Thursday, February 14, 2013

What do we know about the Minimum Wage

One of the proposals in the President SOTU was to increase the minimum wage to $9 per hour, that would raise it from $7.25 which was last raised in 2009.   There is a considerable body of research that suggests either a strong or weak correlation of increases with youth unemployment.  Some like Brown , Kohen and Gilroy argue that there is a linear relationship, especially for teenagers.  (a 10% increase in the minimum results in a 3% drop in the number of teenagers employed).  The Institute for Industrial and Labor Relations has published a couple of papers which discount that - but at this point those studies are a bit outside the consensus of most economics research. So I thought it would be a good idea to understand something more about who benefits from increases in the minimum wage and who loses.   So here are some handy bullet points.

#1 - Reality Check - A full time worker earns a bit over $15,000 if paid at the minimum wage.   The President's proposal would increase that to $18,720.   In reality, that boost will not things much.   The HHS Guidelines for poverty are presented in the chart at the right.

#2 - Young people make up about 12% of the hourly workforce but make up 50% of the people who receive the minimum wage. 40% of the people who earn minimum wages live with a parent or relative.  About 7% of part time workers versus less than 2% of full time workers earn the minimum wage.  The average household income where a minimum wage earner is present is $47,023. (Hardly a family in poverty)

#3 - 13 states have a minimum higher than federal law while 4 states have a minimum lower than the federal standard and 5 states have no minimum wage law. Puerto Rico, Guam and the US VI have lower minimum wage laws.

#4 - So who gets the minimum wage?  From Bureau of Labor Statistics there are two types of employees.  The first are workers in particular industries - food preparation; farming, fishing and forestry; building maintenance; and personal care industries.   Some of those occupations have an expectation of tips, others do not.   Some have a very high incidence of part time workers and first time employees (food preparation for example).   One statistic that jumps out is that the vast majority of workers at the minimum wage receive a wage increase in the first 12 months of employment.

#5 - According to the BLS "the youth employment-population ratio for men was 51.9 percent, and the ratio for women was 48.4 percent. The ratio for whites was 53.5 percent, compared with 
38.9 percent for blacks, 37.4 percent for Asians, and 46.5 percent for Hispanics."   

#6 - The CBO did a study of the last increase in the minimum wage and found that only about 14% of 
the increase went to poor families.   That suggests an inefficient way to achieve the President's stated 

So what are we to draw from all this?   First, the minimum wage may indeed depress opportunities for 
young people who actually want to work.   Second, there may be a very slight improvement for a very small cohort of workers, although many (or most)  of those workers are not supporting a family.   With 
those two conclusions one wonders why the President would highlight the proposal so much.    The 
answer is obvious - this issue is not really about economics.   But then we already knew that.

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