Rapid increases in minimum wages: a bad idea for the people they are trying to help

The widening gap between what many Americans need for an acceptable standard of living and the income they are able to secure is a real problem, and I empathize with those who struggle every day to pay bills. Moreover, the decline in well-paying jobs for people with modest skills and educational attainment is a serious, long term structural crisis.

However, the minimum wage or “living wage” proposals being seriously considered by the federal government and many state governments will not solve this problem: they will make it worse. Minimum wage jobs are the way in which Americans enter the work force and gain skills that enable them to move up to higher paying jobs, not positions into which people should be frozen for their adult lives.  While I believe that a small, multi-year increase in minimum wages can help those starting out in the workforce, a large, immediate increase in minimum wages would be disastrous.

When minimum wages are rapidly and artificially inflated well beyond the value of the jobs to which they are attached, the number of such jobs will decline.  The first rung of a career ladder disappears for many, and they will never get that entry-level job that starts them on a path to long-term middle class employability.

Some employers appear to pay a “living wage” for a job that other employers pay at a “minimum wage” level.  For example Costco pays far more than Walmart for entry-level jobs that appear to be similar.

However, in www.bloomberg.com on August 28, 2013, business columnist Megan McArdle noted that the Costco entry level job is far different from Walmart’s because the companies serve different customers with different degrees of price-sensitivity:

“Trader Joe’s and Costco are, respectively, the specialty grocer and warehouse club, for an affluent, educated college demographic. They woo this crowd with a stripped-down array of high quality stock-keeping units, and high-quality customer service…Fewer products to handle (and restock) lowers the labor intensity of your operation…That’s not the only reason that the Trader Joe’s/Costco model wouldn’t work for Wal-Mart. For one thing, it’s no accident that the high-wage favorites cited by activists tend to serve the affluent; lower income households can’t afford to pay extra for top-notch service.”

http://www.bloomberg.com/news/2013-08-27/why-walmart-will-never-pay-like-costco.html

The Costco entry-level employee is clearly providing a higher level of service for which the Costco customer is willing to pay. If Walmart paid a living wage to its full-time workers, its target customers could not absorb the increased cost, and its entire business model of helping customers buy good products at “everyday low prices” would collapse.

Raising the minimum wage immediately at or above $10 per hour would significantly reduce the number of jobs to which the $7.25 wage applies today.

What would happen if lawmakers simply increased the minimum wage from $7.25 an hour to somewhere between $10 and $15?  Millions of jobs would rapidly disappear.

While past studies that have shown that, when minimum wages were increased, there were only minor reductions in minimum wage jobs, we are in a different time today: the technology available to replace labor is far better and less costly.  Moreover, there is a big difference between a small, gradual increase in minimum wages that are adjusted for inflation and a large increase that attempts to create a “living wage” level of pay in one big leap.

What kinds of jobs would rapidly disappear or decrease in number?

Every one of these trends is already happening, because they are technologically feasible and acceptable to customers.  A substantially higher minimum wage would rapidly accelerate these trends and would be a major job killer, even if those who retained their jobs would move up the socio-economic scale.

So how do we sustainably create more living wage jobs?  We must eliminate artificial and unproductive constraints on new job creation and recognize where readily correctible skill shortages for well-paying service jobs might be eliminated.

Eliminating excessively protectionist job licensing would create millions of new living wage jobs.

The percentage of jobs requiring licensing or certification has increased from 5% in 1968 to 33% today.  My uncle was a barber who cut hair for over 30 years after learning how to do so in the Army.  Today, if were in Connecticut, he would need to take cosmetology courses costing $20,000 for a full year, which makes this job unattainable for many people who have the skills to do it.

These licensing requirements reduce the number of candidates for good “living wage” jobs by putting entry-level jobs beyond what many prospective workers can afford.  While there are a large number of job categories for which regulations cumulatively reduce employment opportunities through excessive entry barriers, in almost every job category, some states impose exceptionally onerous licensing requirements and others have none. There is very little difference in quality between licensed and unlicensed providers. The real purpose of the licensing requirements is to protect existing licensee positions.

Eliminate government licensing of businesses that artificially constrain the creation of job-creating businesses.

In virtually every community with taxicab services, government license the taxicab companies and create artificially low levels of taxicab service.  They also similarly constrain the supply of limousine services that provide transportation to and from airports and train stations, as well as services that transport people between cities.

We have less than 12,000 cabs in New York City because the number of licenses was frozen in 1937.  Licenses, called “medallions,” are transferable, and are far more valuable to owners than the cabs themselves.  Since each cab employs 2-3 drivers, the artificially low medallion population reduces the number of jobs.

Uber, a dispatch system that enables an individual to order a car service online, has grown because it serves an underserved market.  Not surprisingly, the New York Taxi and Limousine Commission is trying to put Uber out of business. Uber and competitors like it create new employment opportunities, usually at a comfortably high hourly rate.

Subdivide jobs into lower and higher-skilled positions and create entry-level opportunities for more people.

I pay $100 per hour for a computer technician, unless I buy Apple products and go to the Genius Bar, or get Apple Care over the phone, both of which require me to pay an annual warranty or subscription fee.  The technician is doing a fair amount of checklist-based work, much of which my assistant or I are doing more of today, but technicians are in such short supply that each one can charge $100 per hour for the remaining work or for people who are intimidated by self diagnostic work.  The Geek Squad at Best Buy charges a minimum of $120 per hour.

Apple has created a $15-20 per hour set of jobs at the Genius Bar, which it is easier to fill than the $100 per hour computer technicians we frantically call to come to our homes.

Part of the computer technician job requires a high level of skill for which $100 an hour is a fair price, but most of what these technicians do is a lower-skilled adherence to a checklist, which could be performed by someone earning $20 per hour, and for which 1-2 months of training would be required.

Identify other job categories in which there has been a longer term shortage relative to demand and, at the same time, relatively low entry barriers.

Besides job categories which have artificial worker supply shortages, there are well-paying service jobs for which demand consistently exceeds supply.  My wife and I pay a tailor who alters clothing for us a very high price, and we wait 2-3 weeks for the alterations to be completed.  The tailor works very hard, but there is a huge gap between market demand and the talent she has available to help complete the work.  Similarly, weavers and other artisans are in short supply.

All these examples yield one compelling conclusion: we can carve out “living wage” jobs far more easily with no bad side effects in terms of a reduction of jobs not by raising the minimum wage, but by focusing on job categories in which demand for services far outstrips the supply of workers.  If we raise the minimum wage, we temporarily increase pay for a small number of people, but we significantly reduce the overall pool of jobs for everyone.  If we use these other ways of creating living wage jobs, we reduce the cost of services, increase the supply of jobs, and introduce more innovation into every marketplace.