Tim Taylor on Minimum Wage Increase
By David Henderson
Tim Taylor, aka, the Conversable Economist, has a good post on the minimum wage. He makes one crucial error, though. Quoting from his own book, he writes:
Here’s an insight for opponents of a higher minimum wage to mull over: Let’s say a 20 percent rise in the minimum wage leads to 4 percent fewer jobs for low-skilled workers (as some of the evidence suggests). But this also implies that a higher minimum wage leads to a pay raise for 96 percent of low-skilled workers. Many people in low-skill jobs don’t have full-time, year-round jobs. So perhaps these workers work 4 percent fewer hours in a year, but they get 20 percent higher pay for the hours they do work. In this scenario, even if the minimum wage reduces the number of jobs or the number of hours available, raising it could still make the vast majority of low-skilled workers better off, as they’d work fewer hours at a higher wage.
Tim goes on to point out that the tradeoff is not nearly that favorable for the minimum wage when you play out the consequences for the 4 percent who would lose their jobs:
There’s another side to the argument, however. The short-term costs to an individual of not being able to find a job are quite large, while the benefits of slightly higher wages are (relatively speaking) somewhat smaller, so the costs to the few who can’t find jobs because of a higher minimum wage may be in some sense more severe than the smaller benefits to individuals who are paid more. Those costs of higher unemployment are also unlikely to be spread evenly across the economy; instead, they are likely to be concentrated in communities that are already economically disadvantaged. Also, low-skill jobs are often entry-level jobs. If low-skill jobs become less available, the bottom rung on the employment ladder becomes less available to low-skilled workers. Thus, higher minimum wages might offer modest gains to the substantial number of low-skilled workers who get jobs, but impose substantial economic injury on those who can’t.
So where’s his error? In the first quoted paragraph. Specifically this sentence:
But this also implies that a higher minimum wage leads to a pay raise for 96 percent of low-skilled workers.
No it doesn’t. Tim’s assuming, incorrectly, that the 96 percent are all employed at wages between the old minimum and the new minimum. In fact, the wage distribution is much wider than that. I’m guessing that he’s thinking of the rule of thumb that a 10% increase in the minimum wage leads to a 1 to 2% decrease in youth employment, where youths are people age 16 to 24. But the majority of youths are earning above even the new minimum that many people propose. And even a large percent of relatively unskilled workers are likely be earning above the new minimum wage. Next time you’re at McDonald’s, ask the person behind the counter what his/her hourly wage is. So, absent ripple effects, they won’t see any increase. Moreover, a substantial portion of the workers above the old minimum but below the new minimum are earning close to the new minimum and won’t see much of an increase. This latter point doesn’t contradict Tim’s claim because he didn’t say they get a big increase. But some of his readers may be misled on that point and so the point is worth making.
Moreover, it seems unlikely that the employers who were paying below the new minimum and now keep most of those workers at the new minimum will simply be passive and won’t adjust other parts of the pay package and all in one direction: downward.
Tim makes a good case against a higher minimum wage. But in those two respects, he understates the case.