Monday, March 23, 2009

Minimum Wage Policy

This suggestion at the website inspired a student reaction:

Raise the Minimum Wage to $9.50 an Hour by 2011:
Barack Obama and Joe Biden believe that people who work full-time should not live in poverty. Even though the minimum wage will rise to $7.25 an hour by 2009, the minimum wage's real purchasing power will still be below what it was in 1968. As president, Obama will further raise the minimum wage to $9.50 an hour by 2011, index it to inflation and increase the Earned Income Tax Credit to make sure that full-time workers can earn a living wage that allows them to raise their families and pay for basic needs such as food, transportation, and housing -- things so many people take for granted.
Here is the student's reaction:

I believe that raising the minimum wage is an excellent idea and way overdue. I agree that people working full-time should not have to live in poverty. The current minimum wage is way below the poverty line. In an article in ( the poverty line for a family of four in 2001 was $18,267 a year. Which is $8.75 an hour if working full time? I believe that people want more than just enough to get by on. The American Dream is more than “just enough.” If an individual works in a full time position and still can not afford their basic needs, it leads to hopelessness. In my opinion, individuals who feel hopeless are more likely to give up, live off of the in-kind benefits, resort to illegal activities, or give in to the escape of alcohol and drugs, all of which contribute to poverty.

I hope that the minimum wage will indeed be indexed to inflation, and not just be raised to the $9.50 an hour amount and then forgotten for several years or shelved by the next administration.

This reminds me of a couple passages from "The Wealth of Nations" by Adam Smith (1776). I'll quote them here. First, this:
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, or 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.

We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labor above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbors and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things, which nobody ever hears of...

And secondly, and most significantly, there was this:
A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation. Mr. Cantillon seems, upon this account, to suppose that the lowest species of common laborers must every where earn at least double their own maintenance, in order that one with another they may be enabled to bring up two children; the labor of the wife, on account of her necessary attendance on the children, being supposed no more than sufficient to provide for herself. But one-half the children born, it is computed, die before the age of manhood. The poorest laborers, therefore, according to this account, must, one with another, attempt to rear at least four children, in order that two may have an equal chance of living to that age. But the necessary maintenance of four children, it is supposed, may be nearly equal to that of one man. The labor of an able-bodied slave, the same author adds, is computed to be worth double his maintenance; and that of the meanest laborer, he thinks, cannot be worth less than that of an able-bodied slave. Thus far at least seems certain, that, in order to bring up a family, the labor of the husband and wife together must, even in the lowest species of common labor, be able to earn something more than what is precisely necessary for their own maintenance; but in what proportion, whether in that above mentioned, or in any other, I shall not take upon me to determine.
So, what does it cost to maintain oneself and also bring up a child? In our city in 2009 you would need at least $500 per month for the smallest apartment with utilities. I believe an adult and child could eat well enough on a budget of $200 per month. If we're merely talking about survival, food and shelter are all they would need, but I suppose a bike, enough money for some bus passes and an occasional taxi ride, some money for clothing, and that sort of thing would perhaps create a need for another $200 or so. So, something just under $1,000 per month would be enough for survival. In a typical month a person might work 160 hours. To earn $1,000 per month working full time, they would need to be earning $6.25. In fact, the federal minimum wage is $6.55, but will go up to $7.25 in July. Here in Illinois the state minimum wage went up to $7.75 in July of 2008, and it will go up to $8.00 in July of 2009.

So, it looks to me as if we have minimum wages that are at the level that Cantillon and Smith thought were "natural" and "necessary" for workers.

If you think we ought to be more generous, and mandate a minimum wage that allows a single income-earner to raise a household with one adult and three children out of poverty, then you must consider the 2009 poverty threshold for a family of three (which is $18,310), and divide by a reasonable number of hours to expect a person to work in a year of full-time labor (a reasonable 1,850 hours would require a minimum wage of $9.90, and a more toil-and-work-diligently American full-time standard of 2,000 hours per year would require a wage of $9.16).

Are there any studies that indicate that people lose jobs when we set a minimum wage? That is a standard argument against minimum wages. Well, there are some studies that show the opposite influences (raising minimum wages increases employment). Here is a list of ten articles that, judging by the abstracts and other information I could gather, seem to have evidence about minimum wages:

The Effect of Minimum Wage on Youth Employment and Unemployment in Taiwan
Author: Chuang, Yih-chyi
Source: Hitotsubashi Journal of Economics v47, n2 (December 2006): 155-67

Minimum Wages and Poverty with Income-Sharing
Author: Fields, Gary S.; Kanbur, Ravi
Source: Journal of Economic Inequality v5, n2 (August 2007): 135-47

On the Empirics of Minimum Wages and Employment: Evidence for the Austrian Industry
Author: Ragacs, Christian
Source: Applied Economics Letters v15, n1-3 (January-February 2008): 61-64

Do Minimum Wages Have a Negative Impact on Employment in the United States?
Author: Bazen, Stephen
Source: Economie Publique n17 (2005): 41-58

Minimum Wages and Employment
Author: Neumark, David; Wascher, William L.
Source: Foundations and Trends in Microeconomics v3, n1-2 (2007): 1-186

Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates
Author: Flinn, Christopher J.
Source: Econometrica v74, n4 (July 2006): 1013-62

Minimum Wages, Inequality and Unemployment
Author: Adam, Antonis; Moutos, Thomas
Source: Economics Letters v92, n2 (August 2006): 170-76

The Minimum Wage Can Harm Workers by Reducing Unemployment
Author: Lee, Dwight R.
Source: Journal of Labor Research v25, n4 (Fall 2004): 657-66

Minimum Wage Policy and Employment Effects: Evidence from Brazil
Author: Lemos, Sara
Source: Economia: Journal of the Latin American and Caribbean Economic Association v5, n1 (Fall 2004): 219-52

Minimum Wage Impacts on Youth Employment Transitions, 1993-1999
Author: Campolieti, Michele; Fang, Tony; Gunderson, Morley
Source: Canadian Journal of Economics v38, n1 (February 2005): 81-104

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