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Will Rogers and Mark Twain meet the minimum wage

Uploaded: Mar 30, 2016

Item: California plans to raise its minimum wage in stages, reaching $15/hour statewide by 2022.

It’s not clear who first offered up the following adage: “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” That saying is variously attributed to Mark Twain and Will Rogers, and does them both credit as the kind of homespun, timeless wisdom for which they’re justly famous.

What Is clear is that it applies to what many folks know about the minimum wage, where our preconceptions can run away and hide from the actual facts. I want to address a few of those mythologies.

First, here’s some relatively non-controversial background. The law has always treated employment as a contract – an exchange of time and effort, usually for currency. ‘Freedom of contract’ is a fundamental doctrine that still covers most workplace situations. That said, both the rise of the labor movement, and various worker protections built-in since the early 1900s have recognized that there’s an imbalance in bargaining power, with the employer holding most of it vis-a-vis individual employees.

Early state attempts to impose a minimum wage focused on particularly vulnerable workers, like children, and women of the day. Federal initiatives were stymied by restrictive interpretations of the interstate commerce that the feds had power to regulate. It took the New Deal era, and a more expansive view of commerce by Supremes (who’d been chastened by FDR’s court-packing scheme) to get the Fair Labor Standards Act (FLSA) covering the minimum wage, overtime and child labor passed and approved. Even so, numerous exemptions, including domestic and ag workers were necessary to secure certain votes needed for passage (read: southern Congressmen, for reasons that are probably obvious).

The federal wage acts as a floor -- states and locales are free to pass their own higher minimums that apply generally within their borders, and a few states have no minimum at all for that small slice of commerce still beyond the federal reach. 29 states have raised their minimums since the federal wage went to $7.25 in 2009.

And now for the more controversial stuff.

Myth 1 – the $7.25 wage is the best it’s ever been.

It’s true that the first FLSA min wage was a remarkable 25 cents/hour (about $4.50 in today’s dollars). It reached its maximum buying power in the 1960s, however, at about $11/hour in today’s value. Since it has never been indexed for inflation, its value starts to erode as soon as it’s passed – that $7.25 enacted in 2009 is worth about $6.56 today. Doesn’t that make you just pine for the ‘60s, all over again? Me, too. BTW, have you gotten a raise in the past seven years?

Myth 2 – the minimum wage has always been a “starter” wage for unskilled teens to get their feet wet in the market (and then decide to stay in school).

In fact, less than a quarter of min wage earners are teens, another 25% are 20-24 and fully half of all such workers are older than 25. Some starter wage.

Further, FLSA was never intended to focus on new workers. Rather, in the Depression era when many folks would literally work for food, it established the labor market’s minimum contractual decencies, and was intended to prime the pump by injecting purchasing power into the economy (all of which would be spent on other goods and services).

Myth 3 – the minimum wage is earned mostly by men.

Nope – about 36% of min wage employees are male, and nearly 2/3 are women (same source).

Myth 4 – despite the original widespread exclusion of minorities from FLSA by exemptions (since changed), it’s mostly ‘those other people’ who earn it today.

In fact, the numbers break down like this: Caucasian 56%, Hispanic 20%, African-American 18%, Asian 4%.

Myth 5 – minimum wage legislation encourages automation, and throws out-of-work the very people it purports to help.

There’s actually very little evidence that this fear is realized, although it’s a hardy perennial argument (especially among folks whose earnings are far from the minimum rate). It suits the “unintended consequences of misguided government intervention” trope that’s popular in some circles.

This myth does find some support in those half-remembered intersecting supply-and-demand curves from Econ 101. If the price of labor goes up, the chart says that the quantity of it goes down. Except that the world is thankfully a lot more complicated than your introductory text implied. A comprehensive ‘study of studies’ compiled by the Center for Economic Policy Research in 2013 examined the topic Why Does the Minimum Wage Have No Discernable Effect on Employment?.

The study concludes that the labor price change is small, and inconsequential in the context of overall costs; that it is partially absorbed in higher prices charged; that it results in less turn-over (a substantial hidden cost, avoided); that it increases demand for other stuff from the folks who get a raise, and that it does cause some so-called ‘wage compression’ as higher-skilled compensation is negatively affected. Thus, in the real world beyond 101, the overall job-loss effect is negligible.

Further min wage jobs tend to be clustered in sectors like fast food, retail and janitorial; there’s an irreducible limit to mechanization of those functions – at least until the robots finally do take over and flip our burgers, too.

Myth 6 – raising the minimum wage drives businesses out of (here, where it goes up) to (there, where it hasn’t).

If we were talking about jobs in large aggregations like factories, new facilities might be slightly incented to locate elsewhere over the course of time (even if there’s risk of an increase anywhere). And there is some evidence that job growth is higher in low wage states, for many reasons. But as above, big businesses rarely pay their workers at anything like the minimum wage. Thus, it is hard to isolate this factor as a driver of ‘business climate’ job migration. We just haven’t yet seen a wholesale migration of jobs out of the CA cities (LA, SF, Oakland) that have jumped-the-gun on hikes, for example. It does help fuel the arguments of the ‘hostile business environment’ mavens, generally.


So, what can we predict if California moves to a $15 rate over the next six years?

We’ll deal with this question next time; it needs its own thousand words. As a preview, clearly the impact of a min wage hike changes as it grows, and eventually you reach a level where myth slides in the direction of reality. So, $12 wouldn’t do much, but $25 (cue the defibrillator) would impact more than 1/3 of the labor force. Is $15 one hike over the line?

Pace also matters – phase-in over a decade is different from doing it tomorrow. And finally, the impact will vary by sector and geography -- what’s good for the coast may not be good for the valley, and what about charity non-profits?

