Myths About the Minimum Wage
Economists don’t agree that raising the minimum wage reduces employment. It actually increases jobs in fast-food industry.
Burger King
Recently the question of whether to raise the minimum wage has taken center stage, both nationally and in Milwaukee. In an Op Ed for the Milwaukee Journal Sentinel, Mark Schug and Gordon Gaster lament that the popularity of raising the minimum wage demonstrates the “economic illiteracy” of American voters. They note a recent Gallup Poll in which 76 percent of Americans said they would vote to raise the minimum wage from $7.25 to $9 per hour, and contrast this to a study showing that “85% of the most credible minimum wage studies provide strong evidence of negative employment effects resulting from minimum wage laws.”
I’ll get to the studies. But let me begin by noting that Schug and Gaster imply there is a consensus among economists on the minimum wage that, in fact, does not exist. For example, every two weeks the University of Chicago’s Booth business school polls a panel of economists at major research universities on various issues. On February 26 of last year, the panel was asked to respond to two statements on the minimum wage.
When asked to agree or disagree to the statement, “Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment,” the panel was evenly split. Of those responding with an opinion, 38 percent agreed, 36 percent disagreed, and 27 percent were uncertain. Notably, no one “strongly” agreed or disagreed, reflecting the ambiguity of research on this topic.
The responses to a second question, whether raising the minimum wage was good policy, were much more one-sided in favor of raising it. In response to the somewhat cumbersome statement, “The distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy,” 52 percent either agreed or strongly agreed, 12 percent disagreed or strongly disagreed, and 36 percent were uncertain.
The classical micro-economic model predicts that prices, including those for labor, when left alone will find an equilibrium level where supply equals demand. In this model, an artificial floor above the equilibrium price — such as a government-imposed minimum wage — will increase the amount supplied but decrease the amount demanded, creating a surplus. In the case of the labor market, this surplus translates as unemployment.
For years the consensus view was that this model accurately predicted the employment effect of an increase in the minimum wage. Trouble came when economists studied the actual results when the minimum was raised. Contrary to Schug and Gaster’s assertions, there was no consistent result one way or the other. Sometimes there was increased employment; sometimes a decrease, but the effect was consistently small. In fact when the results of all the empirical studies are plotted they form a peak right around zero.
For instance, studies of the fast food industry all agree that raising the minimum wage increases the income of low-income workers. Increased income is likely to result in increased demand for fast food, shifting the demand curve for labor to the right, resulting in a new equilibrium point.
Another factor that could be at work: Minimum wage employers often find it hard to fill vacancies, that may result in, say, long lines at lunchtime and lost business. Although they could solve this problem by offering a higher wage to a potential employee, doing so without also raising pay for current employees could mean that experienced employees would make less than new hires. But raising everyone’s pay to fill a vacancy could be too expensive. In economic terms a higher minimum wage could actually reduce the marginal cost of filling the vacancy.
From a theoretical viewpoint, raising the federal minimum wage raises fewer concerns than local efforts, such as an increase that applies only to the city of Milwaukee or Milwaukee county. Local efforts raise fears of shifting a competitive advantage to suburban businesses, further exacerbating Milwaukee’s unemployment rate. Yet several of the studies that found no employment effect were based on adjacent counties with different minimum wages. Still, raising the minimum wage locally may feed into a narrative that disparages Milwaukee and its business climate.
Schug and Gaster make no attempt to accurately describe the diversity of opinion among economists on the minimum wage effect on employment. Rather, under the guise of lamenting the public’s economic illiteracy, they are advancing a political agenda. Based on their article one has to wonder whether the two organizations they recommend also promote an ideological agenda under the guise of furthering economic literacy.
From its website, one of these, the Stavros Center at Florida State University clearly has a conservative agenda. The other, Economics Wisconsin, is harder to categorize, since it offers no examples of curriculum materials. Other than Schug, its board is largely made up of business leaders rather than actual economists. If the board did include some economists, they might act as a buffer against attempts to politicize any information or curriculum offered by the group.
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The sub-headline: “It actually increases jobs in fast-food industry. ”
The article: “In fact when the results of all the empirical studies are plotted they form a peak right around zero.”
