Reporting on the CBO’s recent study, claiming that the planned Federal increase in the minimum wage will lead to a loss of 500,000 jobs, CEPR writes,
The CBO projections imply that 500,000 fewer people will be employed at low wage jobs. It did not say that 500,000 people would lose their jobs. This is an important distinction. These jobs tend to be high turnover jobs, with workers often staying at their jobs for just a few months. While there will undoubtedly be cases where companies go out of business due to the minimum wage hike (many small businesses are always at the edge, so anything can push them over) the vast majority of the lost jobs are likely to be in a situations where businesses don’t replace a person who leaves or don’t hire additional workers as quickly in response to an uptick in demand.
The evolution of my reaction,
- When I first read the brief, yesterday, I thought that CEPR’s writers were trying to make the costs sound less costly than they actually are;
- Then, I started writing a post, and in the process of writing I realized that there is a good chance I was jumping the gun. So, I re-read the CEPR report and decided that they have a point (I’ll specify what made me re-think my position in a little);
- Today, motivated by this Intelligence Squared debate on the minimum wage, I decided to re-read the CEPR study, and I now find myself somewhere in between my initial reaction and my consequent reconsideration.
In reference to step (2), here is the part of the CEPR brief that caused me to reconsider,
With 25 million people projected to be in the pool of beneficiaries from a higher minimum wage, this means that we can expect affected workers to put in on average about 2 percent fewer hours a year. However when they do work, those at the bottom will see a 39.3 percent increase in pay.
That doesn’t sound like a bad deal. I don’t know what the average amount of hours worked by a minimum wage earner is, but I’ll assume it’s 40 per week — although, when I worked for minimum wage I’d be lucky to get 20. So, if the loss in hours is evenly distributed, the new minimum wage will affect total compensation as follows, more-or-less: 10.10(39.2) – 7.25(40) = $105.95. That’s $105.95 more per week minimum wage earners will make, even with a 2% loss in hours.
But, assuming an even distribution of hour loss seems like a very unreasonable assumption. If the average minimum wage worker works less than 40 hours a week, it’s also safe to suppose that some employees work more hours than others — this was my experience. Three main reasons come to mind: (1) firms don’t like perfect work sharing, because it reduces productivity; (2) firms discriminate between workers; (3) some minimum wage earners work two jobs, others don’t. So, the distribution of benefits from an increase in the minimum wage will be uneven. The problem seems worse when we think about some working two jobs, and others working only one, where some will land two jobs at the new minimum wage, making the spread of hour loss even more unequal.
Note how losses and benefits are distributed. That the quantity of labor will fall by an equivalent of a loss of 500,000 jobs suggests that significant chunk of the cost of a minimum wage is being passed on to minimum wage earners, not capital owners. This means that whatever benefits x fraction of minimum wage workers earn from the increase, they are receiving these at the cost of other minimum wage workers.
The minimum wage seems like a regressive welfare program, since some are becoming better off at the expense of the worst off. Even if the minimum wage is Kaldor-Hicks optimal (which I doubt, especially when we look at other margins), is that really a policy liberals want to support?