The fight for 15
Whenever I hear an argument about the possibility of raising the minimum wage to $15 per hour, it sounds like this. Person A, who is for it, makes the case that it’s too difficult to live on minimum wage earnings, and it doesn’t make sense for someone working full time to struggle so much to feed their kids. Person B, who’s against it, says that 15 is too high, that too many employers will be unwilling to pay for unskilled workers at that rate, and they will replace such people with machines instead of doing so. Essentially, they argue the bad will outweigh the good.
Full disclosure: I am often Person A. I once figured out that if you take someone’s hourly wage in dollars, and you multiply by 2, then you get their yearly wages in thousands of dollars. That means an income of $100K per year is $50 per hour. That means an income of the current New York minimum wage, $8.75 per hour, is a measly $17.5K per year, which would be absolutely crazy to try to live on, according to my reckoning. In other words, I think about what I could theoretically live on, if I had a minimum wage job, and I have extreme sympathy for people who try to.
Let’s get back to Person B’s argument. It’s weird because it sounds like Person B is arguing for the sake of the poor, but they’re ignoring the vital question of what is a living wage. Let me give you an analogy.
You have a sick population, and they all need 3 pills per day to stay well. The pills are expensive, though, and so the people in charge of pill distribution give most people 2 pills per day. They argue that, if they gave out 3 pills per day to everyone, some people would have no pills. For the sake of those theoretical people, then, they give out only 2, and everyone remains sick.
In other words, for the sake of holding on to crappy jobs that pay below living wages, and where the employees need food stamps to survive, we don’t raise the bar so they can actually sustain someone in a basic way. It’s almost like we’re desperate to hold on to them because otherwise our unemployment rate would be higher.
I say, figure out what a living wage is, and raise the minimum wage to that level. I actually don’t know what the magic number should be, exactly. Is 15 big enough? Maybe it is, in some places, but maybe in others it’s actually smaller. It doesn’t have to be the same throughout the country. But for as long as we live in a country where the model is that a job is supposed to support you, we should make sure it actually does.
mathbabe 
Living wage calculator: http://livingwage.mit.edu/
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I strongly disagree that the analogy was valid. Let’s say 30,000$ is a “living wage” for people in Nebraska. Then, if the analogy is to hold, it would be much better, if the average poor nebraskan was making 25000$ a year, to take 5000$ from one poor nebraskan and hand it over to the other. This doesn’t make sense to me. Pills have discrete jumps in happiness so that the third marginal pill is the most important. Cash, generally, seems to go in the opposite direction (the more you have, the less you need).
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This is the clearest explanation and justification I’ve read on this issue. It’s too bad that politicians running for national office and advocate for fairer wages have to stick with one number (e.g. $15) that fits on a bumper sticker and into a meme.
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The analogy is also invalid for a different (but surprising) reason. In the analogy, there aren’t enough pills for everyone to have enough. But I argue that there is plenty of money available to raise wages for poor people: http://www.nytimes.com/2015/03/14/upshot/wall-street-bonuses-vs-total-earnings-of-full-time-minimum-wage-workers.html
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The argument of most economists is that if you want to give someone a decent standard of living, you’re better off doing it through the Earned Income Tax Credit. That’s the complete version of Person B. It’s not an argument about goals, it’s an argument about how to get there.
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The problem with the EITC is that it fails to account for human psychology. Giving poor people a big lump sum once a year is not a great way to lift them out of poverty, because people in general (not just poor people) are terrible at managing money. Ironically, the government fully understands this phenomenon when it comes to tax payments (which is why we have tax withholding), so it’s not like this is a new or controversial observation.
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DJ, this is an important point, but it is also only an argument against how the EITC is administered, rather than against the general idea of the EITC. The EITC could be done as an adder to every paycheck, instead of an annual lump sum.
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I agree it could be done, but it is more complicated than the current system of withholding. The problem is that the tax code is progressive: taxes don’t scale linearly with income. So if you have someone working multiple low-income jobs (which is VERY common), the system needs to be able to coordinate multiple income sources, or else the EITC payments will be too high, resulting in a huge tax bill upon filing (which is a much worse problem than the problem we’re trying to solve).
