A simple fifteen dollar minimum wage FAQ

Will Big Macs cost ten dollars?

No.

The reason is that labour costs are only about 20-30% of total costs in fast food.

Let’s look at the evidence. Consider Norway. In Norway minimum wages are not set by the government, instead they are negotiated, sector by sector, by unions- with the negotiated minimums binding on businesses. The catering sector minimum wage for an adult is 167.90 NOK, or about 20 US dollars at the time of writing. As of the 12th of January, a Big Mac in the US costs $5.66 in US dollars whereas a Big Mac in Norway costs $6.09 in US dollars- or 43 cents more.

In New York there is a minimum wage of 12.50 right now, 5.25 more than the national minimum. As far as I can tell, Big Macs cost about $3.99 there. C.F.: https://www.menuwithprice.com/menu/mcdonalds/new-york/new-york/88791/

Are there other countries that have minimum wages this high?

I live in Australia. Australia has a minimum wage of $19.84 per hour in the local currency. At the time of writing, one Australian dollar equals 77 US cents, so our minimum wage is effectively $15.27 in US money. In reality the effective minimum wage is even higher because of what’s called casual loading. Casual loading means that if you are employed “at will” with no fixed hours- like US minimum wage workers almost always are- you have to be paid 25% extra, or the equivalent of at least $19 US. You can still eat out cheap. The sky has not fallen. Our unemployment rate was lowish before the epidemic.

The habit of making wild predictions about what will or won’t follow from an economic change, reasoning from first principles and intellectual prejudices, is absurd. You can just look at what has happened in other similarly rich countries which have implemented the policy in question. Yes those countries aren’t exactly the same, but they are similar enough to tell us that raising the minimum wage won’t double the price of everything, or make unemployment 15% or anything like that.

Won’t it cause inflation?

I have seen some ridiculous stuff claiming that if you double the minimum wage you’ll double the cost of everything. Increasing income can cause inflation, but inflation is a reflection of the wages of all workers (plus profits for business owners and investors), not just the poorest workers. For someone earning under 15 dollars, an increase in the minimum wage will mean greater income- and even people earning somewhat above 15 will see their incomes rise, sure, but for the majority of people their wages will remain unchanged. The total extra amount of wages paid out is relatively small, hence the effect on inflation is relatively small.

Countries around the world raise their minimum wages all the time, and enormous inflation doesn’t follow.

Also, the change is going to be phased in over 7 years.

But what about people earning 16 dollars? Isn’t this unfair on them.

For people earning slightly more than 15 dollars right now, a 15 dollar minimum wage will put upward pressure on their wages. I saw someone recently complaining that in some places EMTs only earn about 15 dollars an hour, so this increase will be unfair to EMTs. On the contrary I suspect it’s going to increase EMT wages. This is because employers are going to have to offer them more to keep them in in the industry, given that they now have the option of a job which pays a similar amount, and is less stressful. If you care about people who are currently paid slightly more than 15 dollars, an increased minimum wage will likely increase their wages.

I will add that, personally I think that caring more about being “above” other workers than the ability of those workers to feed themselves is sickening. Wanting to be richer than other people for the sake of being richer is not great in itself- but wanting this even if it makes others go hungry? Truly wrong. We’re all on this crazy blue-green spaceship earth together.

But doesn’t basic economics tell us that a higher minimum wage/price floor will increase unemployment?

For the next two sections I draw on Noah Smith’s article on the minimum wage.

