The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

A Cynical Interpretation of the Minimum Wage Push


Annie Lowrey ends a recent column on the effort to raise the minimum wage on an appropriately cynical note:

Raising the minimum wage is hardly a panacea. For one, it does little for the millions of struggling families who have higher hourly wages or a salary. Second, the strongest division between those below the poverty line and those just above it is work itself. Raising the minimum wage does little to help the millions of Americans looking for a job.

Messy economics aside, the cynicism of Washington’s political class might ultimately lead to the increase. The minimum wage’s value has eroded over time, and raising it is hugely popular among voters. Corporate profits are well north of a trillion dollars a year. The federal government, meanwhile, continues to run in the red. Unlike any other form of wealth redistribution, raising the minimum wage is basically cost-free to Washington. If it won’t hurt the unemployment rate — as some research suggests — Washington figures, why not slip those fast-food joints the bill?

Earlier on, however, she quotes a Costco executive on the subject:

Craig Jelinek, the C.E.O. of Costco, agrees. “Paying employees good wages makes good sense for business,” he said earlier this year, calling for a federal minimum-wage increase. (Costco pays a starting wage of $11.50 an hour in all states where it does business.) “We know it’s a lot more profitable in the long term,” Jelinek said, “to minimize employee turnover and maximize employee productivity, commitment and loyalty.” He should know; he started his career as a checkout boy.

And it is worth reminding readers that, as Megan McArdle has observed, Costco’s business model entails “a tiny number of SKUs in a huge store,” which makes for a less labor-intensive business model and, as a result, higher revenues per employee. Costco isn’t really in the same business as Walmart, which has a far more labor-intensive business model, with substantially lower revenues per employee than Costco. That said, Walmart was one of the leading voices in favor of a federal minimum wage increase in 2005, though it has stayed out of the national debate in 2013. In Washington, D.C., Walmart opponents cleverly crafted a minimum wage increase targeted at large retailers, as Susan Berfield of Bloomberg Businessweek reported in July:

The bill, called the Large Retailer Accountability Act, classifies large retailers as those with stores of at least 75,000 square feet and whose parent companies have annual sales of more than $1 billion. Given the specifics, and the timing, many—especially those at Walmart—concluded that the only large retailer immediately affected would be the largest of them all.

Had the increase applied to all retailers, one assumes that Walmart would have been more comfortable with the increase, as Walmart could draw on its organizational prowess to best its rivals. But a narrowly-tailored minimum wage increase that targets only one firm is in effect a form of industrial policy.

While we’re on the subject of the minimum wage, it is worth noting that the notion that the minimum wage has eroded in value since its 1968 peak rests on the inflation index we choose to use. Scott Winship clarifies the issue in a recent piece on the minimum wage debate. Advocates of a minimum wage increase have claimed that had the federal minimum wage kept up with inflation, it would now be worth $10.60. But this entails using CPI-U, an index that is widely believed to overstate inflation. If we instead use CPI-U-RS, the Census Bureau’s index of choice for historical analysis, the 1968 minimum wage would now be worth $9.25. And if we use the PCE deflator, Scott points out that the value would now be $8.32 — higher than the current federal minimum wage ($7.25) but actually lower than President Obama’s proposed $9 federal minimum wage.

That is, at a time of extremely high long-term unemployment, during which workers with limited skills and social networks have fared particularly poorly, many policymakers, on the left but also on the right, are embracing a federal minimum wage that can plausibly be understood as higher than the minimum wage in 1968, when the unemployment rate was 3.6 percent. It could be that the latest empirical research now holds that the impact of a minimum wage increase is exactly the same in periods when unemployment is at 3.6 percent as when unemployment is 7 percent, or almost twice as high. I haven’t seen evidence to this effect, but I’d be delighted to read it.

In fairness, the federal minimum wage impacts far fewer workers now than it did in earlier eras, as Scott reminds us:

In 1979, 8 percent of workers made the federal minimum wage (or less), but by 2011, just 3 percent did. Comparing minimum wage workers over time compares the worst-off 3 percent today to the worst-off 8 percent in 1979.

So if a substantial increase in the federal minimum wage does negatively impact some number of less-skilled workers, the political repercussions will be limited, not least because low-income voters tend to support minimum wage increases and they are unlikely to attribute labor market dislocations to such policy interventions. It’s hard not to conclude that, as Annie suggests, the politics of a minimum wage increase are just too good to pass up.

One last thing: I was impressed, and pleasantly surprised, by Peter Coy and Susan Berfield’s take on a minimum wage increase, as it acknowledged that “a higher wage floor would undoubtedly price some marginal workers out of the market” (I know this is a low bar, but trust me, this is something) and that the notion that a higher minimum wage can substitute for government spending is a mirage:

In arguing for a higher minimum wage, Bloomberg View columnist Barry Ritholtz recently blasted Wal-Mart and McDonald’s as “welfare queens” because some of their employees, as a result of their meager pay, live partly on government benefits. (Families of McDonald’s workers have received an average $1.2 billion a year in benefits, according to an academic study funded by Fast Food Forward, which helped organize the summer strikes.)

True, those hidden subsidies to employers would shrink if the minimum wage rose, but it’s unreasonable to think they would disappear entirely. Britain’s New Poor Law of 1834 tried to end subsidies to employers by preventing recipients of relief from working for them. It locked them up instead in poorhouses of Dickensian cruelty. That’s hardly an example to follow. The other way out of inadvertently subsidizing private employers would be to cut off benefits to anyone who got a job. But that would penalize people who landed work or induce them to stay unemployed.

Though I don’t agree with much of what Coy and Berfield write (they are inordinately enthusiastic about a universal basic income, for example), their take is more balanced and realistic than most.


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