May 7, 2014

Does a Higher Minimum Wage Cost Jobs?

Bob Pollin and Anthony Davies debate whether a higher minimum wage means less jobs for young people entering the employment market
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Robert Pollin is Distinguished Professor of Economics and Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. He is also the founder and President of PEAR (Pollin Energy and Retrofits), an Amherst, MA-based green energy company operating throughout the United States. His books include The Living Wage: Building a Fair Economy (co-authored 1998); Contours of Descent: U.S. Economic Fractures and the Landscape of Global Austerity (2003); An Employment-Targeted Economic Program for South Africa (co-authored 2007); A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States (co-authored 2008), Back to Full Employment (2012), Green Growth (2014), Global Green Growth (2015) and Greening the Global Economy (2015).


Does a Higher Minimum Wage Cost Jobs?PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

There's a great debate raging across the country about the rise of the minimum wage. Some people say it's essential to get people out of poverty. Other people say it doesn't really have that effect, because a rise in minimum wage leads to a loss of jobs, so the overall rate of poverty really doesn't get all that much better.

Now to debate this question, first of all joining us, from Amherst, Massachusetts, is Bob Pollin. He's a professor of economics and founding codirector of the Political Economy Research Institute at the University of Massachusetts Amherst.

And joining us from Pittsburgh, Antony Davies. He's an associate professor of economics at Duquesne University. He, in addition to teaching the undergrad and PhD levels, Mr. Davies has served as a senior executive in several technology firms. He also writes for The Los Angeles Times, New York Times, and TheBlaze, and Pittsburgh Tribune-Review, and all kinds of other publications.

Thank you both for joining us.


JAY: So, Antony, first to you. What evidence is there that a rise in the minimum wage leads to loss of jobs?

DAVIES: Well, there are a number of studies--well, I shouldn't say a number. There are a lot of studies that have been done that show, in effect, anywhere from zero to some measurable unemployment effect. The fact of the matter it, it depends on how much you're raising the minimum wage. You know, to go from $7.25 an hour to $8.25 an hour or maybe $9.25 an hour isn't going to have much of an effect. So, I mean, are there going to be some people who are unemployed? Yes, but largely the effects are going to be small.

The great effect--and this is what concerns me--is the mix of who's affected and who's not. When you raise the minimum wage, you tend to knock disproportionately out of the labor force workers who have less skills, less education, less experience. These are precisely the workers that we're looking to help.

JAY: So your argument is there may not be a big rise in unemployment or a loss of jobs overall, but there is a significant rise in unemployment in the low end of the skill level of the portion of those people affected by this. Is that--am I getting it correctly?

DAVIES: Yes, that's correct.

JAY: Bob, what do you make of that?

ROBERT POLLIN, CODIR., POLITICAL ECONOMY RESEARCH INSTITUTE: Well, first of all, thank you for having me on, and I'm happy to talk with Antony about this.

I'm glad that Antony and I agree that after years and years, let's say decades of research, we've gotten to the point where economists agree that if there is any, any negative employment effects through raising the minimum wage incrementally, the effect is going to be modest. A lot of economists say there's zero. A lot of the research says there's zero. Some say there's modest overall.

Now, on the point, do we see businesses substituting out, when you raise the minimum wage, do we see the businesses hiring workers that are more credentialed than the ones that they would employ at the lower minimum wage? Well, you can see the logic behind it; that is, if you've got to pay more, we're going to go get more highly skilled workers. The impact, again--and this is something that I've looked at in various settings--the impact here, again, is almost nonexistent or tiny.

And why? If we think--let's think about McDonald's, and we think about the people that they're going to hire, in terms of formal credentials. You're looking at people with high school degrees or maybe not quite finishing high school. Well, the businesses may in principle say, oh, I want somebody with a high school degree. But they also have more information about their workers than just whether or not they have a high school degree. So if they have a good worker, they know that that person is a good worker, they're not going to lay off that person when they're a good worker just because the minimum wage goes up. They're not going to lay off the worker. They're not going to start shedding workers just because they don't have the higher credential.

Moreover, when we're talking about the low end of the labor market, those differences in credentials aren't going to matter that much, because we're not talking about this becoming--working at McDonald's becoming a great job. Let's be real here. It's still not a good job, and you're not going to attract people that have high credentials just because you raise the minimum wage incrementally.

