The effects of this rise in the Federal minimum wage to $15 are going to be slow in arriving, this is true. That’s what makes it a useful political ploy – the benefits in glory come now, the costs are diffuse and take a long time to turn up.
But we do indeed know that it’s going to be a disaster. The essential point to make here being that Economics 101 is actually correct. Sure, it’s not correct in every exact particular of time and space but the general principles do stand. Much of Economics 301 through 517 is testing the minority of occasions when those general principles don’t quite, completely and exactly, hold.
One of those general principles being that supply and demand curves do in fact work. The implication, hell the fierce insistence, of that being that people buy less of things as they become more expensive. So, we raise the price of low-skill labour and people will buy less of it. We increase the minimum wage and there will be fewer jobs for those at or around that sort of wage level.
The usual come back to this is that the effect, even if it exists, is very small. Sure, there are the idiots who insist that actually, hater, giving more money to poorer people boosts the economy so we get more jobs! But then that’s the sort of response we can expect from those pleasuring themselves over their Marx in Brooklyn laundry cupboards.
The reason for the smallness of the effect though is important. Currently the American minimum wage of $7.25 an hour covers around 2, maybe 3%, of the American workforce. Half of those folks are earning tips too. So a change in their pay is going to have very little effect on the overall employment market, it’s going to be real tough to pull it out of the data. $15 will affect 30% of the workforce, it’s going to be a larger impact.
As to why this is so it’s where the minimum wage is in relation to the median wage. Currently that’s around $18 an hour – the correct median wage we should use that is, including part year, part time and full time work. The one that matters is indeed this one, not the full time full year median of more like $25 an hour. So, $7.25 is 40% of $18 and very few people make only 40% of the median wage. That’s just how labour markets work. We’ve also proof of this in that number of those who do, 2 and 3% of all workers.
At some point it does matter though. If we decided that the minimum wage should be $36 an hour, double the current median wage, we’d expect to see a significant effect, right? We’d end up like South Africa, with 40 and 60% unemployment in the legal and formal economy, everyone instead trying to scrape a living in the informal one. So, somewhere between 40 and 200% matters.
This is going to have an effect therefore:
According to leading labor economists, like Arindrajit Dube of the University of Massachusetts-Amherst, an ideal minimum wage can be set for particular regions rationally and empirically by pegging the local minimum to roughly 50 percent of the local median wage. In an email to me several years ago, he also suggested that a minimum wage set to 60 percent of the local median would form an absolute upper bound, beyond which the minimum wage may start to cause more economic damage than good. Fifty percent of the median wage is roughly where the minimum wage has been set across the advanced OECD nations; and it is also where the US minimum wage hovered during the 1960s and 1970s, hitting a maximum of 55 percent of the national median wage in 1968. In 2013, the national minimum wage of $7.25 stood at just 38 percent of the national median, the third lowest threshold in the OECD.
He’s comparing it to the wrong median there, the full time only one. I have checked this with Dube directly I’ll have you know.
A $15 minimum wage is 80% of the median wage. It’s gonna be a disaster. And that’s before we start to think about geography, for there are entire states where the median even on that full time only basis is below $15.
But, you know, politics, pleasuring the base and screw the people, right?