Caveman Economics: Will the next rounds of higher minimum wages cause massive unemployment?

Some of the academic discourse in The Redistribution Recession: How Labor Market Distortions Contracted the Economy concerns the minimum wage. The eggheads say that when minimum wage is higher businesses will use less labor:

Traditional labor and macroeconomic theory predicts that marginal labor income tax rates and binding minimum wages distort the labor market and thereby reduce aggregate labor usage, reduce aggregate consumer spending and investment, and, in the short term, increase wages, labor productivity, and the usage of factors that can take the place of labor hours. As a result of greater labor productivity, part of the population—those (if any) not subject to the marginal tax rates or minimum wages—actually works more, even while aggregate work hours are less.

To understand why labor demand might be wage-inelastic, notice that prices are one of the ways in which employers might signal to their customers that the labor market has changed employment costs, and thereby create an elastic labor demand curve. For example, an increase in the minimum wage rate makes labor more expensive, in response to which the employers of minimum wage labor might raise their prices. Customers react to a price increase by purchasing less and, with fewer customers to serve the employers can cut back on their labor. This “pass-through” process, as industrial organization economists call it, links the amount of labor hired to the wage rate through a wage elastic labor demand curve like the one used throughout this book.

The Federal Minimum Wage Hikes Likely Reduced National Employment by Hundreds of Thousands, Especially Among the Young and Unskilled

Using the estimates surveyed in Neumark and Wascher (2008) and information about the amount and character of the July 2009 federal minimum wage hike, Neumark (2009) estimated that the July 2009 hike would reduce national employment among teens and young adults by three hundred thousand. Given that about half of all persons earning at or below the minimum wage in 2008 were under twenty-five and the other half over that age (U.S. Bureau of Labor Statistics 2009a), Neumark’s teen and youth estimate suggests that the nationwide employment effect (all ages) of the July 2009 minimum wage hike might be a reduction of about six hundred thousand,

My 2011 paper (Mulligan 2011c) estimated a monthly time series model of national part-time and full-time employment per capita for each of twelve demographic groups distinguished according to race, gender, and age, relative to prime-aged white males, whose employment rates were assumed to be unaffected by the July 2009 minimum wage hike. I used the model to estimate the amount and composition of employment losses due to the hike for the average month between August 2009 and December 2010, and found that lower-skill groups had the greater employment losses. The net nationwide employment loss estimate was 829,000, which includes employment gains among more skilled people

Among persons aged sixteen and over who were neither elderly nor household head or spouse, employment per capita fell from 58.0 percnt in 2007 to 52.3 percent in 2009. If instead their employment rate had continued to be 58.0 percent, about three million more of them would have been working. Thus, the minimum wage hikes since July 2007 might explain about roughly one-third to one-half of the employment decline among persons aged sixteen and over who were neither elderly nor household head or spouse.

Mulligan was talking about the comparatively small rises in minimum wage that occurred between 2007 and 2012. Much larger ones are scheduled, depending on the state and, more recently, on public pressure on companies such as Walmart and McDonald’s. I’m wondering if we can apply our experience as consumers to predicting what will happen.

Costco is known for paying higher wages than Target and Walmart. However, even a casual visitor to the stores in question can notice that the work being done per employee per hour is not the same. The Costco workers know what they are doing, move quickly around the store, and help move an astonishing amount of merchandise per worker. Target and Walmart? Well, let’s just say that the speed at which workers move is highly variable. Could it be the case that with higher minimum wages every retail store will turn into a Costco with a handful of reasonably well paid highly energetic workers? If Target cashiers scanned goods at the same rate as Costco cashiers Target could get by with perhaps 2/3rds as many cashiers.

The McDonald’s that is on my way to Hanscom Field used to have two workers running the drive-thru. One would take the cash and one would hand out the food. Since the Massachusetts minimum wage was pushed to $ 9 per hour (beginning of 2015) they’ve cut back to just one worker handling both tasks. Presumably they could increase throughput if necessary with a touch-screen ordering system and self-service credit card reader at the order entry position (maybe even simpler with the phone-based payment systems that are catching on).

It seems as though there is general political agreement in the U.S. that the lowest quality workers should be winnowed out of the workforce and the labor force participation rate should be kept on the low side. Nobody wants to see someone get off the couch and go to work all day for less than maybe $ 12 per hour. A natural question is “What should investors do about this trend?” Building low-income housing where the rent will be mostly paid by the government is already highly profitable. Perhaps invest in the relative handful of companies that are sufficiently close to government officials to be approved for this activity? Invest in Obamaphone providers? (how many are publicly traded?) People have been predicting doom and gloom for the cable TV providers but if there are a few million more customers who have been winnowed out of the workforce, isn’t that a solid source of revenue for them? An American who doesn’t work gets a lot more value out of a cable TV subscription than someone who is at work all day. Go long Comcast?

We will also need a word to describe what happens when a business goes from a large group of low-paid workers to a small group of gung-ho moderately paid workers. My vote: “The business has been Costcoed”.

Philip Greenspun’s Weblog

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