When complaining that an op-ed doesn’t accurately characterize the view of economists, it’s a good idea to make sure that your op-ed does.
The biggest myth regarding the minimum wage floating around right now is that people supporting a family while making minimum wage make less now then they did in 1968.
In 1968, despite having minimum wage spike to an all time record high in terms of real dollars, families who only made minimum wage took home -after tax- less then do they TODAY. In other words, if you’re supporting a family on minimum wage, your after tax earnings are more now than even the spike year of 1968.
The incredible thing is that on top of taking home more pay, we also have many social programs to help the working poor today that were never around in 1968.
In a college economics course, one professor suggested that labor had not followed conventional supply and demand rules. He pointed out that from about 1900 to 1970 (when I was in college), real hourly wages had increased substantially, yet the supply of labor (the average work week) had decreased.
He suggested this meant that people were using their new-found wealth to “buy” leisure by working a shorter week. I think he was correct and that labor doesn’t follow the usual “supply and demand” rules.
Michael (Post #1), The sub-headline: “It actually increases jobs in fast-food industry.” and the line from the article: “In fact when the results of all the empirical studies are plotted they form a peak right around zero,” do not necessarily conflict.
The second statement about “empirical studies” was for ALL employment, not just fast-food jobs. It is quite possible for employment to shift to fast-food from other industries while overall employment remains level.
Tom D:
You make a good point about the tradeoff between wages and leisure. There are two effects that push in opposite directions. A higher wage means one can buy more, including leisure. But it also raises the cost of leisure.
Michael:
Yes headlines are tricky things. Better to have said something like: “Some studies suggest that …” but perhaps that would have been too long.
Andy, sources. Random comments are just that.
The myth is raising the minimum wage hurts the economy.
Tim, do the math yourself. Not only are taxes lower now but families also get the EITC. Do you want me to just link you the IRS website?
Sure thing Andy, you seem to be a wiz at providing broken or useless links… why not?
OK Tim, I’ve tried to make this as easy to understand as possible. I’ve spent way too much time on this… but filled out a 1040 form for both 1968 and 2012 for a family making minimum wage. I am human, so I could have made errors. Please feel free to fill out this forms yourself as well to verify results.
These two examples are based on a family of four with one income earner working a full 2080 hours at minimum wage with two dependents (married filing jointly). This is without muddying waters from any other tax deduction besides child credits and EITC. However, there are more credits available now than in 1968 (for example child care tax credit available to some families), so that would only make the case stronger.
1968 minimum wage: $1.60/hr
1968 minimum wage in 2012 dollars: $10.42/hr
1968 Total Salary working full time: $3328
Total tax: $48 + 3 (found on tax table page 13 plus surtax on page 10 of 1968 tax form)
Gross income: $3277
Gross income in 2012 dollars: $21,341.46
2012 minimum wage in 2012 dollars: $7.25
Total Salary working full time: $15,080
Tax owed before credits: $0
Individual Child refundable tax credit: $2000 (1000 per child)
Earned income tax credit estimate: $5236 (Page 61 on 2012 i1040 form)
Total gross income in 2012 dollars: $22,316
1968 tax form:
http://www.irs.gov/pub/irs-prior/i1040–1968.pdf
2012 tax form:
http://www.irs.gov/pub/irs-prior/i1040–2012.pdf
Obviously the details of this situation vary based on an individual family situation… but the premise here is just to demonstrate that low income families indeed can -and often do- tend to make more now after tax then they did in 1968 which is the banner year that we are supposed to hold as the standard to follow.
@Andy How does that compare with one child or no children?
Dave, it all depends… are there still married parents? Do they need child care? Do they have any healthcare expenses?
We can come up with an infinite number of examples for which I’m not going to waste my time filling out tax forms for. But if we did, almost all of them will end up with the income earner making more now. In the case of this family, if they lost a child, then a year after the death, yes they would make probably $2000ish less (that’s a guess, and yes they’d be a bit below their 1968 counter part). But we can instead take a 1970 family… or a family with 4 children, or any number of other situations and almost all will end up making more now.
