## Sunday, August 19, 2018

### Minimum wage facts and fantasies

For years I've had fun at cocktail parties by asking this question: what percent of all the people who work in the U.S. are paid minimum wage or less? Of the hundreds of people I've asked, only one has come even close to the right answer. The great majority of the answers I've received (try it yourself!) range from 10% to as much as 50%. My conclusion: A huge number of Americans hold the fantasy belief that a significant percentage of those who work would benefit from raising the minimum wage.

Fact: only 0.5% of those who work take home minimum wage or less.

The facts can be found in a BLS publication from earlier this year: Characteristics of Minimum Wage Workers, 2017.

In 2017, 80.4 million workers age 16 and older in the United States were paid at hourly rates, representing 58.3 percent of all wage and salary workers. Among those paid by the hour, 542,000 workers earned exactly the prevailing federal minimum wage of \$7.25 per hour. About 1.3 million had wages below the federal minimum. Together, these 1.8 million workers with wages at or below the federal minimum made up 2.3 percent of all hourly paid workers.

According to the BLS establishment survey, there were 147 million people employed in 2017 (those paid by the hour plus those who received a salary), so the percentage of all the people working who were making minimum wage or less was 1.8 /147 = 1.2%. Furthermore, according to the BLS, some 1.3 million of all those who work in the U.S. made less than the minimum wage. In percentage terms, a bit less than 1% (1.3/147) of those who worked in 2017 made less than minimum wage.

But here's where it gets really interesting: "The industry with the highest percentage of workers earning hourly wages at or below the federal minimum wage was leisure and hospitality (11 percent). About three-fifths of all workers paid at or below the federal minimum wage were employed in this industry, almost entirely in restaurants and other food services. For many of these workers, tips may supplement the hourly wages received."

If we assume that the vast majority of those who worked in the restaurant and food service industry (10 million) actually took home at more than the minimum wage (thanks to tips), then in 2017 there effectively were only about 700 thousand people (0.5% of all workers) who actually took home minimum wage or less. Big, under-reported fact: in all likelihood, 99.5% of those who worked in 1017 took home more than the minimum wage for their efforts, and without any help from government fiats.

So the next time you're at a cocktail party, ask the person next to you to guess the percentage of U.S. workers that earn minimum wage or less. You won't be lying when you tell them it's about ½ of 1%.

Raising the minimum wage would presumably benefit less than 1% of the working population, but it would most likely make it harder for young and inexperienced workers to get a job. It's already hard enough: the unemployment rate for those aged 16-19 is 13.1%, by far the highest unemployment rate for any age cohort. (The unemployment rate across all age groups today is a mere 3.9%.) Politicians should be lobbying to reduce or eliminate the minimum wage, not increase it. The best way for someone to make more than minimum wage is to first get a job, any job, at any wage, then work your way up.

steve said...

I could not possibly agree more. I always thought min wage was hubris to the extreme on pols part. What gives them the right to deny a workers chance to gain valuable experience at whatever pay level? Moreover, college interns frequently work for NOTHING to gain experience. Same idea. Just another example of the left over stepping in their vain attempt to "help" America.

BTW, Scott have you read Lizzie Warren's latest missive at a bill in the senate? Literally an abdication of capitalism. Only a matter of time before the left takes over and we will get a full dose of something damn close to socialism.

Scott Grannis said...

Elizabeth Warren’s proposed bill is nothing less than the first salvo in a war against capitalism. Deep down inside she is a socialist, and all she wants is to commandeer the economy for her own purposes. Down this road lies madness.

Unknown said...

Many states in the U.S. have laws making their minimum wage higher than \$7.25. Also, most businesses like to encourage their workers by giving them a 25 cent raise after 90 days, but then it becomes much more difficult to get raises. Thus your statistics of the low percentage of people working for \$7.25 is a bit misleading. More important, the statement that a low minimum wage would help employment seems reasonable on the surface, but on inspection can be disproved with a small amount of work. Take the states and their individual minimum wages (which range from \$7.25 to \$11.50) and plot versus that state's unemployment rate. As of April, that correlation for 2018 is a r-squared of .005. Lest you think that is an anomaly, 2017 was .001 and 2016 was .007. So, in reality minimum wage has a negligible affect on unemployment while there are many other factors that have a real affect.

