may make sense to tax corporate income at the federal level, as there really might be a race to the bottom if taxes were done entirely at the state level. (Assuming corporate taxes make sense, which is questionable.)
I’m actually opposed to all minimum wage laws. But if I did favor minimum wages, I’d advocate they be determined at the state level, not the federal level. I can’t imagine why anyone would advocate a federal minimum wage. It would be like having a federal law against pot smoking. Actually worse, because with pot it’s plausible that the optimal law in all states is the same. There is no plausible argument that the optimal minimum wage in Massachusetts is the same as in Mississippi. If you set the rate at the appropriate level for the lowest state, then the other 49 states would all have to set their own higher minimums. So then why even have a federal minimum wage?
This is where the Hollywood plot twist comes in. If you are still reading, you’ve likely concluded that I’m a reactionary dinosaur, out of touch with the times. I can hear people saying, “Doesn’t Sumner know that Jeff Bezos and Bernie Sanders and all the other cool people now favor a higher federal minimum wages? Laissez-faire capitalism is dead, everyone now thinks we need to be more like the “socialist” Nordic countries.”
Let’s see. Would those be the Nordic countries that have no national minimum wage, and that let labor groups negotiate industry minimums at levels appropriate in each case, and allow smaller non-union firms to pay any wage they wish?
READER COMMENTS
Bob
Oct 3 2018 at 9:55am
Scott,
I read to the end and do not consider you a dinosaur. I oppose minimum wages because I think there is a subset of people who have a current marginal utility that is below the minimum wage. I believe that if most of these people were able to work they would increase their marginal utility be having experience and developing habits. However, people advocating minimum wage are well intention-ed, but will not be swayed because your post doesn’t address their legitimate concern that people who work should not be in poverty. My other concern in that the cost of getting to work and other work related expenses create disincentives for marginal workers to get that first job. It seems like the earned income credit has been very successful at solving all three problems for single mothers. How do you feel about expanding the program to all working age adults?
MikeW
Oct 3 2018 at 10:12am
Isn’t the cost of living higher in California than in Texas? And therefore, shouldn’t wages be higher in California than in Texas? That’s the problem with a high national minimum wage — it would devastate rural areas that have lower wages and lower cost of living.
robc
Oct 3 2018 at 12:23pm
Along the same lines, I am not sure even a state minimum wage makes sense, as it should probably be done at the county level.
I agree with Scott that we shouldn’t have one at all, but if we do, even the state level may not be the best option. It should be more local.
Scott Sumner
Oct 3 2018 at 2:06pm
Good points. By the way, California does have higher minimum wages in the coastal areas.
BTW, I chose Bakersfield for my migration example, so the thought experiment would not be distorted by housing cost differences.
Floccina
Oct 5 2018 at 5:27pm
If you were to raise the minimum wage in San Fransisco say 25% above the prevailing wage, how much of the increase would be captured by landlords?
MarkW
Oct 3 2018 at 10:47am
But a state-wide minimums seem just as big a problem in many states as the federal minimum. The differences between SF and Bakersfield or NYC and upstate NY are greater than the differences between states. The Democratic gubernatorial here in MI is pushing for $15. This would have little effect in Ann Arbor but be devastating in the Upper Peninsula.
Mark Barbieri
Oct 3 2018 at 1:11pm
I see two problems with your view. The first is that the same logic could easily be applied at a state level. Why would anyone expect hotel maids in relatively prosperous San Antonio be the same as it is for much less prosperous Brownsville, so clearly we need local minimum wages. But that still doesn’t go far enough because it doesn’t account for variances within a city, variances for different industries, and variances between different workers. It is hard to take a step away from having a single minimum wage without ending up at the logical conclusion that every individual should be free to set their own minimum wage.
The other problem is that you presuppose that people want the economically optimal minimum wage to prevail. Amazon, for example, wants the minimum wage set at the level that maximizes its profits but driving up wages for its more labor intensive competitors. Donald Trump has pressured Mexico to set a high minimum wage for parts of their auto industry to make US car production more competitive. There is a long history of groups advocating higher minimum wages to benefit their members at other people’s expense.
I’d like to compromise at let them set whatever minimum wage they want provided that they allow individuals the freedom to opt out. Then we can all crow about how wonderful we are for getting higher minimum wages without actually forcing them on people and costing them their jobs.
robc
Oct 3 2018 at 2:22pm
I agree, but I fail to see how that qualifies as a problem.
