April 14, 2013 by Omar Passons
I copied this photo from this consulting site and used it because I wanted to make clear that a big part of this series is about finding the best way to raise quality of life for everyone in our San Diego region. We are getting close to a big discussion in the City of San Diego about wages. Whether you call it a living wage, a minimum wage, a government price control or some other name, the issue of how we as a region address opportunity and economic prosperity deserves a balanced evaluation not driven by political or philosophical ideology. So I’m gonna give it a shot.
A few words about this effort first. One, I like to make jokes and I’m in favor of simple explanations when possible. If you don’t like my brand of humor I won’t be upset if you take this advice from Gordon Ramsay. Two, while I want to be balanced, that’s not the same as having no opinion. But I’ll do my best to be transparent about those opinions. Just to get started, here are two recent pieces–a left-leaning piece and a right-leaning one—to help frame some of the issues. Going into this effort I have a few biases that are worth noting. One, I want people who don’t make very much money to make more of it. Personally, this means I’ll pay more for stuff, I’ll tip better than is customary and I’ll encourage everyone I know to follow suit. But before we make broad policy choices locally maybe it would be good to understand how systemic changes might impact people. By the way, in my opinion you aren’t a jerk if you don’t believe legislation to increase wages is the wrong approach any more than you are a “thug” if you work for a union that tries to raise wages using regulation or collective bargaining. These are honest attempts to address strongly held beliefs, not cheap ways to score political points.
Congressional Testimony on Federal Minimum Wage
First, up, I was given a link to March 2013 Congressional testimony by Murtaza Baxamusa, a professor and writer/advocate who is politically on the left side of the spectrum. The 1-page executive summary of the testimony by University of Massachusetts Amherst professor Arindrajit Dube is here and the full testimony is here. What I want to do to begin this conversation is use highlights of Dube’s testimony to raise questions I see as central to making an informed decision about minimum wage. I’m not an economist, but then again neither are most people who will vote for or against such a measure. Needless to say, my writing is targeted at regular people who care about this stuff, not professors and pundits (who may also care, but tend to be hard to understand). I’m going to lay out the points Professor Dube makes one at a time, followed by my thoughts about his conclusions. The goal of this post is to create a starting point for a larger discussion. A discussion about core issues like what information we need to make a well-reasoned decision about what is the best way to impact economic prosperity and whether regulation is needed to achieve that end. Maybe we do, maybe we don’t, but let’s frame the conversation first and see where the existing research ultimately takes us, shall we?
The Typical Arguments
The way I see it, the people who argue for or against raising minimum wage or creating livable wages, etc. typically make a few standard arguments. People against laws for higher wages typically say such laws will actually have two bad impacts:
- They say businesses who are faced with the decision of paying more than the market price to their employees will either fire people or raise prices on everybody else. This, so the argument goes, either leads to the very people who most need the help being directly worse off (with no job) or indirectly worse off (by paying more of their money for the now higher priced stuff); or
- They oppose raising the minimum because more people will want the new higher paying jobs (under the increased minimum wage) and so again the people who are supposed to get helped get the shaft because now that they are competing with more people the jobs are harder to get.
People for laws for higher minimum wages or livable wages tend to make arguments like:
- Employers should share the wealth and make sure the people who do the work can take care of their families and meet their basic needs; or
- Increasing minimum wages helps everyone because the people getting that additional money are most likely to turn around and spend it on things like food and gas and housing and it therefore winds right back up in the economy, leading to more new jobs; or
- It is morally offensive to have someone work a full day’s labor and not be able to meet their needs.
There are other arguments, but these are some of the ones I hear most often. Unfortunately, like most things that matter in life, this conversation can’t be limited to some catchy sound bite or some vague idea about “freedom” or “just treatment.” The real issue isn’t whether some politician can score some points by throwing out some lame rallying cry to his or her supporters, it is what can or should we do, if anything, to improve the lives of all involved. With that, I want to take a look at Professor Dube’s testimony, give some thoughts and over the coming week or so start to evaluate how this conversation might impact San Diego specifically. Ultimately the goal, as the name of the site suggests, is to understand how San Diego is likely to be affected by either instituting or declining to institute some increased minimum or livable wage. Here goes…
On to Professor Dube’s Points
Point 1 – The minimum wage has failed to keep pace with productivity, while top pay and corporate profitability have grown rapidly.
My first reaction to this point is that I don’t have any idea what this has to do with whether raising the minimum wage or creating a livable wage is a good idea. Seriously. It may have a connection, but if it’s there it’s hard to see. Because Mark Zuckerberg created some massively profitable company that almost everyone with a pulse and a phone uses doesn’t mean that he is harming the programmers who make dramatically less money than he does. I don’t get this one. It almost seems to suggest that minimum wages should go up as a direct effect of increased productivity. It’s kind of like saying my car should get better gas mileage because I fill it up every time it gets below a half a tank. The two things don’t have a cause and effect relationship. It seems to miss the point that productivity doesn’t increase wages, more demand for the skills of those workers does. The technology sector makes a good example, right. Engineers make more money not because the companies they work for produce more stuff, it’s because the companies they don’t work for will offer them more money and so their own companies have to pay more to keep them. At least I think this is right. Of course, Professor Dube is, well, a professor. And he trained at some very good schools, so I might be missing something. But that’s my first impression.
