Minimum Wage Meets the Political Machine

When Dickens wrote in the 19th Century, characters such as Scrooge paid their employees next to nothing and gave little break for Christmas, and nothing at all for a Christmas bonus.

American employers are not Scrooges in the 21st Century. All but

three percent of U.S. employees make more than the federal minimum wage. Employers often give generous leave at Christmas, and Christmas bonuses are common.

To read some contemporary columnists, America today is perhaps worse than Dickensian England. The culprit, it seems, is that the American minimum wage is too minimum.  

Over the past few days Financial Times columnist Edward Luce wrote that raising the minimum wage “would inject a much-needed stimulus into the anaemic (sic) recovery without involving a dollar of taxpayer money.” The New York Times has published columns by Princeton professor Paul Krugman and University of Massachusetts professor Arindrajit Dube on the advantages of raising the hourly minimum wage from its current level of $7.25. 

What do Professors Krugman and Dube suggest instead? Perhaps $7.50 an hour? No. Perhaps more than a 10 percent raise to $8.00 an hour? Not good enough for Krugman and Dube, never mind that few American employees have their compensation raised by as much as 10 percent annually. Perhaps minimum wage employees deserve a 20 percent increase, as only the most efficient workers might aspire to. That would lead to $8.70 an hour. Not good enough apparently for Krugman and Dube.

Now a 33 percent increase might put a worker in the league of a major league baseball player after a particularly good season. That would lead to $9.65 per hour. That too is not good enough for Krugman and Dube. It turns out that Krugman and Dube want a $10.10 minimum wage or a 39 percent increase for minimum wage workers.

Imagine that. An employer offers a valuable employee a wage increase of 10, 20, or even 35 percent for extraordinarily good performance, and Krugman and Dube say that the employer is worse than Scrooge. No, they want a 39 percent increase for even the worst employee.

Welcome to the Orwellian world of the 21st century, otherwise known as the minimum wage debate.

Wages should now be set not by supply and demand but by opinion polls.  

• “By large margins, both Republican and Democratic voters support higher minimum wages” (Luce). 

• “Over three-quarters of Americans, including a solid majority of Republicans, say they support raising the minimum wage” (Dube).  

• “This support [for raising the minimum wage] doesn’t come just from Democrats of even independents; strong majorities of Republicans (57 percent) and self-identified conservatives (59 percent) favor an increase.” (Krugman)

Now it does not take a neurosurgeon, or even a McDonald’s cook, to know the right answer when an opinion pollster asks you whether you are in favor of raising the minimum wage. Practically everyone with a heart is in favor of raising wages as long as those higher wages are paid by someone else. 

No pollster asks whether a person would be eagerly willing to pay 39 percent more for a service. The answer to such a question is generally no, and not politically acceptable.

It does not hurt to try to influence public opinion, so that thought leaders such as Luce, Dube, and Krugman can reach the right answer. Fast food workers, who constitute 44 percent of minimum wage workers, have their own public relations firm, Berlin Rosen. In July I was interviewed on National Public Radio with Terrance Wise, who worked at Burger King in Kansas City, Missouri, and who was represented by Danny Massey of Berlin Rosen.

Berlin Rosen’s Danny Massey and Laura Brandon sent out a media advisory on strikes they are helping organize at fast food restaurants in 100 cities on Thursday. According to the media advisory, “the fight for $15 an hour and the right to form a union without retaliation continues to grow.” 

Imagine that. Berlin Rosen believes that the 39 percent wage increase for marginal workers proposed by Dube and Krugman is inadequate. It is Scrooge-like. Berlin Rosen wants a more than 100 percent wage increase for even the weakest of workers.

Berlin Rosen’s clients include the Service Employees International Union, which is organizing Thursday’s strikes, as well as the United Food and Commercial Workers International Union and the Communications Workers of America. 

Luce and Dube both write that an advantage of raising the minimum wage is that higher wages reduce turnover.  As Dube puts it, “If McDonald’s is required to pay a higher wage, fewer of its workers will leave to take other jobs…Moderate increases in the minimum wage, in other words, can reduce vacancies and turnover instead of killing jobs.”

Leaving aside whether 39 percent is a moderate increase, Luce and Dube give employers too little credit.  If they want to reduce turnover, they are free to pay above minimum wage. The vast majority do so. Ninety-seven percent of American workers earn above minimum wage, not because employers are saints, but because firms need to pay higher wages to attract and retain workers.

Another talking point from Luce, Dube, and Krugman is that raising the minimum wage helps the economy, because low-wage workers have more money to spend. Krugman writes that “hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.” He defends increasing the minimum wage by saying that negative effects of raising the minimum wage do not show up in state-by-state comparisons. 

The most well-known state by state comparison is an examination of fast food restaurants in New Jersey and Pennsylvania in 1992 by University of California professor David Card and Princeton University professor Alan Krueger, later chairman of President Obama’s Council of Economic Advisers.

Card and Krueger, in a pair of studies published in 1994 and 2000, concluded that an increase in the minimum wage in New Jersey had no effect, or a small positive effect, on employment in fast food restaurants in New Jersey. They compared New Jersey with neighboring Pennsylvania, which did not raise the minimum wage.

The studies had a number of problems. Card and Krueger do not include information on the portion of employment at minimum wage at any date in time. No information was given on whether the minimum law was binding, and to what extent, for this sample. 

The studies did not include information by county, such as income, unemployment, teen unemployment, labor force, and labor force participation rates. Neither did it include changes in state taxes and franchise fees.

The regression statistics explain little variance, and practically none of the coefficients is significant. Card and Krueger infer that minimum wage policy makes no difference. A more likely interpretation is that equation excludes important variables.

Card and Krueger focus exclusively on fast food establishments, but many other minimum wage employment opportunities in the service industry, particularly the hospitality industry, are also likely affected.

Finding effects of raising the minimum wage is challenging, because 97 percent of American workers now make above the minimum wage—not because it is the law, but because employers have to pay higher compensation packages to retain workers. That is one reason that some academic studies do not find major negative effects of minimum wage increases. 

Those who would be harmed by increasing the minimum wage are young people. Half of minimum wage workers are under 25, and 24 percent are teens. This group’s unemployment rates are already higher than the 7.3 percent average rate. The teen unemployment rate is 22 percent, and the African American teen unemployment rate is 36 percent. The youth unemployment rate is 12.5 percent. 

Despite the talking points and the PR firms, it is the unemployment rates of these workers that would rise if the hourly minimum wage rose to $10 or $15.

The next time a columnist opines that the minimum wage is too low, ask yourself three questions. First, why do some Americans work for minimum wage, and why do many more Americans covet those jobs?  The answer of course is that those are great jobs, and many young people start successful careers with minimum wage jobs. Doug McMillon, who will take over as Walmart CEO next February, started out as a teen unloading trucks at a Walmart distribution center.

Second, would you be equally willing to pay $13.90, or $20.00, tomorrow for a service for which you pay only $10.00 today? If you answer this question as “yes,” you obviously have not mastered basic economics. Of course you would not buy as much of the service if the price increased.

Third, why do certain newspapers publish on the same idea at the same time as Berlin Rosen is organizing strikes? That question is only a little harder, but a coordinated political agenda is one possible answer.