Andrew Hofer said...

What percentage takes home less than the magic \$15 that all the urban progressives want to push min wage to? Do you know?

The Cliff Claven of Finance said...

I wanted to avoid commenting here ...
misled people about the minimum wage:

Mr. Grannis wrote:
"Raising the minimum wage would presumably benefit
less than 1% of the working population ..."

This is a ridiculous statement
-- a red herring not worthy
of anyone with an economics degree !

Raising the minimum wage affects far more
than the people currently getting paid minimum wage.

If the minimum wage was raised from \$7.50
an hour to \$15 an hour, let's say over a few years,
for one common example:
Everyone earning between \$7.50 an hour and \$14.99
an hour would be affected as the minimum rate rose.

In addition, a supervisor or manager,
who had been making more than the
minimum wage, will deserve, and want,
minimum wage workers
he or she supervises or manages.

Some union contract wages are based on a
increment over the minimum wage,
so their workers would be affected too.
Here's an old study on that subject:

The effects of a higher minimum wage
would include these, and others:
Businesses firing their least productive employee(s),
Businesses demanding more work from their employees,
Businesses scaling back operating hours / or work hours
More employees being paid "off the books",
with no Social Security or Medicare contributions.

Benjamin Cole said...

I agree.

But then I would eliminate property-zoning too. And do everything possible to decriminalize push-cart vending or truck-vending.

And is not high-time to sunset the USDA?

George Phillies said...

I seem to recall that workers earning tips have a different legal minimum wage.

However, Massachusetts is in the process of doing this so we will see what happens.
Seatle iirc did this; neighboring Seatac did not. Supposedly the short term changes in unemployment were the same.

George Phillies said...

Effects of a higher minimum wage?

Any employee had better be bringing in an appreciable multiple of what he is paid. For example, in food service, the cost of food, management, equipment, building property taxes, etc. If he is not, you are going broke. Rapidly.

The other choice, is, of course, reduce profits. cap executive pay.

Also, if I am running the burgers by george international chain, I am running it efficiently, and there mostly are not any spare employees to fire. What am I supposed to do, put up the sign "even hours-burgers. odd hours-fries"?

Benjamin Cole said...

I agree.

But then I would eliminate property-zoning too. And do everything possible to decriminalize push-cart vending or truck-vending.

And is not high-time to sunset the USDA?

Ron Gruner said...

I'll kick the hornet's nest here and suggest why not index the minimum wage for inflation as we've done for Social Security, income tax and maybe soon, capital gains? Measured in 2017 dollars the minimum wage peaked at \$11.27 in 1968. Teen job growth continued growing strongly for years afterward (https://www.bls.gov/opub/mlr/2017/article/teen-labor-force-participation-before-and-after-the-great-recession.htm).

A few years later Nixon supported a phased minimum wage increase and actually suggested two minimum wages, including one for teenagers. (http://www.presidency.ucsb.edu/ws/index.php?pid=3950).

Sure, few people actually earn the minimum wage (I was one of them back in the sixties working summer jobs), but it forms a foundation for all others.

Unknown said...

If the federal government can mandate a minimum wage, then why not a maximum wage? Just imagine the possibilities that would open for progressive politicians! By imposing a maximum wage they could take anything earned in excess of that and increase the minimum wage to astounding new heights! Everybody would then be rich and living in a modern utopia. Of course hamburgers would cost several hundred bucks and gasoline would be so expensive that we'd all be walking, but that would have the unintended consequence of making us more fit and healthy. Wow, what an excellent future that would be!

SergioT said...

The real question is: does minimum wage provide a floor to the wages that are right above it?
I am not a fan of minimum wage myself, but the discussion needs a deeper analysis IMHO.

Grechster said...

The idiocy of even HAVING a minimum wage is one of the more straight-forward topics in economics. That said, and I'm basing this on personal experience, do NOT raise this issue in a cocktail party setting. Intelligent people will agree with you which is fine but mostly uninteresting. The economically ignorant will go ape because, you see, this is a religious issue for them. Seriously, issues like this - and I'm thinking of environmentalism - have become something of a religion substitute. Trying to reason with these people is an act of idiocy in and of itself. At a minimum it ruins the cocktail party. I say enjoy the cocktails and re-double your efforts to hang around people who have a clue as to what's what.

steve said...