Dave, are you trying to get Andy to do your taxes for you? If you bothered to look up the EITC, you’d see that it’s geared toward getting more money into the hands of low income families. So with just one child you’d get a little less, and with no children you’d get substantially less (if you even qualified for it). But you’d get more with three children.
I suppose you’d like the numbers for every state that had a different minimum wage in 1968 or 2012 as well?
It seems Andy & Kyle are side-tracked, let’s get back to discussing facts instead of throwing slop at people asking questions… that is the problem right? People questioning you?
Andy, I’m glad you took the time to post that information and run through a comparison, it’s helpful to see that being poor in the random year of 1968 (why 1968?) is just about as bad as being poor in 2012(also, why then & not 2013?).
Wowee, nice conclusion… but wait, there’s more!
http://economichardship.org/a-flawed-poverty-threshold-distorts-reported-poverty-rate/
So, you’re saying that just adding a little bit of inflation to a set value, you mean that doesn’t give you a good idea of a family’s change in well-being over time? I mean, if their income keeps up with inflation & grows a bit… you would think it would be easier for that family to send their kids to college? Or maybe have access to healthcare? Oh, they could absolutely pay their rent easier because obviously all of those things have increased their costs exactly at the inflation rate!
I mean, that family doesn’t have to waste their dollars on buying leaded gasoline, asbestos insulation, or a CRT T.V., so they must have a far higher quality of life, right?
Wait, what we you arguing for again? That people on minimum wage make more than in 1968? Well, using the info you provided, you’re correct. It looks like that family has almost 4.6% more income in 2012, but they don’t seem any better off. Exactly why it’s long overdue to raise the minimum wage today.
Newspaper editors used to say that writing an editorial was like taking a leak in your new blue serge suit, you get a nice warm feeling all over but no one hardly notices” That is what the min. wage is now. It only effects 2% of the people, is not inflationary, will harm some small businesses who will figure way around it but will mean that some people will be become unemployable. That is the only question to ask. Will this increase jobs for the young or lose jobs? Lots of different answers.
With 57% unemployment in the inner city that needs to be answered but we all know that the Left cares little about these kids except when they vote.
What would be a good idea would be a training wage of $5/hr so that businesses could hire between 16-23 kids with little employable skills and then teach them those skills. Basic ones like coming to work every day, on time, clean, able to speak properly,write a sentence and work with people. that would be a great benefit to society. Their hours could be limited to 20 per week. No one will do that, they would much rather these kids live on the street, unable to read, selling drugs etc 50% ending up in jail. That is what the polices of the left have brought them.
Do not miss the Wisconsin Conservative Leadership Conference on 3/29 in Olympia village
Tim, I’m pretty sure everything I posted was pretty factual. Also, I invite questions. Dave’s was a very relevant and valid one for which I answered.
Regarding 1968, I used that year because that’s the year which everyone who supports large hikes in the minimum wage like to cite. Do you know why? Because 1968 saw a huge spike in the minimum wage and was a one year anomaly that soars far higher than any other year in real dollar value. So I could have used any other year, but it would have just shown a more dramatic difference in income.
As far as useless links… that “quote of the day” you linked as got to be about as useless as you could have provided in this discussion.
Do you not think it would be more beneficial to get more people working then it would to affect the 1.2% of the population who lives in poverty that makes less then $9/hr or the 1.5% of the population in poverty that makes less then $10/hr?
See section titled “Minimum Wage today” about 1/5th of the way down the page (I don’t know how to make this easier to find):
http://americanactionforum.org/research/primer-minimum-wage-and-combating-poverty
The problem with poverty, by a wide margin, is not how much a person makes an hour. The biggest problem with poverty is that people can’t or don’t work at all. If we spend our time on THAT we will have a much greater impact.
So lets stop trying to fight poverty with the min wage. Let’s give it a small boost and tie it in with inflation, and instead spend more of our time and energy on creating more jobs and more opportunities for those who want them.
Raising the minimum wage increases demand, allowing businesses to hire more people. Perhaps Bob Dohnal of WIConDig could try keeping up a little instead of shamelessly plugging his time-share sales seminar.
I don’t believe you actually care about those people. If you cared, if the Republican machine you represent cares, there would be actual progress from the State of WI in how they manage MPS. They wouldn’t make little changes on the margin as we’ve witnessed.