Scott Sumner
Oct 3 2018 at 1:54pm
Bob, Thanks. People don’t understand that the best way to reduce poverty is to subsidize work, not discourage it with regulations. The EITC has some good points; an hourly wage subsidy would be even better.
Mark, Just to be clear, I oppose all minimum wages. But if we have them, they should definitely vary by location.
bob
Oct 4 2018 at 9:31am
Scott,
Thanks.
Thaomas
Oct 3 2018 at 2:36pm
The argument for a minimum wage in market J is that firms in market J have monopolistic power. Is a first best political economy this would already have been regulated at the state/local level. But it is certainly possible that the political economy of this is more distorted at the state and local level than at the federal level. The harm from a “too high” (greater than necessary to correct for monopsony power) is greater at the sub national level because elasticity of demand is higher.
Although it is inferior to a minimum wage perfectly calibrated to the degree of monopsony in each market, I think a higher EITC is a better policy for redistributing income to low-paid workers
S D
Oct 4 2018 at 4:32am
I also do not support minimum wages.
But if you are going to have a nationwide minimum wage, it only makes sense if you have a single labour market. The US does not have a unified labour market, it has well over a hundred, particularly when it comes to low-skilled work. A demand shock in Orange County has no impact on wages in rural Alabama, even in the medium term.
$7.25 an hour (plus employer SS) is very close to the marginal product of the lowest-skilled person who is willing to work in say rural Alabama.
$7.25 an hour (plus employer SS) is well above the marginal product of the lowest-skilled person who is willing to work in Orange County.
Any increase in the federal minimum wage is likely to harm low-skilled workers in deprived parts of the US the very most.
nobody.really
Oct 4 2018 at 10:13am
I concur that the U.S. does not have a single labor market, but well over a hundred–especially regarding low-skilled work. This fact bolsters the argument against a federal minimum wage–but undercuts this argument:
I find it difficult to believe that hotel maids in San Antonio and Bakersfield are in the same labor market. Who travels 1500 miles for a minimum-wage job?
Scott Sumner
Oct 4 2018 at 3:48pm
I think people would gradually migrate if there were a $5/hour wage differential. (Or a lack of jobs)
Tom West
Oct 4 2018 at 8:38am
I support minimum wage despite understanding that low marginal utility workers will be displaced because I believe that minimum wage affects culture, and culture trumps economics almost every time.
BLS data shows that in 2017, 0.7% of workers were paid $7.25/hour and another 1.6% of workers earned less than the minimum wage.
I feel if we dropped the minimum wage by half, those numbers would drop, but not by a lot. What people are willing to pay, and what people accept, are often driven by using the minimum wage as an anchor price, rather than the laws of supply and demand.
My preference is to have policy that acknowledges economic realities, but also acknowledges that only a few percent of the population (in both employers and employees) approaches anything like Homo Economus.
And yes, culture is affected by economics, but usually 20 years behind.
robc
Oct 4 2018 at 10:04am
So if we got rid of the minimum wage, some people would work for $0/hr?
Seems….unlikely.
nobody.really
Oct 4 2018 at 10:25am
Well, yes. But they also do so today. They’re called volunteers. (And interns.)
And this is a dynamic that sits uncomfortably with minimum wage laws. Lots of people provide volunteer labor for, say, their churches. What policies to minimum wage laws advance that should not also apply to volunteers? And how should we distinguish between volunteers and merely underpaid workers?
Joe, a professional lawn mower, goes to church each week and mows the church’s lawn without ever submitting a bill. Over time Joe’s participation in church begins to wane. Ten years later, Joe announces that he no longer subscribes to the church’s faith, and submits a bill for all of his years of service priced at the minimum wage. What is the dividing line between when Joe’s work was volunteered and when it became normal labor subject to minimum wage laws?
A more practical question arises in the context of interns. What policy justifies a minimum wage that would not apply to interns–and how would that policy distinguish between workers in these two categories? (If I recall correctly, courts ruled that people who come into post offices to practice sorting mail in preparation for taking a test as a mail-sorter must be paid for their time; that’s an interesting precedent….)
