Wednesday, February 13, 2013

The minimum wage hustle

From President Obama's State of the Union Address last night:
We know our economy is stronger when we reward an honest day’s work with honest wages. But today, a full-time worker making the minimum wage earns $14,500 a year. Even with the tax relief we put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong. That’s why, since the last time this Congress raised the minimum wage, 19 states have chosen to bump theirs even higher.

Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour. We should be able to get that done.

This single step would raise the incomes of millions of working families. It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets. And a whole lot of folks out there would probably need less help from government. In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up while CEO pay has never been higher. So here’s an idea that Governor Romney and I actually agreed on last year -- let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.
What does it say about this President and his ideas, his economic and political acumen, that he would present an increase of the minimum wage as a centerpiece for promoting economic growth and lowering unemployment?

Once upon a time--back in 2008--Senator Obama campaigned on the idea of raising the minimum wage all the way up to $9.50 an hour by 2011. Indeed, such steps were a part of the official Democratic Party platform for that election year (my boldface):
In America, if someone is willing to work, he or she should be able to make ends meet and have the opportunity to prosper. To that end, we will raise the minimum wage and index it to inflation, and increase the Earned Income Tax Credit so that workers can support themselves and their families. We will modernize the unemployment insurance program to close gaps and extend benefits to the workers who now fall outside it.
So what happened to that plan? According to the President now, raising the minimum wage not only helps individual workers make ends meet, it also creates more economic activity and saves the government money. Brilliant! With all of these positives, one would think jacking up the minimum wage as quickly as possible would have been the best thing to do back in 2009, when the recession was at its worst.

And yet the President--when he had a fully Democratic Congress--failed to move forward with this plan. The last increase of the minimum wage occurred in 2009, it is true, thanks to the Fair Minimum Wage Act of 2007, signed into law by President George W. Bush. That law moved the minimum wage up from $5.15 an hour to where it now sits at $7.25 an hour in three steps. And clearly, the economy benefited mightily from those increases. Didn't it? Well, okay the economy started to flatten out and spiral downwards, but maybe the increase in the minimum wage helped soften the collapse? Yeah, right.

It's worth noting that in 2007 much hay was made of the fact that American Samoa was to be exempted from these increases in the minimum wage. Many argue this was because of political cronyism: Del Monte--owner of Starkist Tuna--is based in Pelosi's district and desperately didn't want to see a mandated increase in wages for their many low-wage workers in that territory. The Representative of American Samoa--Eni Fa'aua'a Hunkin Faleomavaega, Jr.--said the following, with regard to increasing the minimum wage in American Samoa:
For this very reason, I do not support efforts to apply mainland minimums to American Samoa at this time. The truth is the global tuna industry is so competitive that it is no longer possible for the federal government to demand mainland minimum wage rates for American Samoa without causing the collapse of our economy and making us welfare wards of the federal government.
Democrats in Congress agreed with his reasoning, thus carved out an exception for the island territory. Let that sink in for a moment. They agreed that increasing the minimum wage was a horrible idea because of the consequences for the economy, because doing so would affect the ability of businesses to compete in a world market.

Which begs the question: what about mainland businesses that want to compete in a world market (or even in a national market)? Somehow, increasing the minimum wage would be a boon for them because customers would supposedly have more money to spend. Do I have that tight? The lack of consistency here is frightening. And it betrays the truth: minimum wage hikes are nothing but political gimmicks, designed to appease people who imagine there is such a thing as economic justice and this can be delivered by the government.

David Neumark, an economics professor at UC Irvine who has specialized in minimum wage research for decades, argued against the final step up to $7.25 an hour back in 2009 in an op-ed at the Wall Street Journal. What he said then:
Based on 20 years of research, I doubt there is ever a goodtime to raise the minimum wage. However, with the aggregate unemployment rate at 9.4%, the teen unemployment rate exceeding 22%, and the unemployment rate for black teens nearing 40%, next month's increase seems like the worst timing possible.  
Despite a few exceptions that are tirelessly (and selectively) cited by advocates of a higher minimum wage, the bulk of the evidence -- from scores of studies, using data mainly from the U.S. but also from many other countries -- clearly shows that minimum wages reduce employment of young, low-skilled people. The best estimates from studies since the early 1990s suggest that the 11% minimum wage increase scheduled for this summer will lead to the loss of an additional 300,000 jobs among teens and young adults. This is on top of the continuing job losses the recession is likely to throw our way.
Pretty much spot on, with regard to the arguments about American Samoa, no? And as I've noted previously, one of the two groups that has benefited from the "job creation" of Obama is the young, unskilled worker. So proposing a new hike in the minimum wage would do what? Exactly what every economist worth his or her salt knows: decrease employment. Yet somehow, decreasing employment is supposed to be a boon for business and save the government money. How?

The President imagines that upping the minimum wage means helping all those families who have to survive on minimum wage salaries. Forget the rather obvious rejoinder--people earning minimum wage shouldn't be starting families--and note what the research actually indicates (from Neumark's piece):
According to recent data from a study by Richard Burkhauser and Joseph Sabia, 34% of minimum-wage workers were in families with incomes exceeding three times the poverty line ($22,050 for a family of four) -- roughly the top half of the income distribution. Only 17% were in poor families. 
In addition, when deciding which low-wage worker to retain following a minimum wage increase, employers may opt for a teenager, who may have high potential, over an adult who, because he still earns a low wage, likely has much lower potential. Thus, the job-destroying effects of minimum wages fall particularly hard on low-skilled adults in poor families.
Thus, increasing the minimum wage tends to disproportionately hurt the very group it is supposed to help. The beneficiaries of an increased minimum wage? More often than not, it's teenagers and young adults in high-income families who take part-time jobs, according to Neumark. Anecdotally, this is my experience, no doubt about it.

Then there's the idea of tying minimum wage to the cost of living. Talk about jumpstarting inflation...

The President warns against spending cuts because of a fragile economy, but simultaneously pushes an agenda that includes the ill-considered and illogical idea of increasing minimum wage as a means of growing the economy. We truly live in interesting times.

Cheers, all.