The State of WI holds the power in how MPS is organized & funded, yet they have thrown away their responsibility for decades. And you think pulling the hardworking kids out of school for $5/hour will help!?!
Anyway, the minimum wage should be increased. It helps increase demand for businesses & puts more money in the pocket of workers… a rare win/win.
Tim, is information pulled directly from IRS forms somehow not factual?
1968 is used because it was the year that most favors people who support a large hike in the minimum wage. If you are not aware, 1968 is an anomalous year that peaks the real dollar value of the minimum wage above any other year since the creation of the minimum wage. If I had used any other year, it would have made my position that much stronger.
(2012 was used b/c my first methodology was more complicated and the most recent data was only available through 2012. When I changed the methodology, which was to use the actual IRS form and not try to figure it out on my own, I just stuck with 2012. But I’m not running yet another tax return unless it’s my own. I’ve done enough taxes for this year, thank you.)
And I do not mind questions, that’s what this discussion is for. Dave had a valid question and it was answered. I even invited you to personally check and validate my findings.
Here is another fact for you… only 1.2 percent of all families in poverty earn an hourly wage of less than $9 an hour. Only 1.5 percent earn less than $10/hr. This is because the vast majority of people in poverty are there because they are not employed.
See section on “Minimum Wage Today” about 1/5th the way down the page on this link:
http://americanactionforum.org/research/primer-minimum-wage-and-combating-poverty
Instead of focusing on making a huge hike in the minimum wage, and risk having many potential drawbacks including less employment, why don’t we do a small increase and tie it to inflation. Once we’ve done that, we can stop wasting our time on this subject and put our efforts into more productive things like actually decreasing the number of people who are unemployed. You will help a staggeringly higher number of people out of poverty by providing employment then you will through any manipulation of the minimum wage.
Btw, was your “quote of the day” link a sarcastic joke about useless links? That’s the only conclusion I could come up with considering how useless that particular “source” was.
Bah, posted twice… once accidentally as “Tim” when I meant to just address it towards Tim. Sorry about that!
Andy, thanks for all the time you put in on this, but you did not include FICA (Social Security & Medicare) taxes in your analysis, and FICA has gone up substantially since 1968.
1968 FICA rate: 4.4% (3.8% SS, 0.6% MC).
2012 FICA rate: 7.65% (6.2% SS, 1.45% MC)
Also, I disagree with a few of your calculations for 1968. The federal income tax in your example was $46 (not $48) and there was no surtax (since married filing jointly had no surcharge when the federal income tax was under $293).
Also, I come up with a different inflation adjustment. You are using an inflation adjustment of 6.5125, but the number I calculate is 6.5975 (based on a 1968 CPI of 34.8 and 2012 CPI of 229.594.
To derive this inflation adjustment factor, I used the “annual average” column in:
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
After these corrections, your basic premise (that a married, minimum wage worker with 2 kids takes home more real money in 2012 than in 1968) still holds, but only barely.
1968 take-home pay after all federal taxes (including FICA): $3,135.57
1968 take-home pay after all federal taxes (in 2012 dollars): $20,687.00
2012 take-home pay after all federal taxes (in 2012 dollars): $21,162.38
Conclusion: 2012 minimum wage worker (if married with 2 kids) takes home $475 more/year (measured in 2012 dollars).
BUT…
Workers WITHOUT children take home about $5,000 less in 2012. (See my next post in response to Dave Reid.)
Dave Reid (post 10),
Here is my take on Andy’s analysis comparing minimum wage workers in 1968 and 2012, each working 2080 hours and taking the standard deduction.
Note my prior post, where I explain how I get a slightly different inflation rate than Andy, where I correct his 1968 income tax amount, and where I bring in FICA taxes.
Married, filing jointly, 2 kids
1968 take-home: $3,135.57 ($20,687 in 2012 dollars)
2012 take-home: $21,162.38
2012 worker BETTER off by $475.38
Married, filing jointly, 1 kid
1968 take-home: $3,037.57 ($20,040.44 in 2012 dollars)
2012 take-home: $18,095.38.