JAY: Antony, I guess there's kind of two pieces to this. One is the logic of the situation. There's also data. And in terms of data, what data do you have that shows that, that verifies your argument or supports your argument?

DAVIES: For a study I did for the Mercatus Center recently at George Mason, I looked at the past 40 years of unemployment data in the United States and compared the unemployment rate to increases in the minimum wage, you know, controlling for other things, like economic activity and so forth. And the interesting thing about this study is I broke the workers down by education: workers with bachelor's degrees, workers with only high school diplomas, workers without high school diplomas, and then workers without high school diplomas who were young--and what I'm trying to capture there are the less experienced workers.

And what you see here is the story is following exactly what intuition would suggest, which is, as you increase the minimum wage, there's no effect of unemployment amongst college-educated workers. There's a bit of an effect amongst high school educated workers, a larger effect amongst workers who don't have high school diplomas, and then the largest effect of all amongst workers that don't have high school diplomas and are young. And I think, as Bob points out, it's not a matter of the credential being the determining factor. Rather, in this study, the credential is a proxy for all sorts of things that the employer thinks about when he thinks about labor--skills, work ethic, this sort of thing. These sort of things, not perfectly, but they will be correlated with education.

JAY: Bob?

POLLIN: You know, I haven't read Antony's study, I confess. We did a survey when the living wage law passed in Boston. We literally interviewed the businesses that were affected by this, and we asked them, did you change your hiring practices as a result of having to pay the living wage? And the living wage was a quite significant jump. It was, like, 40, 50 percent jump relative to what the state-wide minimum wage was. And they said no. Again, you could say--logically, we could say, now, yes, we're going to go look for better workers, but the businesses already know the workers they have, so they know whether they're good workers or not, they know whether--they're not going to start laying off people, especially when the business is operating and the workers are performing reasonably. So at that point the formal credential doesn't matter. And so if there is any effect, it's going to be tiny.

The real effects, in terms of employment, come from other factors. Antony himself--again, I haven't read his paper, but he said he's controlling for other factors. That's the crucial point. And the point is that these other factors will dominate, the most important being the macro unemployment rate. After all, in 1968 the minimum wage in the United States in today's dollars was $10.70 or thereabout. It was the highest minimum wage we ever had. The unemployment rate, the overall unemployment rate in the country was 3.6 percent. And it's not that the high minimum wage caused low unemployment; it's just that the other factors in the economy, the things that Antony is controlling for, overwhelm whatever tiny impact might occur through this substitution of workers based on credentials.

JAY: And, Antony, what evidence do you have that's more than tiny impact?

DAVIES: Well, the evidence I'm finding is not a tiny impact. According to the data that I'm looking at and controlling for economic factors, you know, an increase, a 10 percent increase in minimum wage is correlating with about a 2 percent increase in unemployment amongst young workers who don't have high school diplomas.

Now, I think Bob makes a good point here, that employers know the value of the workers they've already hired. What concerns me a little bit more are the workers they haven't hired. These are the ones that the minimum wage largely is going to affect, not in a form, necessarily, of workers being fired, but in the form of workers not being hired in the first place. And you see this when you go to McDonald's anymore and you order a Coke. When I was a kid, you go to McDonald's, you order a Coke, they would give you a Coke. Now they give you a cup and they point to the vending machine. And the reason for this is because the cost of paying someone a high minimum wage to fill that cup isn't worth the profit margin on the cup, so the workers do that themselves. You're seeing this at--in the United States, we have /ʃiːts/. You know, you stop, you get coffee, and so forth, you don't go and talk to a person about your order; you hit the buttons on the kiosk. And again this is the effect of raising the minimum wage causes the employers to not hire workers they would otherwise hire and instead replace them with something else, either the consumer doing the work or some machine doing it.

JAY: You don't think they would look for these kinds of efficiencies anyway?

DAVIES: Well, this is the interesting thing. They weren't efficiencies until you raised the minimum wage. So let's say for the sake of argument I can hire someone at $3 an hour. And $3 an hour, it's worth it to hire the person to fill the cup and hand it to a consumer. The machine is not efficient. The machine doesn't become efficient until you tell me I've got to pay this person $7.25. Now all of a sudden the machine, relative to the worker, is the lower-cost solution.

