Tuesday, March 15, 2005

Minimum Wage

jw at NJ Politiko blogs in support of the just-passed minimum wage increase. When the acting governor signs the bill for which he just voted, the cost of entry-level labor will increase by 38%.

There are two possible outcomes at the extremes from this change in the labor rate. Either the total market has a constant dollar value, or the total market has a fixed number of jobs. In reality, it'll come out somewhere between, but suspend your disbelief for a minute.

The fixed market value case
According to a quote jw provides, about 200,000 people currently earn the minimum wage. That places the total value of the entry-level labor market at about $2.14 billion dollars, assuming that all 200k work a full year (2,080 hours).
The federal government will collect about $328 million in Social Security taxes -- half from the workers, and half from the employers, so that bumps the total cost of entry-level labor up to about $2.3 billion. This doesn't significantly affect the fixed market value case, but will be important later.
So now, we divide up the available capital at the new rate. The feds get their cut off the top, so we are back down to $2.14 billion dollars. At the new rate of $7.15, that pays for 299,636,363 hours of work, or 144,055 full time jobs. The net loss due to the increased cost of labor is just about 66,000 jobs.

The fixed number of entry-level jobs case
If we assume that the number of entry level jobs remains fixed, then the value of the market will increase. Those 200k people now earn $2.974 billion. The federal take on their earnings goes up to $455 million, an increase of $127 million, and the total cost of the entry level labor market goes up to $3.202 billion. The net increase in cost to the market is about $900 million. Given that New Jersey only gets 57 cents back on each federal tax dollar, should we really be volunteering to send more money to Washington? More importantly, can business afford this much of a cost increase?
Fortunately, the federal Bureau of Economic Analysis has lots of data we can use to figure that out. The regional economic accounts search page reveals that New Jersey private industry spent $179.2 billion in 2001 and $181.7 billion in 2002 for employee compensation, a growth rate of 1.3%. (I exclude the public sector because I can't believe the government pays anyone the minimum wage -- the unions wouldn't stand for it). Assuming a consistent growth rate, the total labor market is about $189 billion today, growing just under $2.5 billion a year.
The entry-level market, at $2.3 billion, is 1.2% of the total. If $900 million of the $2.5 billion available for wage growth is applied to that market, then this would only leave $1.6 billion available for wage growth in the rest of the private sector.
According to the state Department of Labor, as of February there were 4,038,400 people employed in New Jersey. So, there are about 3.8 million workers not making minimum wage. Division of the remaining $1.6 billion in payroll growth results in an average increase of $417, or about 20 cents an hour. Without the distortion of the minimum wage increase, that available pool would average $619 per worker. Suppose that employers decided to distribute increases at the average rate, until the money ran out. In that case, about 2.6 million workers would get an average increase, leaving 1.2 million workers with nothing.

The end result
Are employers going to let those 1.2 million productive workers go looking for greener pastures, just to appease 200 thousand entry-level workers? I don’t think so. I believe that employers would rather retain their skilled workforces, and will sacrifice the training of entry-level personnel to do so. The average worker will be asked to work a few more hours to take up the slack for the new kid that the boss couldn’t afford to hire. We will end somewhere between the two extremes that I’ve laid out, but it will be much closer to the reduced entry-level head count.

Update: Patrick at Jerseystyle has weighed in on this as well. His central point:

Raising minimum wages routinely produces nothing but false positives. Sure, a couple dishwashers are making 7 dollars an hour instead of 5, but that money has to come from somewhere. Guess what, it's not coming from the complaining business. It's coming from the consumer. The money you are putting into the pockets of the dishwasher is coming right out of the pockets of average joe New Jersey everytime he stops into the local 5 and 10 to buy a card for his mother.
As usual, Patrick gets it, and makes a point in 6 lines where I take 6 pages. Nicely done.

Revisited, Feb 01, 2006: Thanks for reading Mister Snitch's compilation of The Best Posts of 2005. Inexplicably, he selected this piece. I guess it takes all types.