Raise The Minimum Wage — A Little

It’s time.  The wage hasn’t gone up since 2009, and a dollar is worth a lot less today.  $7.25 an hour in 2009 is $9.50 an hour adjusted for inflation, and add a quarter a year for a while just to stay even.

There’s people who couch their arguments in terms of a living wage.  Some talk of morality, of exploitation, of fairness.  There’s a big political movement out there supporting $15 and hour on these grounds; they’ve had some success in Seattle.  (More on that later.)  And that’s fine, so far as it goes; questions of morality are always good for public debate.

But I’m going to ignore morality almost entirely.  It’s subjective — more precisely, it’s subject to debate.  Economics, on the other hand, is based on numbers, and despite public opinion on the science, it’s pretty solid.  There are a lot of things we know without doubt; while politicians may attempt to debate them anyway, that doesn’t make them anything other than wrong.

First things first:  Labor is not subject to the law of supply and demand.  Which makes sense if you think it through; after all, it takes twenty years to grow a new laborer if you can afford one, and once you’ve got one you can’t put him back.  When local supply is low, with enough incentives people will move closer in order to take advantage, but otherwise, you end up with potentially profitable work that simply never gets done.  As a result, average wages rarely rise to reflect a tight job market when it’s not just tight locally.

Because labor costs don’t move with demand, it’s appropriate in even a free market economy to use wage control mechanisms.  The most evident of these is the minimum wage, which also functions to help compensate for inflation.  However, if the minimum wage increases too much for the job supply, it will inevitably force down demand for labor — and again, potentially profitable work never gets done.

Add to this that sudden changes can trigger a chaotic situation.  Again, this makes good sense; if a company has enough for payroll but there’s an unexpected increase in costs, they may no longer have the cash to write the checks.  It takes time to adjust even a profitable business model to cope with this; more marginal businesses might completely collapse.  However, even the tightest budget can often cope with change given time to adjust — which means jobs don’t get lost, production remains high, and things keep getting done.

Remember:  I’m not making this up; this is not just my opinion.  Keynes describes it in his “General Theory of Employment, Interest, and Money”; Friedman reaches the same conclusion from the other side in “Capitalism and Freedom”.  All I’m doing here is putting it in English and simplifying.  A lot.

So this brings us to inflation.  Which is, believe it or not, a very good thing — in moderation.  It’s effectively a tax on cash savings; inflation encourages people with tons of money to keep as much of it as possible invested at all times.  This in turn encourages a ready supply of capital to support new industry and innovation, thus keeping people employed and technology advancing.  Real estate leases contain automatic escalators to keep up with inflation; real estate drives most local or service business costs.  As a result, if wages can keep up with inflation, the economy moves faster and everyone’s better off.

(Actually, because rents only go up every year, the poor usually benefit more from inflation.  Effectively, they get an extra cent and a half on every dollar in savings over the course of that year.  Other costs stay lower due to a phenomenon Keynes called “Price Stickiness”  — brilliant economist; not so good with names.  So inflation ends up being a virtual tax on business and real estate that goes directly to the tenant and consumer without the government touching it at all.  More efficient that way.)

But when wages don’t go up — as they haven’t, across the entire market, not since 2009 — and inflation continues, the virtual tax flows the other way: toward the wealthy, but only if they invest conservatively.  The monetary supply tightens, the poor suffer, and we start ticking off Friedman’s indicators toward another Great Depression.  Incidentally, the tax base also dries up and the government starts posting record deficits.

Any of this starting to sound familiar?

So right now we’re overdue for a minimum wage increase.  In order to prevent the inefficiency of labor drain (people moving from Mississippi to Seattle to take advantage of higher wages; moving takes time and effort that doesn’t produce goods or services) it needs to be national.  And, to prevent chaotic effects, it needs to be introduced gradually.

There are always a few who argue against this; the honest ones fear the impact on the labor market.  (The dishonest ones are lobbyists for Wall Street.)  And in truth the labor market can and will suffer for an increase; as mentioned above, that’s inevitable.  However, right now we’re in a period of near-maximum employment; open jobs are more common than available employees.  We can afford to see the demand decrease a little — particularly if, in order to avoid chaos, we plan out the increase over a period of years and let people know well in advance.

This is borne out by studies from the NBER, particularly one done on the results of the massive minimum wage hikes in Seattle.  (The NBER is the organization that we trust to tell us when we’re in a recession.  They’re non-partisan and entirely reliable.)  Their observations indicate that there was very little job loss due to the first Seattle wage hike in 2015, when the local minimum went from $9.47 to $11 per hour.  However, the second increase, to $13 in 2016, reduced hours worked by 7% while increasing per-hour average wages by only 3%.  Preliminary data on the third increase indicates a negative impact on higher-wage positions as well as on total hours worked overall.

Massive sudden increases in the minimum wage, therefore, can be presumed to have potentially disastrous consequences.  The negative impact of incremental rises, however, would likely be attenuated by the generally excessive labor demand at present in addition to the simple fact that much of the population already works in areas where the state or local minimum wage is higher than the federal.  It is probable, extrapolating from Seattle’s numbers, that an immediate increase of well over $1 per hour would not have observable negative effect.  Eventually, if the wage were to come in line with inflation, there might be some — but that would be more than offset by the increase in pay.

It’s worth noting that, in Seattle, some industries left the city rather than pay higher wage.  Given a national increase, some might actually leave the country — but very few.  After all, most production jobs pay far better than the legal minimum.

Remember too:  The benefits would include not only an improvement in the lives of the working poor, but also a relaxation of the monetary supply, increased tax revenue, a more robust overall economy — and, quite possibly, indefinitely delaying the next Great Depression.

 

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