Minimum Wage Policy

This suggestion at the change.gov 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 (wps.ablongman.com) 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

Fair Wages and College Educations

A week or so ago when I was watching President Obama talk about the recession on virtually every television network there was one thing he said that truly struck me and made me think of a conversation we’d had in class weeks prior. He spoke about how important it was to get people jobs as janitors, auto-mechanics, in factories – typically “blue collar” jobs. In class the question had been posed as to whether or not people in those jobs deserved the same pay scale as people with master’s degrees or beyond. I believe depending on the job, people with skilled trades deserve to be paid the same amount of money as someone who spent years in college. For the most part, these people have been to some sort of trade school or are comfortable doing a job that no one else wants to do. Janitors for instance – I wouldn’t want to have their job for anything in the world. And President Obama made a good point that without those people our country wouldn’t have grown to what it is today. America was founded on hard work and while some people with high educational status work incredibly hard day to day – for the most part those who work what would be considered medial jobs work harder than someone working in a fortune 500 company. Without someone working in a factory we wouldn’t have things like cars, computers, or even food. Sometimes the people at the bottom are the most important.

Let’s see, I think about two-thirds of Americans over 25 have some post-secondary education or training, maybe with a few courses at a community college, or a certification program at a beautician school, or training in a skilled trade apprenticeship program. About a third of Americans over 25 have a bachelor’s degree (it’s actually less, but the cohort that is growing up now will see the 1/3rd mark of college graduations). I think it’s about 6% or 7% of the population that has either a master’s degree, a post-college professional degree, or a doctorate, with the doctorates being about 2% of the population. In other words, two-thirds of our population works without a college or graduate school diploma. So, it does make sense for our president to talk about the jobs where people can earn a living without having a college degree. That is, after all, the condition for most of us.
Wages are set by a combination of factors, with supply and demand being pretty important. Collective bargaining and unions can drive up wages, as can policies that set minimum wages. Employers can also keep wages down, especially in times of high unemployment. Other factors that relate to how well a job pays include:
Responsibility needed. Greater responsibility requires higher pay.
Dirtiness and danger: the more awful a job is the fewer who will want to do it, and so the pay will increase, and there may also be a bit of sympathy as well, and those who set pay may think a person risking their life or putting up with terrible working conditions deserves a bit of hardship pay.
Training needs: Lots of training will generally command higher wages, while a job anyone right off the street can do will get lower wages.
Skills and strengths needed. If only the strongest or most dexterous 10% or the smartest or most clever 10% of the population will even be able to do the job because it requires extraordinary aptitude in some ability, then your labor supply is reduced and the wages generally will be higher.
Difficulty of the work. Easy work is easy to do, and wages are lower, while more demanding tasks generally require a higher pay incentive.
Tendency of the work to be dominated by men or women. Work that women generally do gets paid less, all else being equal, compared to work that men do. Men’s work is seen as more deserving of a living wage, since men are out to provide for their families, while women are just out to get a bit of extra income. Of course we’re not supposed to think this way, but I believe this is the explanation for why nurses, social workers, and elementary school teachers make so much less than engineers, mechanics, computer programmers, and so forth. We need to overcome this assumption that men are the providers and women aren’t, and that takes some conscious questioning of our gender roles and expectations.
A job that requires extraordinary personal attributes, advanced and lengthy training, and is generally difficult, dangerous, and unpleasant should command the highest salary, while work that is easy, pleasant, and requires no special aptitude, training, trustworthiness, or experience will generally command the lowest salaries. A college education is to some degree a proxy for intelligence and responsibility. People who are flighty and less committed are unlikely to graduate, as are people with sub-normal intelligence. But, college training also changes people in ways that make them generally better in their social skills and problem-solving abilities. There are actually some fairly good studies that compare equivalent groups of people who graduate college and those who don’t attend, and these studies suggest that college educations have an independent and significant influence on many aspects of life that are greater than the admissions standards and selectivity of college admission alone.
But yes, our economy is now structured in such a way that we need a vast army of service workers and laborers who need no vocational training in college. College educations may be useful to many of these people in terms of making them better citizens, happier marriage partners, wiser parents, and better-informed consumers. Probably just about anyone with both intelligence and commitment/ambition at average levels or higher could make it through some form of college education and benefit from it, even if there was no vocational or direct financial advantage.
A serious problem comes when we think of college education as merely a vocational training system. I think about one-fifth to one-quarter of college educations ought to be directly vocational, although perhaps as more than half of the courses one takes in the final two years ought to have a connection to one’s career if one wants to work in a specialized field such as engineering, natural sciences, computer programming, finance, medicine, law, social work, education, and so forth. College is also a system of producing an elite leadership segment of the general population in a democracy. Those with college educations ought to be leaders in consuming news about their communities and governments, and then getting involved in influencing policies and conditions in their communities and governments. So, college works as a system to help a democracy remain healthy. We need critical thinkers and people who know how to make themselves well-informed so we don’t lapse into a dictatorship or elect too many idiots into powerful offices.
College also helps people with personal growth and development, so that after completing their education they are better friends, marriage partners, parents, neighbors, and so forth. College generally enriches a society by improving the people within the society, so that you can have better experiences in your interactions with people you meet. College also plays a role in helping people become very good at a few basic skills related to writing and reading, understanding science, and generally communicating. Finally, college is supposed to help people become familiar with a core set of values and ideas that have contributed to the institutions of a society. In this way college indoctrinates people with certain values such as tolerance, openness, inquisitiveness, and civic engagement. At the same time, college graduates are taught to question and doubt, and this helps foster counter-cultures and experiments in alternatives.
So, university educations perform many roles, and it would be a mistake to think of college education as a way to help individuals increase their earning potential. College in our democratic society is mainly concerned with creating a better society, with advances in social organization as well as science and technology, and a flourishing mental and aesthetic life. I see no reason why college graduates should necessarily be expected to make much more than persons who prefer to stick to vocational education in a lucrative career.
In fact, powerful people often set wages for reasons that have very little to do with the actual jobs or the value of the work done. We can see this with the bonus pay packages given to people in certain financial companies. Their work may require significant responsibility and some training and intelligence above average, but their labors are certainly not worth the thousands of dollars per hour they earn when one averages out their salaries and bonuses out over their hours of actual work. They earn this money simply because they or their friends or associates in similar lines of work are responsible for setting their salaries. A similar thing happens in business or university administrations. Supervisors, vice-presidents, directors, deans, and chancellors clearly need to have more responsibility and experience than other faculty or workers, and their jobs are difficult and somewhat unpleasant. So, they should earn more than faculty or front-line workers. It seems fair that administrators could earn double what faculty or front-line workers earn. But in fact, when administrators set their own salaries, they inflate their estimations of how valuable administrative work is, and they tend to set their salaries at three or four times the wages of front-line workers and faculty, and in some sectors of the economy the administrators and directors have such a sense of entitlement that they set their own wages at ten times or a hundred times the salaries or wages of the people who work under them.