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The Anti-Minimum Wage Con Job Argument

March 3, 2014

Fast Food Worker This is not a post about leadership, or at least directly. It’s about people who work their butts off but who have become the disenfranchised, the contemporary version of 19th Century France when abused workers revolted.

I’ve been a loyal reader of The Economist for three decades. The oldest newspaper in the world (magazine format for some time, along with an excellent online web site), its analysis, prose and subtle humor make for very worthwhile reading. However, as a retired labor economist, who spent 30 years in the public sector in Canada and who also worked on science, technology and innovation issues, I have a bone to pick with The Economist, and more broadly the neo-right wing of unenlightened commentators.

What’s my beef? The minimum wage as it’s currently administered in the United States and, in my own country, Canada.

Plenty has been written on the need for economics to get with it, to drag itself out of the 1800s into the 21st Century. The models and concepts articulated at the time by progressive thinkers such as David Ricardo (the opportunity cost of free trade, or what most incorrectly call comparative advantage) were wonderful in an age of much greater simplicity, in terms of the later politicization of international trade.

The topic of the minimum wage, notably in America, was on the front burner for much of 2013. Fast food workers launched a series of protests that captured the media’s attention, and undoubtedly however fleetingly, the hearts of middle class Americans. And being a Canadian, we, too, got caught up in the emotion, given our proximity to the United States.

In its December 14 issue, The Economist ran a few articles on the minimum wage, noting that in a number of Western countries the minimum wage is set based on a percentage of a country’s median income. For example, in the U.S. it’s 38% of median income; in contrast, it’s 47% in Great Britain and just over 60% in France. Since 2009, the federal minimum wage in the U.S. is a whopping $7.25 per hour. In contrast, in typical fashion in Canada where the 10 provincial governments have specified constitutional powers there is no precise federal minimum wage. Each province, similar to the 50 states, has its own minimum wage. For nationally regulated companies in Canada, workers must be paid no lower than the minimum wage in a certain province.

I digress.

To return to the calculation of minimum wages across countries, there’s the proverbial BUT.

While France has a very high minimum wage, it also has very high youth unemployment.

And so goes the argument against raising the minimum wage. The conventional argument has been that it’s youth, who are still in school, who have no dependents and who are much less productive, who deserve a low wage.

Here’s the second BUT.

Bull Thanks to globalization and technology, along with other factors such as demographics, more older people are working in what I’ll call the minimum wage ghetto. Yours truly has been in that space for the past two years on a part-time basis. Granted, I’m retired from the federal government and pick up some contract writing work; however, I’m not alone. Current and former minimum wage co-workers include retired high-tech managers, administrators and police officers. We, as ageing Baby Boomers, want to be kept busy and generate some added income.

So the dynamics of the minimum wage sector has changed dramatically. The Economist and others have yet to catch up.

The truly pressing dimension is working poor parents who put in 40-plus hours a week at fast food restaurants, retail stores or grocery stores listening to whiney Gen X and Baby Boomer customers. The disconnect is palpable.

Yes, the minimum wage at both the U.S. federal and provincial/state levels should increase. It’s the right thing to do from an economic aggregate demand perspective (consumer spending drives over 65% of America’s economy, and similarly for Canada) and from an ethical viewpoint.

President Obama’s suggestion that $10.10 per hour is the desired federal minimum wage jives more or less with what many labor economists agree. However, economists, in usual form, disagree on the effects of a significant rise in the minimum wage. The Congressional Budget Office produced a study in early 2014 which stated that up to half a million jobs would be lost. However, it would also lift 900,000 Americans out of poverty.

A study done at the University of California at Berkley, along with other studies such as at the London School of Economics, found that raising the minimum had no negative effect on employment. Indeed, one can argue that it spurs aggregate demand, the driver of any economy.

Here’s the third BUT.

Fast Food I’ve always been somewhat surprised that in North America the restaurant industry has not been more aggressive in introducing automation, especially in fast food establishments. My heart and mind goes out to those fast food workers who protested valiantly in New York City and beyond for a $15 per hour wage. Yes, you deserve that. No question in my mind. However, understand that any significant increase in the minimum wage will likely prove to be the catalyst to not just the paring of labor costs (aka laying off employees) but the introduction of automation.

If you don’t believe me, check out what’s been taking place in Europe and Japan.

The subject of what should be the minimum wage is not a political one, as The Economist correctly observes. However, it’s not just one based on mechanical derivations of what should be its relationship to a country’s or state’s/province’s median income. This is a very difficult issue, with plenty of blow-back on workers if it is not done correctly.

For example in the Province of Ontario, where I live, the provincial government recently lifted the 2010 imposed minimum wage freeze. On June 1, the minimum wages rises from $10.25 to $11.00 per hour. The increase was based on the average inflation rate since 2010 (which ranged from 0.9 to 2.9%). This was the intelligent way to determine where to set the rate. Take the politics out of the minimum wage. Henceforth, the minimum wage in Ontario will increase each year based on the inflation rate. Employers will be given a four months heads-up notification. This is a smart approach.

Lastly, I’ll note that if the $15 per hour wage were ever to materialize for American fast food workers, as expressed during the demonstrations in late 2013, it would amount to only 50% of the country’s median income.

We’ll hear a lot more about the minimum wage issue in the months ahead. And economists will continue their polarized debate.

To be conscious that you are ignorant of the facts is a great step to knowledge.
Benjamin Disraeli

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3 Comments leave one →
  1. March 4, 2014 1:50 am

    I can really see why France doesn’t seem to have the underclass poor that America does. Their minimum-wage workers are making double what American workers are, plus they have free health care and many other social-welfare benefits. Many American minimum-age workers are not working 40-hour weeks; most are working at least 60-hour weeks, and some even 80-hour weeks, and still without health care.

    • March 4, 2014 3:02 am

      I’m not sure what will happen over the next 20 years as young people mature, have families and try to make a living from sub-standard wages. And who will buy the massive glut of homes that have been built in the past decade for Boomers and Gen X is anyone’s guess.

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