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There was an attempt to transition the EITC to be included in the employer withholdings system, with employers filing to get credit against the withheld income taxes they would otherwise owe to the IRS (and I think quarterly refund checks if they ended up actually owed money, b/c they employed many EITC qualified people and few people with positive income tax rates). This was called the Advance EITC. It unfortunately died for lack of support from the political and business classes.
http://www.gao.gov/products/GAO-07-1110
There’s no reason you couldn’t completely standardize this — make a negative rate part of the standard structure of income taxes, and always just calculate it as part of the employer-handled withholdings process.
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AEITC was discontinued at the end of 2010, as noted here: http://www.pbs.org/wnet/tavissmiley/a-wealth-of-knowledge/understanding-the-earned-income-tax-credit/
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We often look at minimum wage as being too small for family size x. Cost of living varies by geographic area, so poverty dollar levels should reflect that. As DJ says, EITC as lump sum doesn’t work for psy reasons. We work too much. So, to me, ideal would be to peg minimum wage to just over regional poverty level for one, allow EITC payments to spread across each paycheck (opposite of tax withholding so wouldn’t be technically hard to put in place) so those EITC payments get earner up to just over poverty level for family size, and decrease the work week by one hour a year for 16-20 years (adjusting up wages and EITC payments each year to maintain levels).
Of course, pipe dream.
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just a couple of points:
1) Correct me if I’m wrong, but seems like most places (with a couple exceptions) I see actually adopting a mandatory $15 minimum are phasing it in over YEARS, so it’s not as if businesses suddenly find themselves opening up some upcoming Monday with everyone suddenly jumping to $15/hr.
2) When businesses wail that there products/services will become uncompetitive if they have to pay employees $15/hr. they seem to be disingenuously failing to acknowledge that their competitors also suffer the very SAME plight. It’s true that if all cooks/waiters/waitresses/busboys/dishwashers make a $15 minimum the price of eating out will go up and there may be fewer customers initially (although now those very workers will have more funds for eating out themselves!), but people do adapt — my eating-out habits and frequency have changed a lot in last 4-5 yrs. with rising food costs, but few of the restaurants in my neighborhood have gone out-of-business.
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Another piece we don’t talk about much is the increases to the labor participation rate that comes with minimum wage increases (see Card and Krueger’s original studies in 90’s). Over time this leads to whiter labor pushing out the less white. We need a solution to this, and I don’t know what it is.
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Options A and B, are nothing more than the wealth distribution problem of our world (1% and 99% concerns). The same question is also related to taxes, where the issue is not really if we will have more or less taxes, but how the taxes will be distributed based on each taxpayer’s income and wealth.
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I agree with the goal. I think a basic income guarantee makes more sense.
There is another practical problem (raised in some other comments) which is that the right wage (or income) for NYC is very different than for Nebraska or upstate NY. There is no perfect way to address this but national minimum should probably be set relative to a measure of what is required by locality.
I am concerned that EITC just makes is easier for predatory employers to pay miniscule wages and take advantage of government subsidy.
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I’m more of a Person B. I think where A loses me is in explaining why exactly that every job that is offered must have adequate value to sustain an individual or family. Not everyone that wants to work is trying to run an independent household. I don’t understand the need to establish such a threshold that outlaws the hiring and provision of lower value work. I also don’t understand what’s so special about an employment relationship that imbues so much parental type of responsibility on the employer.
Besides that, as discussed above, a few simple tweaks to EITC will more efficiently achieve Person A’s aims without the unemployment risk of a too-high minimum wage. I’d be perfectly happy to see EITC expanded and improved.
Kudos on your note that a $15/hr wage is probably not universally appropriate either. Puerto Rico and Mississippi already have plenty of economic problems.
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First, the EITC is very small: the maximum benefit for a couple without children is less than 500 dollars. For a full-time worker, that’s a wage subsidy of 25 cents an hour. It’s not nothing, but it’s not much, either.
But suppose we did expand it. Then we’d run into the problem (common to means-tested benefits in general) that we’d create very high effective marginal rates of taxation. In combination with Medicaid and TANF, the EITC can already sometimes get marginal taxation rates of *greater* than 100% — earning a dollar more can reduce benefits by more than a dollar. Increasing the size of the benefit would make a benefits trap even sharper.
