I am delighted to host another student guest post–the 2d one of this semester–by Mackenzie Wolgram. It is on a topic of interest to so many people that I have been drawn into writing about it quite a few times:
- Isaac Sorkin: Don’t Be Too Reassured by Small Short-Run Effects of the Minimum Wage
- Jonathan Meer and Jeremy West: Effects of the Minimum Wage on Employment Dynamics
- Jeff Smith: Why I Won’t Sign a Petition to Raise the Minimum Wage
- Arindrajit Dube: Jonathan Meer and Jeremy West’s Negative Correlation for Minimum Wages and Employment Growth is a Statistical Artifact
- The Economist–Destination Unknown: Large Increases in the Minimum Wage Could Have Severe Long-Term Effects
- John Stuart Mill on Freedom of Contract
- Smoking Out the Essence of Minimum Wage Effects
Also, no one is caught up on the empirics and theory of minimum wages who hasn’t read Isaac Sorkin’s work (including his work with coauthors).
Here is what Mackenzie has to say about the minimum wage:
New York Governor Andrew Cuomo has already issued official recommendation for all fast food chains in New York City to raise the minimum wage for employees to $15 per hour, and he doesn’t intend to stop there. On Thursday the Democrat unveiled plans to hike the statewide minimum wage for all workers to a hefty $15 per hour. On the surface, these wage hikes seem like a benevolent plan. One that is only fair to the people who work low paying jobs only to live in relative poverty; after all, paying poor people more money should lead them out of poverty. Again, that is on the surface. In reality, this wage hike is one of the worst things that legislators can do to these lower class workers. Raising the minimum wage this drastically will have huge negative effects on employment, the profitability of thousands of businesses, and the condition of the lower class.
The arguments against this movement are laid out fantastically in Tim Worstall’s, “Yes, New York’s $15 Fast Food Minimum Wage Will Be A Failure–Why Do You Ask?” In this article, Worstall effectively dismisses any good that the $15 minimum wage is rumored to do. Cuomo claims that his plan will benefit the people of New York in the following ways:
- Ending government welfare as a means of subsidies to employees of large corporations
- Saving taxpayer money at the sole expense of multimillion dollar corporations
- Having minimal effects on employment
Effectually, these benefits are meant to raise low wage workers out of poverty. Unfortunately, not one of them is fundamentally sound.
Governor Cuomo attacked fast food corporations, namely Burger King and McDonald’s, for paying such low wages that their employees were required to live with the aid of state funded subsidies, costing the state millions of dollars annually. However, as Worstall points out, welfare is by no means a subsidy program. This can be clearly proven.
A subsidy to the workers of a fast food franchise would lead to the employer paying lower wages. Since part of the reserve wage would be met by the government subsidy, the employer would only have to make up the difference between the subsidy and reserve wage. So, a true subsidy would cause businesses to pay lower wages, since the government would step in and pay a portion of their workers salaries.
With exception made for the Earned Income Tax Credit (EITC), which is pretty clearly effectively a subsidy (and which I will ignore due to its making up only a small percentage of welfare) most forms of government welfare offered today do not allow companies to pay lower wages, and therefore cannot be considered subsidies. In fact, welfare is cause for a higher reserve wage. When a person is unemployed with no welfare, they are willing to work for a lower wage. So without welfare, companies can attract people to jobs that offer lower wages. When a person is unemployed, but has welfare, it will take a higher wage to get them to accept a position. This is because welfare will theoretically give them a bargaining point, and a means of holding out for higher paying positions to come along, as they no longer need the money as desperately as they did when there was no welfare. Since welfare does not lower wages, it cannot be considered a subsidy.
Although Cuomo’s point about subsidies was not exactly correct, I find it immoral to take the stand that we should force people to take the lowest paying jobs for fear of homelessness and starvation. In addition to immorality, the subsidy argument is mainly a semantic one. Yes, Cuomo is wrong to claim that he is subsidizing fast food workers, but the fact remains that these workers are not making a living wage, and require welfare to live. Semantics aside, there is still a problem. However, I maintain that this wage hike is only going to hurt both the employees and employers.
Cuomo’s next point was that this higher wage will save millions of dollars of taxpayer money at the sole expense of big businesses. For the sake of argument, we will give Cuomo an advantage, put on rose colored glasses, and say that companies will not lay off a single employee as a result of this wage hike. (Unlikely, and these newly laid off employees will require even more welfare than they already require.) However, even with these unrealistic expectations, Cuomo is still wrong to claim that he is only hurting McDonald’s and Burger King type businesses. Just because a store says McDonald’s on the outside does not mean that the McDonald’s corporation owns it. In fact, the vast majority of these businesses are owned by franchisees. This wage hike would double the cost of labor for these franchisees and cause many to go out of business, since they cannot afford to staff their restaurants. This plan only attacks these small franchisees. In a way Cuomo is right, he will be hurting these big brands, but indirectly, and only by shutting down their franchised locations, ending the livelihood of hundreds of franchisees, and causing mass layoffs of low wage employees. Again, this is not good for the people his plan “helps.”
Cuomo’s last point is that, empirically, wage increases have not caused widespread changes in employment levels, so this one shouldn’t either. He is wrong. This wage hike is magnitudes bigger than any that we’ve ever seen. The new price floor on labor will be binding for many work positions, unlike prior wage bumps where only a small percentage of workers were forced below the new minimum wage. In this case, a huge percentage of workers would have to be given substantial raises, many nearly doubling their salaries. Businesses cannot afford this hit. We will see vast layoffs, as well as robotics and new computer tech taking over low skilled, formerly manned jobs. Currently, these low skill low pay laborers have jobs, once they become low skill high pay laborers, they will no longer be employable. Again, this plan hurts everybody.