The Minimum Wage Debate, Danish Edition

Ryan Chittum writes in praise of Denmark’s high effective minimum wage:

The average full-time equivalent McDonald’s employee in Denmark makes about $45,000 a year in total compensation. Forty-five thousand dollars! Even after high Danish taxes, that average worker will take home some $28,000 a year, roughly double what a full-time American McDonald’s worker will. To add insult to injury, the Dane gets at least five weeks of paid vacation while the American is lucky to get off (unpaid, of course) when her daughter is home sick with the flu.

And so at the Aalborg McDonald’s, for instance, a Big Mac extra value meal costs 58 kroner, or $10.25, while the Dollar Menu is the 10 kroner menu, which means it’s the dollar-seventy-seven menu here. In Denmark, taxes are included in list prices, unlike in the US, so backing out the 25 percent VAT gives us $8.20 for a Big Mac meal and $1.41 for the “dollar” menu. That compares to $6 and $1 in Seattle.

According to Bloomberg View’s Caroline Baum, such a high minimum wage should mean that scads of Danes can’t find work because it “violates the most basic principle of economics”: the law of supply and demand.

Of course, Baum is empirically wrong. Denmark’s unemployment rate is 6.8 percent, despite its close ties to the depressed eurozone. That’s well below the 7.4 percent rate in the US, where the minimum wage is $7.25. The labor participation rate for working-age Danes is 64.4 percent, which means Danes are more likely to work (despite their super-generous welfare state, which includes earlier retirement) than working-age Americans, 63.6 percent of whom work. And amongst teenagers and those aged 20 to 24—the group most likely to have low-paid jobs—far more Danes work than Americans.

Chittum is being unfair to Baum, and a bit slippery when he refers to Denmark’s close ties to the depressed eurozone — Denmark has its own currency, and like other European Union member states with their own currencies (Sweden, Britain), it has used monetary policy aggressively since the crisis. The eurozone economy to which Denmark is most closely tied, Germany, has an unemployment rate of 5.3 percent. 

The more important point is that his comparison between Denmark and the U.S. leaves many questions unanswered. For example, is the composition of the Danish workforce meaningfully different from the composition of the U.S. workforce? 

The foreign-born share of the U.S. workforce is 16.1 percent. In the U.S., the jobless rates for the foreign-born and the native-born were the same as of 2012. Almost half (48.3 percent) of the foreign-born U.S. workforce is Hispanic, and 43.6 percent of foreign-born Hispanics have less than a high school education. Moreover, foreign-born workers tend to earn less than their native-born counterparts.

In Denmark, in contrast, the foreign-born share of the workforce is much lower, as is the labor force participation rate of the foreign-born population. The unemployment rate for foreign-born workers in Denmark is much higher than for native-born workers. Unfortunately, the best data I’ve found is fairly old (from 2007-8), but the following is from a 2012 OECD report:

Foreign-born men are more frequently unemployed than native-born men. This is particularly true for first generation immigrants of Non-Western origin, for which the unemployment rate was 8.9%, compared with 4.1% for native-born men and 4.2% for foreign-born men of Western origin. The discrepancy is even larger among women: while only 2.5% of native-born women are unemployed, the rate rises to 7.4% for foreign-born women from non-Western countries. 

There are many reasons why foreign-born workers might fare poorly in Denmark. I discussed some of the possibilities earlier this week — “a mix of less developed personal networks, information asymmetries and discrimination seems to be part of the answer.” Given that foreign-born workers are less likely to have strong Danish language proficiency than their native-born counterparts, it seems reasonable to surmise that a high effective minimum wage constitutes a barrier to entry. This might not matter very much in a society in which the foreign-born share of the workforce is relatively low. But it might matter in the United States, where the foreign-born share of the workforce is quite high. 

And of course this leaves aside Denmark’s active labor market policies. Chittum oversimplies when he refers to Denmark’s “super-generous welfare state.” The Danish welfare state has in some respects become less generous in recent years, in terms of unemployment benefits, etc., yet it has also become more generous to those who work, a development that has tended to raise the labor force participation rate. In 2011, Mike Alberti of Remapping Debate published another celebration of the Danish model, which included the following cautionary note from Lane Kenworthy, a left-of-center sociologist at the University of Arizona:

Kenworthy warned that there are some costs associated with the Danish labor market model. In particular, he said, certain services such as housecleaning or personal care become unaffordable for some people, which can end up creating an underground economy where workers, often immigrants, perform these jobs off the books.

“One obvious issue this raises is the true absorption of immigrant persons,” Kenworthy said. “If they’re working in an underground economy, I think at the very least it slows down the process of integration. The second big issue is that it reduces the tax base, since these people are working outside of the tax system.”

Kenworthy, author of Progress for the Poor, a comparative study of anti-poverty policies across market democracies, also offered the following observation:

Kenworthy also recommended caution when comparing the wages of American and Danish workers, because many low-wage workers in the U.S. receive tax benefits from the government, such as the Earned Income Tax Credit, while Danish workers pay much more of their income in taxes to the government. This serves to equalize take-away income somewhat, he said, but still doesn’t account for the benefits that all Danes receive from the government — like free and guaranteed health care, childcare, and education, along with paid vacation time, sick leave, and parental leave — which Kenworthy said “are probably beyond the wildest dreams of American workers in the same jobs.”

Chittum, to his credit, factors taxes into his analysis; for a true apples-to-apples comparison, however, he’d have to contrast a Danish low-wage worker with a U.S. low-wage worker, factoring in the value of means-tested transfers. I doubt doubt that the (native-born) Danish worker would come out ahead, but it’s worth keeping in mind.

I still think the best take on the wisdom of a sharp minimum wage increase for the U.S. is Dylan Matthews’.

There are a few other issues that come to mind. In light of Megan McArdle’s recent discussion of Wal-Mart vs. Costco, one thing I’d want to know is whether the business model of a Danish McDonald’s is subtantially different from that of its U.S. counterpart. Are Danish fast-food employees generally more productive than their U.S. counterparts? One assumes that Danish fast-food restaurants are more likely to substitute capital for labor in markets with high statutory minimum wages. I would guess that the answer is yes, but I can’t say for sure. 

Denmark doesn’t seem to have too big an edge over the U.S. along other dimensions of labor force quality. The OECD estimates that an average five-year-old child can expect to spend 18.8 years in formal education in Denmark; the U.S. number is 17.1 years. The percentage of people, aged 25 to 64, with at least an upper-secondary (high-school) education is 76 percent in Denmark as opposed to 89 percent in the U.S, with the U.S. advantage stemming from older cohorts, which also tend to have fairly high rates of labor force participation. (Moreover, the U.S. upper-secondary competion rate relies heavily on the GED.) The average educational performance of 15-year-olds, according to PISA results, is 499 for Denmark and 496 for the U.S. I would, however, be interested in comparing rates of drug and alcohol dependence, and the extent to which chaotic family lives might interfere with labor force participation.

And by the way, I’d be just as happy talking about some country other than Denmark. It just happens that American left-liberals are really, really, really into Denmark, so blame them.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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