Robert EV
Oct 4 2018 at 11:59pm
Oh, it’s even worse than people working for free: https://www.insidehighered.com/news/2016/05/17/when-students-pay-tuition-work-unpaid-internships
One could easily imagine an exploitative company that requires job seekers to work for free for a certain duration, with the expectation that a fraction of them (say, 20%) would get a full-time job in 3 months time. People play the lottery, after all.
robc
Oct 5 2018 at 9:04am
We don’t have to imagine that situation, nobody.really pointed out a current example of it with interns.
I find free interns weird, in my fields (engineering and IT) interns have always been fairly well paid (significantly above min wage).
nobody.really
Oct 5 2018 at 9:35am
<blockquote>I find free interns weird….</blockquote>
That’s been my experience, too. 🙂
Floccina
Oct 5 2018 at 5:36pm
Some people already do, and not all in a labor of love.
A company named Vector Marketing occupied an office in the building next to my office. There was continual stream of young people going in there in response to their perpetual help wanted ads. Most people would work for them a few days and net out at less than zero income.
Mark Z
Oct 6 2018 at 12:00am
“I support minimum wage despite understanding that low marginal utility workers will be displaced because I believe that minimum wage affects culture, and culture trumps economics almost every time.”
So what’s your argument for raising the ‘cultural’ minimum wage?
Even if employers all decided to increase their wages voluntarily because ‘culture’ forbade paying less than some amount, this would still lead them to utilize less labor now that they’re paying more for it. It doesn’t matter whether it’s written law or ‘culture’ that drives employers to raise the wages they pay, it will have the same effect.
And it doesn’t matter that most people aren’t ‘homo economicus’ (I would dispute this claim; I think everyone I’ve ever met would prefer to pay 1$ for a widget to paying $2 for the exact same widget); if even a fraction of the population is self-interested in their shopping, then competition will drive the market toward the point where wages follow productivity.
LK Beland
Oct 4 2018 at 9:25am
A minimum wage increase can lead to an increase in total wages–i.e. job loss smaller than wage gains–not only in the case of large monopsony power, but also because it effectively transforms the supply of low-skill work into a cartel.
From that point-of-view, wouldn’t such a cartel be more effective at maximizing its overall revenue if it were enforced at the federal level?
Jon Murphy
Oct 4 2018 at 10:51am
Cartels increase profit by restricting output, which in turn leads to lower welfare gains in the market as a whole. It’s improbable total wages would rise
nobody.really
Oct 4 2018 at 1:05pm
Depends on the labor supply curve.
But historically, worker productivity in the US moved in step with worker compensation, rising in tandem. But around 1980 that ended; worker compensation flattened, while productive continued to rise; firms collected the resulting surplus value. Perhaps not coincidentally, this coincides with the decline of unions.
A minimum wage can, to some extent, emulate the role of unions. That is, it can eliminate the supply of labor available at lower prices. Yes, this may eliminate some jobs; but it may result in other workers getting more pay for doing their current jobs, clawing back a larger share of the value of their labor.
It’s interesting to observe how, with the decline of unions, we embed ever more labor-contract-type provisions into general statute. Obamacare is the most obvious example. But OSHA. anti-discrimination laws, Social Security disability, unemployment compensation all have a similar quality.
Of course, a minimum wage, like a union, creates winners and losers. Arguably a more equitable and efficient system would be to eliminate both minimum wages AND federally-protected collective bargaining over compensation–and replace both policies with a basic income guarantee. But that’s a whole ‘nuther matter….
Hazel Meade
Oct 5 2018 at 4:59pm
clawing back a larger share of the value of their labor
Are we really going to revert to using the labor theory of value ?
In an efficient market, workers get paid their marginal productivity. There are not evil capitalists out there extracting profits from the surplus labor value of the proletariat. Full stop.
Mark Z
Oct 6 2018 at 12:06am
“But around 1980 that ended; worker compensation flattened, while productive continued to rise; firms collected the resulting surplus value.”
Though this is often claimed, it isn’t really true. Some reached that conclusion by using the wrong price deflator and dubious definitions of compensation.
http://thf_media.s3.amazonaws.com/2013/pdf/bg2825.pdf
Alan Goldhammer
Oct 4 2018 at 9:41am
I’m somewhat agnostic about minimum wages but what pushes me towards favoring them is that the trade union movement has essentially been gutted by right to work laws over the years. Movement of ‘industrial production’ to states where such laws have been in force for some years is amply documented. Clearly cost of living varies greatly throughout the country and addressing this on a state/locality basis as noted makes sense.
