Thursday, July 13, 2017

What a Minimum Wage Should Be

Yesterday, economist Walter Williams wrote about the minimum wage. As usual, he explains things very clearly.
Walter Williams
photo from here

This is how he describes the current situation for a cashier-job worker:

The average wage for a cashier is around $10 an hour, about $21,000 a year. That's no great shakes, but it's an honest job for full- or part-time workers and retirees wanting to earn some extra cash. In anticipation of a $15-an-hour wage becoming federal law, many firms are beginning the automation process to economize on their labor usage.
He didn’t mention, but he could have, that two $21,000/year jobs put a household well out of poverty.
What those who favor a $15/hour minimum wage picture is a single parent trying to rent a place for herself and a couple of kids in an urban area. That’s not going to happen at $15 an hour either.
One recent study reported this data point for San Francisco and a couple of other cities:

Average rent on a two-bedroom apartment in San Francisco is $4,650, $1,000+ more than the number two city (New York) and $2,000 more than the rest of the biggest cities in the country.
If we do the math, then it takes $55,800 a year just for rent. Forget about food, clothing, entertainment, medical care (insurance for which, alone, is beyond what a $15/hour worker could pay, thanks to Obamacare). So, we still have to feel pretty sorry for any $15/hour worker.

The thing is, most minimum-wage workers are not mothers trying to manage an entire household on their income. In those few cases, we do have a safety net of social services to help out—and we can suppose that minimum wage is temporary, because with experience and hard work come raises, promotions, and better opportunities.

Williams points out the obvious:

Why would anybody work for $21,000 a year if he had a higher-paying alternative? Obviously, the $21,000-a-year job is his best known opportunity.
He does this in the context of what is really compassionate. Because raising the minimum wage has consequences. He names three likely outcomes for business owners forced to raise pay to a level above what the worker is worth to the business.

·         The business raises the pay without getting more output from the workers, so profit margins drop to below survival rates, and the business closes—including all the $15/hour workers.
·         The business invests capital in technology that can do the work of minimum-wage workers, such as self-serve kiosks in many fast food chains; the business might get enough return on the investment to stay in business, but those $15/hour jobs are permanently lost.
·         The business can raise its prices to compensate for the higher labor costs, which puts them in a losing position once shoppers compare prices to a business that kept prices low with technology; eventually the business closes, and all jobs are lost.
photo from here

Williams looked at San Francisco, which has been implementing its “compassionate” $15/hour policy for a while now. He quotes a study:

A recent study by Michael Luca of Harvard Business School and Dara Lee Luca of Mathematica Policy Research calculated that for every $1 hike in the minimum hourly wage, there is a 14 percent increase in the likelihood that a restaurant rated 3 1/2 stars on Yelp will go out of business.
This was looking at actual restaurants in the Bay Area that had closed between this past September and January. Even some of the better restaurants have fallen prey. A restaurant needs a 3-5% profit to keep going. The minimum wage hike dropped one example restaurant from 8.5% in 2012 to 1.5% in 2015.

So, is outlawing all jobs that bring in less than $15 of worth to a business actually compassionate to entry-level workers?

Let’s repeat this Spherical Model point:

Whenever government attempts something beyond the proper role of government (protection of life, liberty, and property), it causes unintended consequences—usually exactly opposite to the stated goals of the interference.
The minimum wage issue is maybe a quintessential example. But, then, there are so many examples around these days.

I’ve written about the minimum wage a number of other times. So, let’s make this a “best of” on the minimum wage:

·         Beware Government with Good Intentions, May 11, 2011 
·         Outlawing Entry Level Jobs, July 27, 2015 
·         Unfair Egalitarianism, July 9, 2015 
·         Predictions, January 5, 2015 

As I’ve said before, employment is an agreement between two people: employer and worker. If the arrangement is agreeable to both, what business does government have inserting itself between them?

An unpaid internship, for example, is an agreement that looks economically disastrous for the worker—but if that worker gets some experience out of it that she values, both business and worker are benefitting. And government ought to just get out of the way.

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