JAY: So, Bob, what do you make of that, the higher minimum wage makes it more worthwhile to introduce technology that will replace workers?

POLLIN: Well, I think that's true, and I think that's good. I mean, do we want people taking jobs at $3 an hour because they're less productive than a machine? I mean, I think over time productivity is improving in the economy. That's a good thing.

The bad thing is, when productivity improves in the economy and workers aren't getting the benefits of higher productivity. And as we know, wages, the average wage has been essentially stagnant for 40 years, the minimum wage has gone down in real dollars over the past 40 years, while productivity on average, labor productivity, has essentially doubled. So what we instead need is the minimum wage should go up with productivity. And, yeah, there will be fewer workers needed in each and every McDonald's, but the jobs will be decent and the economy can expand into other areas, and there'll be decent jobs there as well.

JAY: Antony, expand on the point you made early on, which has a lot to do with how much the minimum wage is. I mean, at what point do you think the consequences in loss of jobs become too high? In other words, $10.10? Some people are saying $15 an hour is a living wage. And what do you make of Bob's point, if it's not a living wage, it's not really a job?

DAVIES: [inaud.] things here. One is, you know, as you push the wage higher and higher, depending on how high you push it, you start to risk knocking out of the labor force people who currently have jobs, because the employers just say, it's not worth it to keep these people anymore. At the lower levels, which is what, I think, we're discussing now, the effect is different. What you're doing is preventing people who are just coming up and would otherwise enter the labor force, you're preventing them from going in.

You know, Bob raises an interesting question: do we want people working for $3 an hour? And on the one hand, you can think, well, $3 an hour is nothing, I don't want people working for that; until you realize, but wait a minute, what if the alternative is zero dollars an hour? If the alternative is zero dollars an hour, certainly $3 an hour is better.

JAY: Okay. Bob--let Bob respond to that particular point. Isn't $3 better than zero?

POLLIN: Three is better than zero, but $3 is really, really bad. And you know that nobody can survive on $3 an hour. People can't survive on $10 an hour, hardly. So the point is the minimum wage is not the determinant of unemployment, which is, in other words, that choice between zero and $3. We need other policies to move the economy toward full employment. We need the minimum wage to help ensure that when we are at full employment or something like full employment, they're at least minimally decent jobs. The minimum wage can do that. It can do that without causing unemployment. But getting from the difference between $3 and zero is not something that the minimum-wage policy itself is going to determine.

JAY: I mean, Antony, don't you think if--I mean, yes, if the alternative to $3 is zero, why not make it $2, why not make it $1? I mean, essentially you're saying if the alternative to a very low wage is starvation, but is that people will take the very low wage. But is that the kind of society we want to live in?

DAVIES: Yeah, I think what's happening here is we're focusing on the symptom, not the disease. A low wage rate is a symptom of a reality. The reality is that the worker's labor simply isn't worth more than whatever the number is, $3 or $4. That's the symptom.

JAY: Determined by what? How are you saying it's not worth that?

DAVIES: Well, determined by what consumers are willing to pay for the product that the worker is producing. If the worker's labor isn't worth enough to enable the worker to attain a decent living, the answer is to make the worker's labor more valuable. Simply altering the wage rate doesn't change the underlying reality.

JAY: But isn't a portion of that also profit? I mean, there's--the consumer may be willing to pay x, but what part of that x goes to profit and what part of that x goes to wages, that has a lot to do with the relationship of the employer and the employee, not whether the consumer is willing to pay x or y, no?

DAVIES: Yeah, and largely when we're talking about minimum-wage workers, you know, there's only--whatever it is--2 percent or 3 percent of workers are minimum-wage workers, and of those about a third or a half are in the fast food industry. This is not high profit margin industries.

JAY: Bob, what do you make of that? If the person's making low wage, it's 'cause they're not worth any more, 'cause that's the level of their skill set?

POLLIN: No, I think that, you know, what determines wages, the minimum wage, the average wage, are overall social conditions, overall bargaining power between workers and employers. I mean, why is it, as I mentioned before, in 1968 the minimum wage, rock-bottom minimum wage, if you're 16 years old, you walk into McDonald's, you're making $10.70 an hour? It's not that those people were more skilled in 1968; it was that the social conditions that helped set wage levels was very different. It was a much more worker-friendly environment.