2012 worker WORSE off by $1,945.06
Married, filing jointly, no kids
1968 take-home: $2,932.57 ($19,347.70 in 2012 dollars)
2012 take-home: $14,241.38
2012 worker WORSE off by $5,106.32
Single, no kids
1968 take-home: $2,767.57 ($18,259.11 in 2012 dollars)
2012 take-home: $13,393.38
2012 worker WORSE off by $4,865.73
Conclusion:
If married and 2 children, you are better off today by less than $500.
If married with less than 2 children (or single without kids), you are much worse off today.
@Tom D Thanks. That was exactly what I was getting at.
Wow, great breakdown of the numbers. I just didn’t have the time for that today… and with trying to get my own taxes together right now, I doubt I would have done that myself.
Thanks Tom D!
Tom, thanks for that response. I sincerely appreciate the time you took to analyze that information.
So yes, when I say “families” I am referring to people with children. The single or married couples would make less if they are not supporting children. That is valid. Just as the gap would widen as more children are added.
Regarding FICA, I purposely left it off as I did with current tax benefits and deductions that are available now that weren’t (or were different levels) in 1968. They further complicate the equation, but indeed they all have an affect both positive and negative. If this wasn’t just an internet blog discussion we could take out the analysis much further of course.
The whole reason I brought this up to begin with is a common reasoning for raising the minimum wage is because it’s difficult to support a family on those wages. This shows it’s no more more difficult now then it was in 1968 because, while min wage is lower, tax credits are greater. So going forward, when someone tells us that families are living on so much less now then they did in 1968, we know that’s not really true despite any tweaks we make in the numbers. This is especially true if we take any year other than 1968.
That is why I call this one of the biggest myths of minimum wage.
Tom, thanks for pointing out what I did earlier, that the EITC is designed to get money into the hands of families with children. So of course, it doesn’t help single people with no kids. Just like Medicare doesn’t particularly help out young people. I notice you skipped any 3 children scenarios, where the EITC is higher than it is for 2 children households. Congratulations on cherry-picking your data points just as much as Andy did.
I also calculated 1968 and 2012 taxes for a married couple with 2 children where EACH parent works 2080 hours at minimum wage.
That family does much better (almost $5,000 better–expressed in 2012 dollars) in 1968 than 2012.
2012 (in 2012 dollars)
Gross income (4160 hours at $7.25): $30,160
Federal income tax: -$308
FICA Tax: -$2,307.24
EITC: $3,578
Child Credit: $2,000
Take home pay: $33,122.76
1968 (in 1968 dollars except where noted):
Gross income (4160 hours at $1.60): $6,656
Federal income tax (including surtax of $39): -$589.37
FICA Tax: -$292.86
Take home pay: $5,773.77 ($38,092.60 in 2012 dollars–$4,969.84 MORE than the 2012 family)
I also calculated a single-parent household (one child) both ways. The 2012 family comes up over $1,100 short.
I’m really coming to the conclusion that in nearly every family minimum-wage situation, the take-home money (in real terms) was better in 1968 than in 2012. The only situation (out of 6) where 2012 was better was “Married couple, only 1 employed, 2 kids” and in that case 2012 was better by only $475 (in 2012 dollars). In the other 5 cases, the couple was worse off in 2012 by between $1,107 and $5,106.
@Tom Thanks for your work on this. I was wondering about this scenario as well.
2 children… one child… yep, still no 3 children scenarios. Don’t worry, I’m sure no one has that many kids anymore, so it’s probably not relevant.
Thanks for showing up those stats Tom. Although it doesn’t address this conversation of trying to support a family on a single minimum wage job and you still haven’t increased the number of children or shown us any other year then 1968, it is nice to see that families earn even more with two parents working.
It’s by no means an extravagant life, but congratulations to our family for working their way out of poverty level.
Light bulb idea… after writing that it came to me… perhaps another great use of our time and resources should be on fighting an epidemic of teenage pregnancies and unwed mothers. While I’m not saying a woman can not choose to have a child on her own and we don’t have situations where the father leaves, is not good for the mother/child (although they should still support their child) and other situations. However, if we can help foster a culture that nurtures the family unit (in whatever guise that may be) we will have less children in poverty.
See all the good ideas we come up with in these conversations??