Stay tuned, and fire away, mythologists!

Comments

 +   4 people like this
Posted by Hal, a resident of another community,
on Mar 30, 2016 at 4:47 pm

I read with interest today your first installment on the minimum wage. I have my own "myth" that I would like you to address as my economics education is limited to one class in high school taught by the wrestling coach.

My "myth" simply put is that raising the minimum wage is in the long run inflationary and makes the USA less competitive in the global market. The wage compression you addressed would be temporary and all salaries would eventually rise thereby raising the price of all goods and services negating the gains in wages and making us even less competitive. A corollary to this myth is that global competitiveness is a primary reason for wage stagnation that seems to be one of the primary complaints.

This plays into other unsubstantiated theories about the cause of the recently publicized statistic about the declining longevity of middle-aged whites. The theory goes that they have lost their jobs due to their inability to compete in the global market because of their wage expectancy and have turned to drugs and suicide for relief. I would be interested in your thoughts on these subjects.

BTW, I always enjoy reading the Raucous Caucus on-line and think it is (usually) one of the best things I regularly read. I am always impressed by your thoughtfulness, well-researched opinions, broad knowledge that obviously comes from your own education and experiences (especially the musical references), and your entertaining writing style.


 +   1 person likes this
Posted by JMH, a resident of Pleasanton Heights,
on Mar 31, 2016 at 11:52 pm

This is the Pleasanton Weekly,(forgive me in advance for the parenthesis, I like to comment on my own comments) the raise in minimum wage will hardly affect the(dare I say) property values (addressed later)...until...

For the sake of the argument lets say this is a fast food job (its the mainstay of the minimum wage argument).

So two things can happen, both are negative in "real dollars". The raise in California, versus near by states, increases the labor supply, (casino employees and Arizona resort employees for instance) relocate, rents in lower income areas go up as the state population increases with a higher % of low wage earners. As rents go up (low income housing shortage) the net gain of the minimum wage is absorbed by the slum lords who will most likely not upgrade properties in-line with increased rents.

Next is the day to day products, milk, eggs, bread, gas, all tick up 5% (at 1st) as the population has increased but the supply has not changed. No big deal to the majority of Pleasanton, hardly a dent right?

As the wages rise most economic models suggest a stagnate or decrease in employment opportunity. So we've increased the low income population on the California dream created on a (think Locke) minimum wage hike. No economic model suggests that businesses relocate to a higher wage environment. Now we begin to see unemployment spikes and greater stress on the public programs designed to support short-tem issues, think welfare. We have an increase in payroll or state taxes to absorb the new economic social welfare pressures.

Pleasanton "property values" are as such do to demand, Pleasanton is a great place to live. But if the economic stress begins to drive (this is key) future business from locating here, (not the ones already here) we begin to have a problem...houses stay on the market for a bit longer, property taxes remain flat or regress because prices are sinking as common prices rise.

The single entity that makes Pleasanton great, the schools, begin to let down the community do to lack of funding that meet higher costs. Pleasanton is built on the excellent public schools that allow residents to pay mortgages rather then tuition to private schools. Then as time moves on, that money stayed with the family, and the equity grew for the family, not for the local private schools new Social Studies wing.

Long winded yes, but the cause/effect needs to be reflected somewhere. The raise creates an imbalance that negatively affects California. I'm sure there are w=holes her but I dint really proof or run it by my old econ professors.


 +  Like this comment
Posted by JMH, a resident of Pleasanton Heights,
on Mar 31, 2016 at 11:53 pm

[Removed duplicate post per request of poster JMH]


 +  Like this comment
Posted by LeeLatham, a resident of Del Amigo Continuation High School,
on Apr 1, 2016 at 2:38 am

[Removed SPAMish post. Please stop.]


 +   3 people like this
Posted by SHK, a resident of Another Pleasanton neighborhood,
on Apr 3, 2016 at 7:33 am

Just posted a public thank you on my blog .. to you.. for articulating what I could only awkwardly and partially explain. -great read, and I can print/share, "this is what I was trying to say.." [removed]

very grateful. blessings!


 +   1 person likes this
Posted by Tom Cushing, a resident of Alamo,
on Apr 5, 2016 at 10:14 am

Hal: Thanks for your comment. I think the Qs of 'inflationary' and 'damage global competitiveness' are separate issues. As to inflation, there is a mild income redistribution effect, from the middle (compression) and perhaps the top toward the bottom. Somebody has to pay for the higher wages. And there's a pump-priming effect on the economy, as those at the bottom will spend nearly all their raises on stuff, whereas fortunates farther up the income ladder typically save some significant %. Whether that's inflationary or not would depend on where we are in the business cycle -- if the economy's already overheated, it gets hotter and prices rise generally ("too many dollars chasing too few goods"); if it's still in recovery, then the spending helps to stimulate that recovery, without much inflationary effect. My two cents.

I don't think there's much of a global competitiveness impact, because that relates mostly to the costs of specific goods that aren't produced by min wage work. We don't export many Big Macs, and they don't travel here to get 'em. To the extent that there may be a general inflationary effect, I suppose that hurts, but I suspect it's a minimal amount in the big picture.

That said, I am Not an economist -- I just get to play one on this blog. And thanks for the plug! Psychic income is rare and much appreciated.


 +  Like this comment
Posted by Tom Cushing, a resident of Alamo,
on Apr 5, 2016 at 10:30 am

JMH -- thanks for your post, and sorry it seems to have gotten deleted by mistake, temporarily.

I hadn't thought of the possibility of worker migration to CA, drawn by these higher wages. I suspect it's not a major draw, and there are many others, but we'll see. Guessing most of My old econ profs are peering down from Keynesian paradise by now.



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