Yup Matthew you are right re the Passion of the Left and min wage, abortion (forged aboud it), inequality and of course how guilty DT is with "colluding" with the Russians. Just to clear the air, while obviously no DT fan, this Mueller investigation is 100% BS. If he had anything we'd know it via leaks. DT is right on this one although he might express his opinion with a trite more decorum. I know-ain't gonna happen!

xr-3609 said...

By highlighting the destructive effects of a higher MW; The Cliff inadvertently illustrated how a rise in the MW would lower the productivity of the economy. Thus benefiting 0% (rounded to the nearest 1%).

bt1138 said...

Leaving aside your heartfelt concerns for the "young and inexperienced",

If so few people are on minimum wage why are so many people so adamant that it will be a spectacular socialistic job-killer that will eat away at the very foundations of our capitalist society? Something's fishy here.

Perhaps is it a just a libertarian / intellectual stance?

Maybe we should be against it because the government must NOT be allowed to do such things? Perhaps people will like it and it will be popular and it might lead to the government doing other such things and that's very very bad.

Ron Gruner said...

Three comments on Sergio's question regarding whether minimum wage affects the wages above it. 1) There's a near perfect correlation (0.988487) between the minimum wage and BLS Average hourly earnings of production and non-supervisory employees from 1964 - 2017, 2) Inflation-adjusted average hourly earnings peaked at \$22.87 (2017 dollars) in 1972, four years after the minimum wage peaked, and 3) I grew up in my dad's machine tool factory of about 150 employees. When the minimum wage went up everyone over time got a raise.

I'm not an economist, just an interested reader so won't draw any conclusions from all this.

steve said...

Ron, did MW going up affect other wages or did other wages going up affect MW? I doubt anyone knows for sure but it is the salient point. Wages go up due to supply/demand forces. Look at trucker wages. There's a paucity of truck drivers and lo and behold, their wages are going up!
Employers have to compete to attract workers-at all levels. Even workers with no/low skills will attract a decent wage in a vibrant economy.

Ironically, the left is always pushing for higher MW and also espouses policy that would limit economic growth. I guess you NEED a higher MW in a 2% GDP environment!

Ron Gruner said...

Steve, I just ran six correlations skewing the BLS average wage from minus to plus three years relative to the minimum wage year. Correlations are above 0.98 when the average wage precedes or is the same year of a minimum wage increase and drop off to a low of 0.65 when the average wage lags the minimum wage. This suggests that if there is a causal relationship, it's average wages driving the minimum wage, and not the minimum wage pushing average wages up. Very interesting.

Now looking at BLS average wages over the last 47 years, they haven't moved much during either good or bad times (2017 dollars)...

1970: \$21.50
1980: \$20:37
1990: \$19.13
2000: \$19.95
2010: \$21.42
2017: \$22:05

One guess: Manufacturing jobs have been declining for decades so even though the overall economy may be booming at times hourly workers aren't in the demand they once were.

Peter X said...

Scott,

I know that you correct errors in your blog post. In that vein, I believe that you meant 147 million people in the fourth paragraph of the current post, not 147 people.

Scott Grannis said...

Peter X: many thanks for spotting that typo!

Scott Grannis said...

The fact that so few people make minimum wage is evidence that it is not currently being set too high. But places that have set min wage at \$15 hour (e.g., Seattle) are seeing rising unemployment, which suggests that \$15/hr is too high. Government cannot set wages at a level that is too high for businesses to absorb. What's more likely is that the current minimum wage is just about right, but efforts to raise it to \$15 are terribly misguided. In truth, there is no need at all for a minimum wage. It's existence only provides fodder for politicians to mess with the economy, and that's something that rarely benefits more than a very few.

The Cliff Claven of Finance said...

There is no logical reason to have a minimum wage law
-- it just prevents some people from getting jobs,
discourages development of better job skills,
and discourages business formation / investment.