What does not make any sense is Scott’s example of minimum wage workers moving from Texas to California to get a higher wage. This ignores the cost of moving. Migrations of workers usually take place during moments of great economic stress (dust bowl migration in the 1930s and the black migration from the south to the midwest that began somewhat earlier). The one recent migration that occurs to me is that of oil field workers (good example is North Dakota). However, I don’t think these are minimum wage jobs.
Mark Z
Oct 6 2018 at 12:11am
If other states didn’t introduce right to work laws, what makes you think employers wouldn’t simply move to other countries that have lower wages?
I’d say the decline of unionization was an inevitable result of globalization. The US (except for Michigan it seems) simply couldn’t pretend any more that its labor force could keep wages so high and remain competitive. If we had tried to keep unionization as high as in the 60s through today, I suspect, rather than keeping the economy of, say, Michigan from becoming what it has become today, the whole country’s economy would look more like Michigan’s does today.
Steve Trinward
Oct 4 2018 at 2:29pm
Has anyone been aware that Bezos at the same time removed stock options and bonuses, and in some cases a worker who was making $18 an hour will now be making only $15? This is a scam by Bezos, and then he is trying to make it a mandate so his competitors will go out of business trying to comply — compare it to how Standard Oil and Rockefeller had a hand in writing the “antitrust laws” …
Meanwhile the purpose for minimum wage laws was to prevent unskilled labor from competing with unions, by making new workers not worth paying the minimum; additionally, anyone who has shown both reliability and trainability is capable of working at the lowest rate, before moving on with a resume to find a better gig.
michael pettengill
Oct 5 2018 at 12:41pm
Do you have evidence these incentives added more than a dollar an hour to compensation?
Amazon does not employ many fulfillment workers in Washington state, instead doing that work in places like Kentucky where wages are low and business tax preferences funded by workers are high.
Kentucky Amazon workers will pay significantly more in taxes as a consequence of this Amazon minimum wage, certainly more in higher taxes than they got from the recent GOP tax cuts: 2-3% income plus 6% sales tax on a $10K income hike.
And Amazon will probably get some of these wages back in increased spending at Whole Foods and Amazon.com. Though Whole Foods will lose SNAP (food stamp) revenue. Although Gov Begins has been trying to cut SNAP revenue to Whole Foods, Wal-Mart, etc, without increasing worker incomes, maybe even driving down wages by forcing people to work for wages below their marginal costs just to get SNAP.
michael pettengill
Oct 5 2018 at 12:04pm
Is the problem with a $15 minimum wage that Amazon workers in Kentucky will be able to afford to buy US made cars that aren’t nearly a decade old? Assuming a two Amazon worker family…
While Kentucky has car factories, new cars in Kentucky are priced almost as high as when sold in California, New York, Maryland.
Is there an economic justification for keeping business revenue suppressed in Kentucky for the vast majority of products consumed but not produced and sold for consumption only in Kentucky?
Or is there a reason government should give money to low income consumers to give to businesses to boost business revenues and profits?
Hazel Meade
Oct 5 2018 at 5:19pm
The problem is that if you give some people more money, it has to come from someone else’s pocket somewhere else. Ultimately amazon customers will pay for it. And then those customers have less money to spend on other stuff, and it just negates whatever benefit you might believe comes from Kentucky workers having more money to spend on stuff.
Let me put it this way, bitter experience has shown that the market is invariably better at allocating resources. Any time the government tries to intervene to force the market to pay something other than the market rate for something, it causes bad things to happen.
Mark Z
Oct 6 2018 at 12:18am
“Is the problem with a $15 minimum wage that Amazon workers in Kentucky will be able to afford to buy US made cars that aren’t nearly a decade old? Assuming a two Amazon worker family…”
The problem is that Amazon may be inclined to hire fewer workers in Kentucky if it is more expensive to do so, even if they merely made it more expensive for themselves.
“Or is there a reason government should give money to low income consumers to give to businesses to boost business revenues and profits?”
Sectors that employ largely low wage labor, like retail or food services, are very competitive sectors, so low wages don’t really boost profits, but rather lead to lower prices, benefiting consumer. Take the oft maligned Walmart for example: their profit margin is ~3%; retail profit margins in general tend to be even lower. If they were forced much further down there wouldn’t be much incentive for investors to invest in such companies. It’s a myth that these companies are just squeezing massive profits out of underpaid workers.
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