A Closer Look At Minimum Wage

Jim Prevor - The Fruits of Thought

The minimum wage is a contentious issue, but the debate borders on the ridiculous.

First of all, even the most ardent supporters of raising the minimum wage implicitly recognize that raising the minimum wage will reduce employment. After all, if one didn’t believe that, then why stop at $15 an hour or any other number? Why not raise the wage so everyone can afford a beach house and a Ferrari? The only reason is because there is a cost.

We all experience this in our own lives. If you can get a gardener for $100 a month, you hire him and let him mow the lawn and trim the bushes. If the cost becomes $1,000 a month, you may decide to do the lawn yourself and save money. In addition, if labor is available and cheap, you may landscape your house with more lawn and lots of lush foliage and plants – knowing you won’t be maintaining it yourself. If labor is scarce and expensive, you may redesign with a much larger patio area or pool deck so there is not as much grass and landscaping to maintain, permanently reducing the need for labor.

Though there has been loads of research on the minimum wage, most is, by its nature, lacking. One big problem is that these studies typically cover only “cash wages” — spendable money one gets from working. When Amazon raised its minimum wage to $15 an hour, it also reduced benefits, such as stock-option plans. In the end, it was not clear the workers were better off at all.

Even where studies take non-wage income into account, it is very difficult. Some of this income is variable. The Wall Street Journal recently had a piece on how New York City restaurants were dealing with a higher minimum wage, and the takeaway was that restaurant owners were reducing overtime. This leads to the possibility that although employees’ hourly wage may go up, their total income may go down because of reduced overtime.

So which is better for the employees? Lower hourly wage but higher total income, or vice versa?

Another problem is that the time horizon of these studies is usually very short. Often the impact of minimum wage increases becomes evident only over time. If the wage increase requires higher prices at table-service restaurants, the culture may transition to limited-service restaurants, such as those where you give your order for a burger or a bowl at a counter and then the server delivers the food to your table.

Automation, off-shoring, redesign of work flows — all these things take time, and virtually no studies of the minimum wage stick with it long enough to judge whether increases encouraged labor-saving changes.

Indeed, the very makeup of a city or region may be affected by minimum wages. Obviously, some activities, such as restaurants, personal services, etc., are, by their nature, local.

People may choose to eat at home, bring lunch to work from home, or they may choose to go to a less expensive type of restaurant, but they won’t go two hours out of town to grab an inexpensive lunch where there is a lower minimum wage.

Other types of work absolutely can move. If a big city raises minimum wages, and the city has a labor-intensive factory such as a fresh-cut facility, that operation increasingly will find itself under pressure from competitors outside of the city.

In the short term, there are many sunk costs in the physical facility, the expertise of its labor pool, etc. — but if someone one town over can get labor at $10 an hour, the $15 an hour minimum in the city ultimately will cause that kind of business, and the jobs it offers, to switch to operations outside the city.

This means the high-wage urban economy becomes less diverse and more dependent on certain types of jobs. Equally, if a country increases its minimum wage, it could lead certain types of businesses to locate outside the country.

In produce, the availability and price of labor, just like the cost of water and other inputs, impact decisions about whether and where to plant. One reason programs designed to bring in labor under controlled working conditions tend to lead to more immigration — for better or worse — is that the availability of inexpensive labor leads to planting crops where they would not be planted without such programs.

A further difficulty in studying the minimum wage and its impact on employment is that we can’t make the minimum wage a kind of independent variable and randomly impose it. A minimum wage is a creature of law and tends to only be imposed at times of prosperity. The Bureau of Labor statistics reports that in 2016, only 2.7% of all workers earned the federal minimum wage.

It is fair to guess that many of these people get extra income of some sort — such as overtime, health insurance — or are in family businesses choosing to be paid minimum wages to reduce their disclosed income or keep money in the business, or are people, such as teenagers, getting training. In any case, raising the minimum wage, when almost nobody gets paid the minimum, can really be political theatrics.

As for the economics — if you raise the price of something, say labor, you will reduce the demand for labor. That stubborn fact is why nobody urges $100-an-hour minimum wage. The political goal is to be perceived as a friend of the working man, and so many politicians always will be for increases in minimum wages — but the dirty secret is that the politicians pray the consequences are small and slow enough that nobody can blame the minimum wage increase for there being fewer jobs available than there could have been.

Remember, politics aside, the minimum wage is always zero if you can’t get a job.

Jim Prevor is President and Editor-In-Chief of Produce Business magazine.