It is true that in a standard perfect competition model where demand isn’t perfectly inelastic an increase in prices will lead to less demand for a product. Hence higher wages will equal fewer workers. The problem is that a majority of economists no longer affirm that this simple model describes the labor market. There are alternative models. The most popular is the monopsony model. On this more sophisticated model, raising wages can actually increase employment under some conditions. https://en.wikipedia.org/wiki/Minimum_wage#Monopsony

Personally I don’t like the monopsony model for a variety of reasons. However, empirical results suggest that minimum wage increases don’t seem to have much detrimental effect on employment, and the monopsony model at least has the advantage of correctly predicting that (although it’s prediction that the minimum wage will actually increase employment doesn’t seem to be borne out). Noah Smith cites Dube’s summary of the empirical evidence on the effects of the minimum wage:

In the US, a large body of high-quality research has investigated the impact of minimum wages on employment. Overall, this body of evidence points to a relatively modest overall impact on low wage employment…Across US states, the best evidence suggests that the employment effects are small up to around 59% of the median wage…Research conducted for this report also finds that in the 7 US states with the highest minimum wage, where the minimum is binding for around 17% of the workforce, employment effects have been similarly modest. Not all US studies suggest small employment effects, and there are notable counter examples. However, the weight of the evidence suggests the employment effects are modest.

I suspect some third model, apart from either the standard supply and demand model, or the monopsony model, is correct, but I have no idea what that third model would be.

What does the economics profession think?

There is no consensus among economists that a fifteen dollar minimum wage will lower employment substantially. See for example the result of this IGM panel of experts question:

If the federal minimum wage is raised gradually to $15-per-hour by 2020, the employment rate for low-wage US workers will be substantially lower than it would be under the status quo.

mainly macro: Views on the minimum wage show economics to be an inexact  science

Moreover as Noah Smith noted, economists have been getting more positive about the minimum wage over time:

Marcin Piatkowski (@mmpiatkowski) | Twitter

Warming economic sentiment towards a higher minimum wage is extraordinary, and really shows the depth of the evidence base because the discipline is- sorry to say- deeply biased towards business and against labour and also deeply biased towards elegant mathematical models over messy empirical realities.

Can you honest to God promise me that there will be zero unemployment caused by this policy?

No, I cannot in good faith promise you with absolute certainty that this will not effect employment at all. We can show pretty convincingly that any unemployment effect will be small compared to the number of people pulled out of poverty, but we can’t show there will be no effects at all. However I would rather risk a relatively small number of extra unemployed people, than stick with the the certainty of tens of millions on starvation wages.

Wouldn’t a policy fixing the minimum wage to a portion of the local mean wage or median wage be better than a fixed 15 dollars nationally?

Look, probably yeah it would be. What 15 dollars is worth varies from place to place. However, economists have this terrible habit of making the perfect the enemy of the good. Whenever a progressive proposal is made, some economist will say “well actually I’d rather it be done this way”. The result is that economists contribute to nothing progressive ever actually happening. I’m not going to participate in that. 15 dollars an hour is better than what we have now, it’s easy to understand and easy to use as a rallying cry, so I support it.

Isn’t the minimum wage intended for kids making pocket money?

No. If the minimum wage were just for kids earning pocket money, we wouldn’t need to have one. For better or worse, the amount of pocket money kids earn isn’t of great concern to public policy. The purpose of the minimum wage is to prevent people living in poverty.

According to Franklin Roosevelt who introduced the minimum wage in the US, the purpose of the minimum wage was to ensure living wages would be available to avaliable to everyone. He defined living wages as:

“By living wages, I mean more than a bare subsistence level. I mean the wages of a decent living.””

Shouldn’t people be aspiring to lift themselves up out of the kind of jobs that pay minimum wage anyway?

  1. The world needs cleaners, caterers, shop assistants and so on, tens of millions of them. We should not treat that which we need as a form failure.
  2. When your only response to poverty is to tell people “try to get ahead” you’re basically not responding at all, because, by definition, it cannot be the case that everyone gets ahead of everyone else.
  3. Money, property etc. etc. are all things we as a society conjure into being. We decide on who gets what prizes through property law, economic management, social convention etc. If we choose that some of the most vital workers upon who our lives depend, should get crusts and suffering, shame on us.
  4. In any case, people tend to be better placed to “get ahead” and “better themselves”- whether by starting a business, going through education etc., when they don’t need to work 80 hours and can save some money.

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