There are many ways to avoid paying the minimum wage:

- Hire people as self employed contractors,
(such as UBER drivers?) and the net pay after expenses
can be well below minimum wage,

- Have family members work for "slave wages"
while promising they will inherit the family business
... some day!,

- Have employees work "off the books" -- some of them
will be collecting welfare at the same time -- welfare rules
often discourage working on the books
for single women with children.

--Working a unpaid intern /volunteer, for the work experience,
but hopefully not in the White House, when a Clinton lives there !

The Cliff Claven of Finance said...

Did I say that department:

In my previous post on this thread,
I posted this comment about the article:

"This is a ridiculous statement
-- a red herring not worthy
of anyone with an economics degree !"

On second thought, that sounds rude,
and I apologize,
however to my credit
I did not compare anyone
to Stalin or Hitler,
which is how anonymous
internet arguments usually end.

Unknown said...

Not saying this is MY argument, but if your stats are correct (as they surely are), then one could probably successfully argue that raising the minimum wage would have small impact on the economy since it would only affect a minuscule part of the working population. ?

Flying Robot said...

I happen to think mw is a mostly useless limitation, but I wouldn't dismiss it that casually.

When you raise the min wage \$1 you capture all the people that are making in between the former and current min wage, but I suspect a large portion of people making close to mw start at mw and then get a 25 cent per hour raise or what have you, and so are 'not making minimum wage'... but for all practical purposes they are.

Also, the economic impact of mw implementation seems to depend on the magnitude and scale of implementation to some degree.

However, I think we can likely mostly agree that mw is a facile solution to several more central issues.

Tommy Byrne's Blog said...

I believe a moderate increase and indexing the minimum wage to the inflation rate is a reasonable compromise to put this issue to bed once and for all. The lefts dream of \$15 an hour minimum is a job killer. Every McDonald's in my area has added kiosks replacing people because it cuts into their bottom line.

Tommy Byrne's Blog said...

New York State’s Minimum Wage

As part of the 2016-17 State Budget, Governor Cuomo signed legislation enacting a statewide \$15 minimum wage plan that will lift the earnings of more than 2.1 million New Yorkers, in all industries across the state. The Governor’s plan takes the needs of workers and businesses alike into account.

As of December 31, 2016, the first in a series of wage increases will go into effect. Rates will differ based on region and industry because the increases are calibrated to provide businesses ample time to adjust.

General Minimum Wage Rate Schedule
Location 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 2021*
NYC - Big Employers (of 11 or more) \$11.00 \$13.00 \$15.00
NYC - Small Employers (10 or less) \$10.50 \$12.00 \$13.50 \$15.00
Long Island & Westchester \$10.00 \$11.00 \$12.00 \$13.00 \$14.00 \$15.00
Remainder of New York State Workers \$9.70 \$10.40 \$11.10 \$11.80 \$12.50

Ron Gruner said...

Tommy, You've identified one major reason why wages have been stagnant the last 40 years...

"\$15 an hour minimum is a job killer. Every McDonald's in my area has added kiosks replacing people because it cuts into their bottom line."

With technology replacing people what will we do with all the people that used to work in factories, Amazon warehouses and McDonalds? How will the cheapest workers earn a living when they can be replaced by a \$2,500 kiosk?

Bob said...

Ron Gruner said;

"With technology replacing people what will we do with all the people that used to work in factories, Amazon warehouses and McDonalds? How will the cheapest workers earn a living when they can be replaced by a \$2,500 kiosk?"

Like every generation before us, with jobs that have not been invented nor needed until they are.

App developer
Uber/Lyft driver
Social media manager
Driverless car engineer
Cloud computing specialist
Drone operators

To name a few that didn't exist a decade or so ago. Have faith my brother, the future is golden. (if we can stem the socialist juggernaut)

Ron Gruner said...

Bob, you may be right but many, maybe most, new jobs today are highlly skilled, as are your examples excepting Uber drivers. It’s been tough for unskilled workers to make a living for decades...the real minimum wage is worth 30 percent less today than it was in 1969. I hope you’re right about the future being golden but that hasn’t been the case in the Rust Belt and Appalachia as blue collar jobs disappeared and little replaced them.