Minimum Wage Myths

Here we go again…beginning January 1, 2012, eight states raised their minimum wage. The way news articles have hyped this, one would think that somehow raising the wage another 30 cents is going to catapult the bottom 99 percent into the top 1 perce

nt. According to the Huffington Post “the new rates will translate into hundreds of additional dollars annually for many people who are working yet remain in poverty.” In another article, the New York Times refers to a 1994 “landmark” study on minimum wages by David Card and Alan Krueger showing the increasing the minimum wage did not reduce employment in the fast food industry. By the way, this study was highly controversial and discredited by many economists due to its methodology. Since then, some studies, such as one by Neumark and Wascher and one by Burkhauser, Couch and Wittenberg, have found an adverse effect of the minimum wage on lower-skilled workers, young adults and teenagers, particularly African-Americans.

Proponents of a minimum wage or a “living wage,” (as is being proposed in New York City and is defined as at least $10 an hour plus benefits) argue that a wage floor is necessary to lift people out of poverty, especially those earners who support families. But let’s look at the characteristics of a minimum wage worker. According to the Bureau of Labor Statistics:

  • About half of minimum wage workers are younger than age 25.
  • Never-married workers are more likely to earn the minimum wage than married workers, and never-married workers tend to be young.
  • Part-time workers are more likely to earn the minimum wage than full-time workers.
  • Among hourly workers age 16 and over, those with no high school diploma were more likely to earn the minimum wage than those with a high school diploma or college degree.

But workers are not relegated to a minimum wage caste system of sorts. More education, more years of work experience, and more hours worked per week mean a lesser chance of earning the minimum wage. While it is likely that some workers are heads-of-households supporting families, it is more likely that they are teenagers, college students or part-time/full-time second earners.

Setting aside demographics, proponents also claim that paying low-wage workers more means they will have more to spend on goods and services, thus boosting the economy. This sounds all too good until my economic conscience reminds me that nothing happens in a vacuum. If employers cannot absorb an increase in the cost of labor, they will either hire fewer workers, hire more productive (educated) workers, lay off workers, or pass the costs on to consumers. There is no free lunch. Consider these factoids from the Bureau of Labor Statistics:

  • In November the BLS reported that the unemployment rate among workers age 24 and younger was over 16 percent, more than twice the rate of workers age 25 and older. Could the minimum wage discourage teen employment?
  • The unemployment rate for those with less than a high school diploma was 13.2 percent in November, compared with 8.8 percent for those with a high school diploma. Could hikes in the minimum wage price under-educated workers out of the labor market?

How can minimum wage workers actually purchase more and boost the economy if they find themselves out of work or facing price increases for basic goods?

According to the Council for Community and Economic Research (C2ER), San Francisco ranks 4th in metropolitan areas with the highest cost of living. As of January 1, they also have the highest minimum wage in the nation, at $10.24 an hour. The table below shows C2ER’s top 10 most expensive metropolitan areas (third quarter, 2011) and the ten least expensive metropolitan areas. After I adjusted each area’s minimum wage to C2ER’s cost of living index, a pattern emerged:

Most Expensive

Minimum Wage

Adjusted for Cost of Living

Manhattan, NY

$7.25

$3.24

Brooklyn, NY

$7.25

$3.91

Honolulu, HI

$7.25

$4.34

San Francisco, CA

$10.24

$6.35

Queens, NY

$7.25

$4.70

San Jose, CA

$8.00

$5.25

Stamford, CT

$8.25

$5.56

Washington, DC

$8.25

$5.59

Truckee-Nevada County, CA

$8.00

$5.51

Orange County, CA

$8.00

$5.57

Least Expensive

Minimum Wage

Adjusted for Cost of Living

Harlingen, TX

$7.25

$8.87

Memphis, TN

$7.25

$8.63

Ardmore, OK

$7.25

$8.62

McAllen, TX

$7.25

$8.58

Waco, TX

$7.25

$8.56

Pryor Creek, OK

$7.25

$8.54

Richmond, IN

$7.25

$8.45

Fayetteville, AR

$7.25

$8.42

Cookeville, TN

$7.25

$8.42

Temple, TX

$7.25

$8.42

  • Three states and D.C., where the most expensive areas were located, have higher minimum wages than the federal minimum of $7.25 an hour.
  • In states where the least expensive areas were located none has a higher minimum wage than the federal minimum.

San Francisco’s minimum wage is not much to cheer about when it only buys $6.35 worth of goods and services. New York city is even worse, with the buying power of minimum wagers in Manhattan at a paltry $3.24. This does not mean that the minimum wage is solely to blame for the cost of living in New York City or San Francisco. After all, desired location raises costs (hey, it’s the Big Apple, right?). Regulations that restrict the supply of housing raise costs. Impact fees that raise the cost of building are passed on to buyers and consumers. But since wages tend to rise faster than prices, could price increases be following wage hikes?

If San Francisco wants to lift people out of poverty, why not raise the minimum wage to $25 an hour?

Because they know better.

 

 

 

 

Comments (3)

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  1. Arnie Ree says:

    So 7 & a quarter goes a lot further in small, working class towns than it does in the big city? Also, it appears that living inland is cheaper than seaside.

  2. Joe Barnett says:

    Prices for services that involve lots of labor would tend to be higher in the high wage areas — e.g., hotel rooms.

  3. Daniel Milstein says:

    That is so true Pam Villarreal. As an author and business man, I can relate to how you said “If employers cannot absorb an increase in the cost of labor, they will either hire fewer workers, hire more productive (educated) workers, lay off workers, or pass the costs on to consumers”.I hope more people discover your blog because you really know what you’re talking about. Can’t wait to read more from you!

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