Wrong to judge minimum wage as just labor demand issue
The Kansas City Star
The debate about raising the minimum wage always seems to focus on the demand for labor. Conservatives contend that increasing the minimum wage will raise costs which will partially be borne by the consumer in terms of higher prices and partially borne by workers in the form of a combination of fewer jobs and reduced work hours. Liberals point to studies that show that past increases in the minimum wage have neither significantly reduced the number of jobs nor the average hours worked. Technically the liberals are right, but they miss the point.
Both sides don’t understand the real impact of the minimum wage. The action is not so much on the demand side, but instead on the supply side. Prior to raising the minimum wage, marginal workers fill a significant number of some of McDonald’s and Walmart jobs. Marginal workers have difficulty holding jobs. They don’t always show up for work on time, call in sick frequently, and are sometimes rude to customers and fellow employees. In short, they lack what economists call non-cognitive skills.
At the same time there are a large number of potential workers who are not in the labor market because they have alternative non-market opportunities and activities. Such workers include retirees, college students as well as housewives and househusbands.
When wages are raised significantly, some of these more highly qualified workers enter the labor market as part time workers. Since the turnover of marginal workers is typically high, it does not take long for their jobs to be taken by the new, more productive workers. The marginal workers are, in effect, pushed aside.
Neither the number of jobs nor the number of hours worked fall. Prices do not go up because more customers are served more efficiently and more politely. After all, attracting more customers is the key to business success in maintaining or even increasing profits in the face of increased labor costs. In other words, the new employees have brought greater productivity in the form of more revenue per labor hour.
What can be done? How can we help the marginal worker? One answer is to offer more job training opportunities for unemployed workers. While it is great to gain cognitive skills such as learning tire repair or inventory management, it is equally important for marginal workers to learn non-cognitive skills.
A key non-cognitive skill is simply recognizing that you have some control over what happens to you in life. Your actions have consequences, both short-term and long-term. A successful life requires planning. Pure existentialists typically do not get very far in life. You need a wealth plan and a health plan. Life is like a chess game. It is not enough to think just one step ahead. You must think several steps ahead if you want to achieve real success.
In 2010 I traveled back and forth between Kansas City and the University of Chicago to teach some graduate courses. On the bus traveling between Midway Airport and the University, I saw the problem. A woman got on with her two young daughters. She immediately yelled at them to sit still, don’t touch this, don’t touch that. The most damaging phrase that came out of her mouth was “… because I said so.”
Did she know the long-term consequences of suppressing her children’s natural curiosity and need to understand the world around them? Simply saying “because I said so” doesn’t help develop her children’s skill in logic and reasoning. Even if she doesn’t want her children to become lawyers, she should at least appreciate the need for logic and reasoning in many other well-paying and rewarding careers.
In Harlem’s Children Zone, Geoffrey Canada and others created Baby College to teach mothers (and hopefully fathers) how to develop their children’s non-cognitive skills. Politicians need to think at least one step ahead and understand the consequences of raising the minimum wage. If they raise it significantly, they will need a plan to help all those displaced marginal workers acquire both more cognitive and non-cognitive skills.
Finally, don’t forget the impact of minimum wage increases on the demand for goods and services. When Henry Ford increased the wages of workers making the Model-T Ford, he did so to be able to break out of the narrow market of selling cars to the wealthy and include his own workers as customers. To some degree, paying McDonald’s and Walmart workers more, just enables them to buy more at McDonald’s and Walmart.
It is not just the amount of money in circulation that matters, but also the velocity, or turnover, of that money. Poor and middle class families have a significantly higher propensity to spend on goods and services than wealthier families. They impart a higher velocity to money and, thereby, increase the overall demand for goods and services.
This can be a problem when the economy is booming and inflation is threatening. In that case more investment funds are needed to increase productive capacity to generate more supply to satisfy excess demand. Wealthy people tend to invest more and spend less so they can play a key role in taming a booming inflationary economy.
But currently the economy has a lot of unemployed capacity and inflation is low. Under these circumstances, putting more money in the hands of poor and middle class families by raising the minimum wage can help increase overall demand. Getting the money flow right is the key to a healthy economy.
In conclusion, for the most part the minimum wage debate should focus more on the supply of labor and the demand for goods and services generally, rather than simply on the demand for labor alone. Finally, keep in mind that what works for moderate increases in the minimum wage may not work for substantially larger increases.