If you want to avoid labor market distortions, then you need to make benefits unconditional. But expanding SNAP, Medicare, Section 8, and childcare into free, universal, non-means-tested benefits kind of puts you to the left of even Bernie Sanders.
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Neel – excellent point about marginal tax rates and indeed my first-best policy is more akin to a guaranteed national income that scraps existing alphabet soup of aid programs. But I didn’t expect that expanding EITC or raising minimum wages would have different impacts on a recipient’s marginal tax rate. Maybe I just don’t know enough about the mechanisms by which those phase-outs are computed.
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Do you have any figures about proportion of those trying to live off the minimum as opposed to merely wanting some pin money? Otherwise you’re arguing that even one person who just wants a little extra cash is reason enough not to raise the minimum wage.
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Why must every job pay a living wage? Why can’t some jobs pay other things, like the ability to acquire skills, develop a professional reputation, or build a network, which are simply other forms of payment which might be valuable to people starting their careers? Or they may provide flexibility to people who value that? Why should we make these jobs pay a living wage and thus make them unattractive for an employer to provide?
The point of internships and minimum wage jobs isn’t to feed your family off them. They are to be temporary jobs. They are stepping stones to something better and won’t be as long as they pay a living wage. Doing so turns them into permanent positions.
The real issue is that this economy isn’t creating enough “move up” jobs for people who want them. Spending 20 years making French fries because you can feed your family from your wages isn’t something we should think of as moving forward as a country.
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“The point of internships and minimum wage jobs isn’t to feed your family off them. They are to be temporary jobs. They are stepping stones to something better and won’t be as long as they pay a living wage.”
Totally false. FDR in 1933, on introducing the minimum wage law: “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country… By living wages, I mean more than a bare subsistence level — I mean the wages of a decent living.”
More here: http://takingnote.blogs.nytimes.com/2014/03/07/f-d-r-makes-the-case-for-the-minimum-wage/
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Well if FDR said it in 1933 that makes it so.
Seriously though, even FDR had s qualifier “depends for its existence”. Even FDR recognized that not all work must be compensated at that level.
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Raising the EITC without also raising the minimum wage would likely further increase the share of the EITC going to low-wage employers. On the other hand, if you also raise the minimum wage up to the point where Person B’s concerns are barely starting to actually happen (maybe this is only $12 rather than $15 in some areas of the country, though studies of actual minimum wage increases show basically no sign at all of this effect), then more of the EITC increase will go to the workers.
But the perfect is the enemy of the good: it’s important to keep in mind political realities. Assuming that in the fairly short term, an EITC increase is off the table and the only politically viable options are no change to help low-wage workers and a minimum wage increase, then a “Person B” who claims to be against a minimum wage increase but in favor of an EITC increase is really in favor of no change to help low-wage workers. See this editorial for more on this: http://www.nytimes.com/2013/12/02/opinion/krugman-better-pay-now.html
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I’m one who advocated exactly that above, I don’t agree with your characterization for a couple reasons. First, I think raising the minimum wage to $15/hr would be a net harm to the working poor. It’s complicated, primarily because the impact is asymmetric. Unemployment does much greater harm than just the loss of income. So opposing that policy and preferring another, even if unfeasible to enact, is not opposing change to help low wage workers.
Second, as a citizen, I think it’s my responsibility and right to advocate the policies I think are actually best. An elected legislator, on the other hand, does need to content with political realities and not let the perfect be the enemy of the good. When I vote I can take those concerns into account if the legislator didn’t achieve my preferred policy.
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I’m certainly not saying people shouldn’t strongly advocate the best solutions (including things like a guaranteed basic income which would, in my opinion, be far better), I’m just saying that it’s useful to also offer your measured support to the solutions that are best given political constraints.
I don’t think that a $15/hour minimum wage would be a net harm to the working poor, but I’m aware that $15 is a high enough number that there isn’t very strong evidence to support that assertion. On the other hand, the evidence that an increase to, say, $10/hour wouldn’t have any significant negative influence on employment is pretty overwhelming.