Point 2 – Minimum wages have not kept pace with cost of living.
This particular point isn’t really up for debate, right? I mean, it’s like saying my car is parked in the driveway. That’s an objective piece of information that is either true or it’s not. So let’s assume it’s true, this may or may not be a reason to use regulations to get low wage workers more money. The impact of this point is the one most up for debate. Should we set higher minimum wages so that low wage workers can afford more of the basics or decrease regulatory/tax burdens to make it easier for companies to succeed so that they’ll want to pay more to their employees to compete with other companies? Or maybe something else. This is one I am hoping to find more data about. My gut says we’ve been trying to do this by giving businesses incentives to higher certain workers and by reducing tax burdens and it doesn’t seem to be getting the job done. Having more people be able to feed their families and not struggle seems like it would be good for everyone in the region. So, at present without more data, this seems like a good reason to increase the minimum wage.
Point 3 – Minimum wages have also lost ground in comparison to median wages.
Okay, quick terminology lesson. Minimum wage is the lowest wage allowed by law, it’s kind of the obvious one. Median just means the one in the middle (see this). The point in saying the gap between the bottom and the middle is growing is really a larger point about the impact of income inequality. Here’s a New York Times article about why a big difference between the lowest paid workers and the average pay of all workers in a region might be something we want to avoid. I had this conversation with a friend last weekend and he pointed out that any instability in areas with these big gaps might be caused by other stuff (like d#@$ bag dictators killing citizens or stealing money/natural resources). Here’s a blog post on the issue that makes my friend’s point. Then there’s this guy’s post showing what over 1,000 economist types had to say about it. Perhaps most interesting and relevant to San Diego, is this one that takes into account the impact of technology jobs. The only thing I’ve realized at this point is I need to challenge my own beliefs about the high importance of income inequality. Well, that and even if I end continuing to believe that high income inequality is a bad thing, I still want to figure out what the best way to do something about would be.
Point 4 – For the range of minimum wage increases we have seen in the U.S. over the past two decades, recent evidence based on credible methodologies do not find job losses of any sizable magnitude.
This one is self-explanatory and puts the “minimum wage as job killer” argument under the microscope. That Reason Foundation article I linked to in the first paragraph above says hotels in Long Beach are laying off people and decreasing available rooms in direct response to an increase in minimum wages for hotel workers. Professor Dube’s materials—the full testimony—shows that he did a lot of research on this one and his findings are that there’s not as much impact as some think. If I’m being honest, this doesn’t make sense to me. I would expect increasing wages above what an employer is already willing to pay will cause that employer to hire fewer people, fire some, or both. But if that doesn’t actually happen, maybe this is just the last remnants of my limited economic training rattling around.
To my mind, this is a unique consideration in the San Diego region because we have an international border and rural Arizona nearby. I can’t wait to start looking at the data that exists for San Diego on this topic.
Point 5 – While employment may not fall from moderate increases in minimum wages, both separation and hires fall, lowering the turnover rate.
This one seems strange. The point he is making is that if we increase minimum wages, people who work at a low wage job won’t leave for a higher paying competitor so that will open op more jobs at those competitors. At least I think that’s what he’s saying. But wouldn’t competitors have to raise their rates too to keep the competitive advantage they believe they gained by paying more in the first place? It’s not clear to me how this is a rationale for raising the minimum wage.
Point 6 – Based on existing evidence, we can expect some increases in restaurant prices from a minimum wage increase. However, the overall price level is unlikely to change noticeably, and there is little risk of wage-price spirals from indexation.
So this point takes on the “increased wages lead to increased pricing” argument. Essentially, Dube says that doesn’t really happen much. If true, this might be a compelling reason to increase minimum wages. What I’d really like to do is have a panel with my friends at Urban Solace, Blind Lady Ale House, Alchemy and URBN and find out from them what the impact of increased minimum wages would be. While I’m at it, I wonder what the big thoughts on the tipping aspect of these jobs are and whether the employees would prefer a better minimum wage in exchange for not having tips. Or if these things must be all or nothing. Hmm, more questions. Greeeat.
Point 7 – The best evidence suggests that minimum wage increases lead to moderate reductions in the poverty rate, especially together with the Earned Income Tax Credit.
Again, as with the last point, if this is true, it might be a compelling reason to increase minimum wages. But there is one point worth considering. Think about buying a home. We often talk about it as an investment, which I would say is a questionable proposition. But even if you do view it as an investment, the real way to measure the value of that investment would be to compare how much you make on your home relative to what you paid versus what you would have made with that money if you’d rented and invested the difference in a mutual fund or something. Applied here, the question would be not whether the higher minimum wage and Earned Income Tax Credit reduced the poverty rate, it is whether that would reduce the poverty rate more than some other policy like direct payments to people or reducing taxes or something. Again, it doesn’t appear that the tax break model is doing the trick, but that’s the data I want to find – especially has it applies to the San Diego region.
So, Professor Dube did a nice job taking on some of the more interesting aspects of this debate. I’ve gotten some material from my friend Mark Cafferty of the San Diego Regional Economic Development Corporation, which I plan to analyze soon. At the end of this little adventure I want to have a series of easy to understand posts about the pros and cons of the minimum wage issue so that more people are informed when it comes time to vote on City and County of San Diego minimum or livable wage issues. Thanks for dropping by.