Sunday, February 16, 2014

The costs of a higher minimum wage

The NY Times had an article recently that profiled some minimum wage workers in the Pacific Northwest. Workers from Idaho are commuting to jobs in neighboring states like Oregon and Washington to take advantage of the higher minimum wages in those states. This article provides some evidence that supports the claims of minimum wage opponents like myself.

1. As pointed out by GMU economist Don Boudreaux, the fact that minimum wage workers are able to change jobs is evidence that employers do not have monopsony power over minimum wage workers. Employers are competing for minimum wage workers; not colluding in order to artificially set the price of low skilled labor. This quote by auto mechanic Stevan Lindsay says it all:

"The competition for workers has in turn forced many businesses on the Idaho side to raise their wages. “I have to offer more to my employees to keep them,” said Steven Lindsay, owner of Main Street Automotive, a repair shop in Payette, Idaho, six miles from Ontario. “People are going to go to where the money is."

Now some people will point to this as proof that a higher minimum wage helps workers. And for the workers who keep their jobs this may be true. But there are costs too, which brings me to my second point.

2. Employers pass on much of the increased costs of their labor to their customers.

"Todd Heinz, who owns three coffee shops called Jolts and Juice with his wife, Vicki — two on the Oregon side, one in Idaho — likened the result to a treadmill when Oregon’s wage went up Jan. 1 by 15 cents under an automatic system linked to the cost of living. (Oregon is one of 10 states that link their minimum wage to the Consumer Price Index.) After raising the pay for his 24 employees, he raised the prices for coffee, smoothies and beer to compensate."

Employers will try to maintain their profit margins. One way they can do this by passing on some of the costs to their consumers.

And this brings me to point 3.

3. Employers can also hire less workers. A bar in Oregon where one of the people interviewed for this article got a job at did just that:

"But Mackey’s owners also told her that she would have to work harder than before for that money. Higher labor costs meant getting rid of the dishwasher, for one thing, said Angena Grove, who owns the restaurant with her husband, Shawn. And whereas Ms. Lynch covered three tables at a time in her old Idaho job, Mackey’s waitresses, with the owners helping out, cover five."

So the worker, Ms. Lynch, is making more money in Oregon but she is also doing more work. Economic theory says that workers are paid the value of their marginal product i.e. they are paid based on what they produce. If an employer is going to pay more in wages they are going to expect more output in return. Once you factor in the increased work done by people making a higher minimum wage you see that there is no free lunch. (Also, regardless of whether there is a minimum wage workers who produce more get paid more because employers want productive workers. This is why I think a minimum wage is unnecessary.)

And what happened to that dishwasher? Ms. Lynch may be making more money for more work but that dishwasher lost their job. Try telling the unemployed dishwasher that a higher minimum wage is a win-win.

A higher minimum wage has costs. Employers will expect more output and if their current employees can't meet the new expectations they will eventually be replaced by higher skilled, more productive employees who can. A higher minimum wage also leads to less employment, e.g. the unnamed dishwasher. Consumers are also hurt by a higher minimum wage in the form of higher prices for the goods and services they buy.

This article is a snapshot of what would happen around the country if the minimum wage is increased nationwide.

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