So suppose that any of the other related changes were impossible but you had the power to do whatever you wanted with the federal minimum wage. What would you do? (Note that the answer isn’t necessarily just a number. For example, I might advocate gradually raising the minimum wage to $12/hour over the next four years, with subsequent gradual increases up to $15/hour tied to employment data.)
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Well, since you asked… I’d abolish the national minimum wage for at least two reasons.
First – There’s no single wage that will be both meaningful in high cost areas like New York City and not dreadfully harmful to poor areas like Mississippi and Puerto Rico. You can tune it by cost of living adjustments or whatever, but at that point, why bother with a national policy at all? There’s still bound to be mistakes, just let cities and states handle it.
Second – I think minimum wages are a terrible mechanism for helping the working poor. Some problems have been highlighted in mine and other comments – not every low-wage worker is poor, so it’s an inefficient means of distribution. There are unemployment risks which are particularly harmful to young, unskilled workers – if you look at youth employment since the minimum wage was raised 40% during the 2008 recession, the numbers are pretty ugly compared to adult employment figures. But more fundamentally, if you want to help low-wage workers, then you should vote your own tax money to go to them through mechanisms like EITC or a guaranteed income instead of treating employers like oppressors of working people that must be hamstrung at every opportunity. That mentality is a recipe for economic stagnation.
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The argument that I have heard from my friends in the restaurant business is that a flat minimum wage would drive many businesses out of business. For example, the margin on low-cost restaurants like McDonald’s is very thin, and those restaurants rely on an absolutely stunning volume of sales in order to make a profit. If labor costs are 30%, and then you suddenly get a doubling of the minimum wage (which would be the result of a $15 minimum wage in my home state), labor costs would now consume 60% of total expenses. Assuming the *same* sales volume, prices would have to close to double in order to maintain the same profitability.
Now let me ask you this. Suppose you were getting a Big Mac Meal Deal before for $6, and now it is $10. Are you going to continue buying them with the same frequency, or is your frequency going to drop? The latter, obviously. Because it is a universal law of pricing that if the price increases, your willingness to pay decreases for anything that is not absolutely necessary for survival.
It is not guaranteed for every business that there will be a new equilibrium at $15 such that the business can maintain profitability. A viable equilibrium (at $15 minimum wage) is far more likely in urban environments like New York, where a substantial proportion of customers *are* willing to pay $10 for a Big Mac Meal Deal. In my home state, a $15 minimum wage is very likely to drive many businesses to close. The pay rate for the newly unemployed is now $0/hr instead of $7.50/hr. It is hard to call this a net benefit for the poor. Incidentally, it is already possible to live on $15k in my home state, though not with the kind of lifestyle that most people would call comfortable.
In short, it is possible to believe that wages should be set so that a 40-hr working week should be sufficient to support oneself and one’s contribution to a family, and yet oppose a $15 minimum wage on the grounds that it would be a net penalty for the poor. The first-order correction is to adjust the minimum wage on an area-by-area basis to adjust for the actual cost of living. It is hardly obvious that this will guarantee sustainable equilibria either, but it can’t be worse for unemployment than raising the minimum wage to $15 across the board.
Would it be interesting to work these numbers out with a real restaurant? My brother might or might not be able to give me access to the balance sheet for a typical unit of a fast food restaurant in a low minimum-wage state.
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I think MIT did a poor job on its living wage calculator. http://www.basiceconomicsecurity.org/best/
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Increased unemployment (or reduced work hours) should be the measure of the success of the economy. Freedom – in “The land of the Free” is not being enslaved by bills and debt. It is being free of them. High unemployment is the opportunity to pursue arts and music and hobbies and math problems. Bill Gates had the ability to sit in his garage and do whatever he chose.
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I don’t understand why this is even an issue. If an employer doesn’t pay a living wage then the society pays it instead through food stamps, housing allowances, crime, death, etc. All that just so someone else can have more wealth and POWER. When society pays the costs then society is saying that this company is more important better than this company and they are picking the ‘winners.’ By that scenario Wal-Mart, Target and many other companies which have low wage workers which society pays for must be the society’s most important companies. If not, then why do we supplement their workers? Why do we give them special tax deals for property taxes, utilities, etc.?
