EconoMonitor

The Wilder View

Minimum Wage Set to Rise Later this Month…Hmm

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The Wall Street Journal is noting that the minimum wage hike may come at a bad time. This is the second minimum wage hike since the beginning of the recession. Some bullet points from the article (I added my commentary in bold):
  • “In the past, minimum-wage increases have done little to dent job creation.” Rw: Yes, when the labor market and economy are tight, firms can pass on some of the new cost via output prices.
  • “You’re going to have a very negative response. In a recession like this, companies don’t have the pricing power to pass on those costs.” [says John Silva, chief economist at Wells Fargo]
  • “Economists say there are 2.8 million workers earning between the current federal minimum wage of $6.55 an hour”…”But some estimates figure an additional seven million workers are affected because their wages are tied to the minimum and will go up accordingly.”
  • “The Economic Policy Institute estimates that the minimum-wage increase will add $5.5 billion to the economy, and that this money is likely to be readily spent by low-wage workers, giving a boost to local economies. Heidi Shierholz, an economist at the liberal think tank in Washington, argues that “it is actually a good time” for an increase in the minimum wage. RW: But there will be offsets, via reduced spending as workers lose hours and jobs. The net effect is likely negligible at best, probably negative.
  • “Still, many economists also see long-term positive effects for the economy from boosting the income of those at the bottom of the economic ladder. They note that many small businesses may benefit through higher productivity in the form of improved worker retention and less churn.” RW: I don’t understand why there would be improved worker retention and less churn if the distribution of workers stays the same. The mean has changed – that is all.
The Wall Street Journal does present the pros and cons of the minimum wage hike – the nominal minimum wage rate now approaches the rate adjusted for the cost of living. However, the cons will be quite evident, as different measures of unemployment rise, teen unemployment and probably the U-6 measure of labor underutilization, which includes part-time work for economic reasons (unless they change the survey to include the minimum wage effects). This could, and probably will, grow the national unemployment rate if workers lose jobs in lieu of manager’s reducing hours.

Originally published at News N Economics and reproduced here with the author’s permission.

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