Two observations I have on Andy’s quoted source of information above:
1. American Action Forum – “a 21st Century center-right policy institute”;
2. Ben Gitis, author of the minimum wage article – a policy analyst w/ the AAF, he graduated w/ a BA in Economics in 2013.
I personally question whether raising the minimum wage will have much of an effect on poverty, but I hesitate to base my opinion solely on an organization that freely admits it has a political slant and an author that just graduated from college less than a year ago.
Al, i would make the same observation if someone else had linked the same paper. However, I linked to his page because of the bls data he pulled and not for his opinion.The bls data is either true or not true regardless of education level of the person citing it.
OK, I have calculated the 1968 & 2012 minimum wage situations for 15 theoretical families: single, married (one person working at minimum wage), married (both working at minimum wage), all for 0, 1, 2, 3, & 4 children. In each case I calculated the 1968 take-home amount in 2012 dollars. (I built a spread sheet that calculates almost everything except the 2012 income tax (which was often zero) and the EITC (which I looked up manually each time).
Families with 2 or more children but only one working adult do better (up to $2,827 better). All others (including EVERY family where both parents work) do worse (up to $9,734 worse).
Here are the results:
Single, 0 kids: WORSE off (in 2012) by $4,891.12 (in 2012 dollars)
Single, 1 kid: WORSE off by $1,107.18
Single, 2 kids: BETTER off by $1,123.26
Single, 3 kids: BETTER off by $2,129.85
Single, 4 kids: BETTER off by $2,826.89
Married (one working), 0 kids: WORSE off by $5,106.32
Married (one working), 1 kid: WORSE off by $1,945.06
Married (one working), 2 kids: BETTER off by $475.38
Married (one working), 3 kids: BETTER off by $1,826.89
Married (one working), 4 kids: BETTER off by $2,826.89
Married (both working), 0 kids: WORSE off by $9,733.86
Married (both working), 1 kid: WORSE off by $6,232.39
Married (both working), 2 kids: WORSE off by $4,969.84
Married (both working), 3 kids: WORSE off by $3,795.64
Married (both working), 4 kids: WORSE off by $3,673.11
Note: two different families (“single, 4 kids” and “married (one working), 4 kids”) both worked out exactly the same: as being “better off by $2,826.89”. I agree this looks suspicious, and it alarmed me when I prepared this summary table, but I checked it out, and it looks right. Each year, both families had zero income tax (whereas most 1968 families had some tax), and both had the same child credit & EITC.
The only situations where the minimum wage family was “better off” in 2012 would be where only one adult works and there are 2 or more children. But “better off” here is meaningless because it is pretty much impossible to raise 2 or more children on a single full-time minimum-wage job.
Also note that when both parents work at minimum wage (whether childless or up to 4 children), the families do much, MUCH worse now than in 1968.
More great info, but this is still trying to steer the conversation away from the myth that says people supporting a family on minimum wage make less now then in 1968. People who support huge hikes in the minimum wage never say “It’s impossible to support a family on two minimum wages!” This is probably for several reasons. First, only a fraction of people on minimum wage support families, fewer still have two working adults on minimum wage. Second, they realize that although it’s not a fancy life, you can indeed survive on two full time minimum wage jobs. Yes, it is possible. Especially with today’s social programs and other benefits.
I’m getting the sense from you Tom that you think it’s a good idea to bring these married couples (as few as they are) that both make minimum wage to the take home pay level of their 1968 counter part. If that is the case, do you support rewinding the social programs and safety nets we have back to their 1968 levels as well?
If an individual earns minimum wage but is able to support a family via today’s social programs…taxpayers are subsidizing the business instead of customers:
http://bloggingblue.com/2013/12/minimum-wage-versus-the-cost-of-labor/
So what is your solution Ed? Even if we raise the minimum wage to $15/hr then a family would still qualify for pretty much all of those social programs. Do you propose we end social programs? Or should we go up to the $20 /hr that one of the posters on your blog suggests? Do you really think a $20 minimum wage will have no affect on inflating prices?
It was good of you to point out that you’re no economist and your economics classes are over 20 years gone… because you seem to have forgotten that there’s a lot more connected to wages than just shelling out dollars from companies pockets.