You look at what’s spent for some of the anti-worker lobbying efforts and when you figure out of the costs of that effort vs. the cost of what workers were asking for (or the implementation safety measures or environmental standards) and you come to realize that the money aspect is such a small piece of the puzzle.
If it’s not about the money then what is it about? I suspect it’s about control and keeping one’s power and place in the world.
That MIT calculator is ridiculous. Why in the world would one ever calculate a living wage based on a single person? That’s a huge built-in bias that says a lot about our society’s values.
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PS. On that MIT calculator: There is also a built-in assumption that the living wage is based on 40 hours of work. With the stories we hear about service jobs and not knowing how many hours one might have from week to week,
What’s the probability that $15 an hour is a living wage for even a single person if they aren’t guaranteed 40 hours a week and what does their living situation look like? Do they have a car in New York vs. California? Is there public transportation available when they need to go to work? How many roommates do they have to have? If they can’t get 40 hours of work at one job then how many jobs do they have? etc. With the $15 an hour wage, is it possible that they still qualify for food stamps? medicade? housing allowances? if they get hurt on the job how likely is it that they will get workers compensation? disability? do they have the money to hire an attorney? do they have the money for major medical expenses?
Is it really a living wage or is it merely an existence wage?
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I once argued strongly in favour of person B, but I have shifted my view over time to the perspective of person A. Here is how I see it:
– it’s ok for part time jobs to pay low wages because often those positions are filled by teenagers and retirees looking for a little extra scratch,
– the premise of a crappy minimum wage full-time job is that the person must do it to feed him/herself and family
– if that person cannot be paid a living wage by the owner then I don’t think that service or product is needed in the economy
– just like low interest rates, low wages keep crappy businesses, in business. Higher interest rates and higher wages mean only good businesses survive (yes, I hope that higher wages would kill most fast food businesses as that capital could be allocated to something far far better),
– I don’t like seeing mothers/fathers having to take TWO crappy full-time jobs because that just harms children. I would rather the government pay welfare because a better parent will likely produce a happier, healthier, and better kid. Some people just don’t have the ability to improve themselves, so we have to stop thinking that welfare is ALWAYS bad.
We need better balance between returns to CAPITAL and wages paid to PEOPLE. Lately capital has been aggressively taking a larger chunk of the economy than it ought to.
For the record, I strongly believe in free markets and I am especially concerned about liberty and the loss of it. Normally such a person would object to minimum wages. I like that certain parts of the US are experimenting with such wage policies and in this day in age I hope we have the data science to really examine cause and effect.
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I don’t get the Person A/B characterizations.
Raising minimum wage will have the completely predictable effect of less jobs. People who keep their jobs after the increase will benefit from it, and people who’ll lose their jobs will suffer from it. Additionally, some products that exist only because of cheaper labor, will disappear, presumably to the detriment of everyone.
Now given the above (facts/strong expectations?) – I’d like to see what exactly these Person A/B positions are. How exactly does Person A think we as a society are supposed to deal with the increase unemployment (or maybe we don’t deal with it) and decreased output? Shouldn’t Person B argue for decreasing the minimum wage to zero?
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It’s really not clear that raising the minimum wage results in fewer jobs. Studies on this question are inconclusive. The proposed mechanism is that raising wages puts more money into the hands of consumers, money that otherwise would have represented corporate profits stagnating in an offshore tax haven. While farfetched, the idea is at least as plausible as, say, supply-side economics. In any case there are a bunch of less controversial labor regulations (no slavery, no child labor) which we accept even at some economic cost.
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How come when we talk about wages when never talk about what wages are simply too much? Is any human being worth $1 Million dollars are hour to society?
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From an outsider’s perspective, I believe that an increase in (or even the existence of) minimum wage is only a temporary solution, because prices will adjust eventually and the problem will present itself again. I think a better solution would be providing universal, free (or heavily subsidized) and better public services. If one takes out the costs for education and healthcare (those cash outflows that people have little or no control on), and factors in an adequate provision of public housing and transport, then the job market can be left free to adjust itself with less worry.
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One important considerations is that wages return back to the economy in full. Corporal profits, based on low wages, usually do not, they end up in some tax paradise.
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