Jim de Bree: Finding the best minimum wage


A couple of weeks ago my friend and fellow columnist, Ron Bischoff, sent me a Washington Post editorial titled “Sobering news for $15-minimum-wage boosters.” The editorial can be seen at www.washingtonpost.com.

Everyone wants to see that employees are paid fairly, and since 1968, the minimum wage has not kept pace with inflation. If you adjust the 1968 minimum wage for inflation, you arrive at an hourly wage of approximately $15. That is the justification for increasing the minimum wage to $15/hour.

Last year I wrote a column about the minimum wage conundrum. The point that I made in the column was that technology is rapidly replacing many minimum-wage jobs.

Those jobs get replaced when technology can perform the employees’ tasks in a more cost-efficient manner. Increasing the minimum wage accelerates the rate of replacement.

I recently stopped at a local fast food restaurant and noticed that there were six employees. Last November when I was in Holland, I stopped at a McDonald’s restaurant that was many times larger. It had only three employees.

Customers ordered and paid for their food from a kiosk and the cooking process was automated. Workers’ tasks were limited to delivering food and keeping the premises clean.

In the Netherlands, McDonald’s employees earn about €30/hour (about $33), so not surprisingly, the restaurant chose automation over human labor. Menu prices were comparable to those in the U.S.

The Washington Post looked at the conundrum from a different perspective. It cited adverse economic consequences to communities that raise the minimum wage to $15.

For example, in Seattle, a University of Washington study concluded that workers whose hourly wages were boosted to $15 lost an average of $125 a month either because their hours were reduced or they lost their jobs altogether. Because it takes time to employ technological alternatives, the impact of such implementation has not been considered.

The impact is also felt by local governments. In January, Montgomery County, Maryland, considered implementing a $15/hour minimum wage, but before doing so it commissioned an economic study.

According to the Post’s summary of the study, “…there would be offsetting costs and they could be substantial: a loss of almost 47,000 jobs and $396.5 million in total income by 2022 due to workers’ being priced out of the job market by the higher minimum wage.

“This would spell a reduction of nearly $41 million in expected county tax revenue between fiscal 2018 and fiscal 2022; meanwhile, the county government’s payroll costs would go up $10 million.”

So what does one conclude from this?

When I took economics back in college, they taught a concept called elasticity of demand. Those are fancy words, but the concept deals with consumer sensitivity to changes in price. In certain cases, a price change affects the demand for the product.

In such situations the demand is highly elastic. In other cases, when demand is inelastic, a change in price does not affect demand.

For example, if you are paying $2.90/gallon for gas and the price increases to $3.10/gallon, the price increase is inelastic because it is not likely to affect your spending patterns.

However, if the price increases to $5/gallon, you will likely consume less gas. Such a price increase would be in the elastic part of the demand spectrum.

Considering the elasticity of demand for labor is critical when determining the appropriate minimum wage. If labor is priced too high, the demand for labor will decrease — particularly for businesses who cannot pass the cost increases on to consumers.

Since 1968, the value of labor has declined in relation to the value of goods and services produced by such labor. This is not surprising because technology frequently has either made jobs obsolete or has allowed them to be out-sourced to lower-cost jurisdictions. For example, retail clerks are not needed when making an on-line purchase.

In most industries, technology has resulted in increased consumer price sensitivity because it is easier to shop around for the best price. This has resulted in compressed profit margins. Both of these make it difficult to pass increased costs on to the consumer.

Therefore, merely adjusting the minimum wage for post-1968 inflation ignores prevailing economic reality. Such ignorance produces the results discussed by the Washington Post.

When resetting minimum wage levels, we need to set aside political considerations and consider the elasticity of demand for such labor. When we do, we will find that the optimal minimum wage is likely less than $15/hour.

Jim de Bree is a retired CPA who resides in Valencia.

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