Tuesday, May 20, 2008

The lost concepts of the minimum wage

One concept that seems perpetually lost in minimum wage hike v. job loss discussions is inflation: as consumers nominal income grows more dollars become available to chase the same old number of hamburgers -- ergo, there should be no hesitation as far as job loss is concerned to hike flipper wages in step with inflation. IOW, the demand curve has moved already and the price curve is merely catching up. Rudimentary, but seems endlessly ignored when you hear policies debated.

Another factor that makes more dollars available to chase hamburgers is economy wide increases in productivity. As we get richer we may become more willing to pay same-old productivity minimum wage workers to flip burgers for our lazier selves.

Another all important and seemingly always ignored factor is that even if a raise in the minimum wage from $5.15/hr (really a foreign born worker, mostly Mexican, minimum wage -- Americans used to show up for that minimum wage the first time around: in 1939) to $10/hr cuts minimum wage employment in half: labor would still take home the same amount of pay -- albeit for half the hours.

Lastly, when the minimum wage (and other low end wages) have dropped so low that they amount to a minuscule fraction of the cost of GDP output (raising the minimum from $5.15/hr to $12.50/hr would add all of 3.5% to the cost of output -- about what we grow every couple or years -- giving 40% of American workers a raise!), then the dollar or half dollar a dose increase that is usually prescribed is liable to be below the sensibility level of such a fantastically productive economy.

When, Illinois recently raised its minimum to $7.50/hr, I and others noticed a definite up tick in business in our local Macs -- all in the third-world segment (Mexicans finally able to afford some of what they make?). At $12.50/hr ($2.50 more than the 1968 minimum) McDonalds profits might really take off -- never know until we try.

Posted by: Denis Drew | Link to comment | May 20, 2008 at 08:23 AM

1 comment:

eoionline.org said...

Great post! Also interesting to note that according to a recent survey by a payroll company, the majority of small business owners (51 percent) don't even know what the minimum wage is in their state - and a large majority (70 percent) support increasing the national minimum wage.

By the way, Washington State passed a minimum wage law indexing it to inflation 10 years ago. The state has the nation’s highest statewide minimum wage - $8.07 as of January 2008 - and job growth here has outpaced the national average.

Stop by Washington Policy Watch or visit the Economic Opportunity Institute online sometime for more about our minimum wage policy research.