JAY: Okay. Antony, respond to that point. What about--if that's what a minimum wage was in 1968, how is that worker's skill set of any more value than it is now? It's the ratio of the wages that changed.

DAVIES: Yeah, and we can't look at the worker's labor in isolation. The fact is the world is a much different place. Employers at McDonald's have options open to them they didn't have open in 1960. You know, the employer can do things with computers, could have the computers do things that the workers were doing before, have machines do things the workers were doing before that simply were not possible in 1968.

JAY: Bob?

POLLIN: True. That means that productivity at McDonald's has gone up. Who has benefited from the productivity gains? Well, I mean, normally when we talk about wage bargaining situations, we say workers can get raises as long as productivity goes up. So, based on that, the workers at McDonald's should be receiving wage increases in correspondence with productivity at the workplace. The fact is that hasn't happened.

The fact is that it used to happen. That's how the minimum wage was at $10.70 way back in 1968. Average productivity has risen by about 150 percent since then, and the minimum wage is lower. It's that workers' bargaining power has gone down. Employers have a much more aggressive stance relative to what they did in 1968. And that's the determinant of the minimum wage and the average wage.

JAY: Alright. Antony, what do you make of that argument? It's not about the value of the work as much as it is the relative strength of bargaining? I mean, if tomorrow McDonald's workers got organized into a union and were able to raise their wage with collective bargaining, that wouldn't be because some inherent value of their skill set went up; it was because they had collective bargaining.

DAVIES: Yeah, that's correct. And what you want to assure throughout is you have competitive markets. You want--you know, of course we understand workers competing for jobs. You also want the employers competing for the workers. And I believe that in most industries what we have today is a far more competitive environment than we had in 1968.

But nonetheless, I think all of this conversation is ignoring a key group of people. And the key group of people are the young people. Maybe you can picture someone from a poor, lower-income household who doesn't have the benefits of better education, who doesn't have the benefits of a better upbringing. This person wants to go out and start, take the first step on the ladder of building a career. An employer is going to take a risk on hiring this person. The more we raise the minimum wage, the more expensive we make it for the employer to take that risk and the less likely that person is to take the first step on what will be many steps on moving up the income ladder.

JAY: Bob?

POLLIN: [inaud.] what Antony says is correct. It's just that that factor is one factor among many, many, many, many, many others that is going to determine whether an employer is going to hire a young kid.

[inaud.] important factor is going to be the demand for the products. So if the employer has people coming into McDonald's and she has to hire people, she's going to hire people. And, yeah, she wants people that are going to be reliable, and she'll discover who's reliable according to who she hires and the turnover. Now, yes, there will probably be some small difference between people who, say, have high school degrees versus those who don't. But if you're in an expanding economy, when there's a lot of opportunity, people are going to get hired into McDonald's, into Burger King, into a lot of other places. So full-employment policy should be recognized here as a major factor and as a complement to an effective minimum wage policy.

JAY: I mean, it seems to me, Antony, your logic would lead to that if the rise in minimum wage means that they will hire people at a somewhat higher educational level or that that would--one, it would still be not a loss of jobs, a somewhat a switch from jobs from people that have less education to people with little more. But then your argument is those people should then raise their level, and that would be inducement to raise their level, to finish a high school degree or something of the sort, which is not that difficult to do. So in the end it's not really about loss of jobs; it's sort of a impetus, you would say, to have more people graduate high school.

DAVIES: Yeah, I think that there are two effects here. And I would agree that for the types of minimum-wage increases we're talking about, the lesser effect is a net loss of jobs. The greater effect is this switch, this switch out of lower-skilled, lower-experienced, lower-educated workers for higher-skilled, higher-experienced, higher-education workers. And that's what really disturbs me, because we're hurting the very people that we're setting out to help.

JAY: Okay. Well, we're going to have to continue this debate. And maybe we'll do a part two of this very soon, because I think we have to take on the question of what would happen at a $15 wage, because we go back to is it a real job if it's not a living wage. And if people are deep in poverty, then just what kind of job is that?

So thank you both for joining us.

DAVIES: My pleasure. Thank you.

POLLIN: Thank you very much, Paul.

JAY: And thank you for joining us on The Real News Network.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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