Two things you should consider about a $15 min wage
The perils of narrativizing. Also running a business is hard.
Welcome to the Weekend Reccs by Harrison Satcher. This newsletter delivers a lovingly-tailored collection of thought-provoking goodness for your Sunday. Inside you’ll find: (1) a weekly column on economics, politics, or something unexpected, (2) a curated list of links for your enjoyment, (3) a lagniappe (because everyone deserves lagniappe), and (4) a collection of interesting, relevant charts. Grab a coffee and enjoy your morning.
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The links marked with asterisks (*) are the recommended reads.
The Long Read: Two thoughts on JRB2’s $15 minimum wage (7 min read)
Takeaway: (1) Many small improvements can swamp one big negative. (2) Running a business is hard, and that may be unintentionally creating some slack in the labor market.
There are lots of takes flying around the takeosphere now that JRB2 has released his economic plan*. I want to focus on the provision that would raise the national minimum wage to $15/hour by 2025.
There are some people that claim that increasing the minimum wage is going to be hugely devastating and bad. These people are almost certainly wrong according to current economic thinking.
The prevailing economic view and evidence is that, at worst, there may be a small decrease in overall employment. At best, we may witness an increase in overall employment (though this seems unlikely). Most likely, we’ll see little to no impact.
To put the stakes in context, though, we’re talking about one in four workers receiving pay raises to get them near or above a living wage and the best research so far suggests that it probably has negligible to slightly negative macroeconomic effects.
I think we all know what that means.
Aside from that I’ve got two thoughts to contribute to the ongoing discussion.
Thought 1: Someone will lose their livelihood. We need to be ok with this.
When we get to 2025 and the minimum wage is binding there are going to be plenty of stories about X, Y, or Z restaurant/hotel/bodega/etc. that had to go out of business because of the minimum wage increase (you can substitute in “unemployed person that cannot find a job” for business owner in this section).
Obviously our media consumption wildly skews our perception of reality (e.g. crime shows and cable news definitely have a hand to play in this) and we should be skeptical of the external validity of a given interviews we see on TV. But that will not stop them from coming.
And while my guess is that 30% of these will be politically motivated interviewees, and another 30% of these will be people who were going to go out of business anyways and don’t want to take responsibility for their poor business decisions, maybe 40% of these folks genuinely lost their business due to the higher minimum wage.
And for all the business owners represented by that 40%, that sucks. Truly. We should recognize that.
Yet we need to keep in mind three things when we think about these folks:
1) On the other side, the benefits of the policy will be broad and diffuse. We likely won’t hear interviews with the millions of folks whose pay went up a few dollars (or a lot). Yet these people will be living more stable, healthier, happier lives. To see this we will have to look to multiple years of data after the increase.
2) We should be ok with things that have (1) acute negative effects (2) within the realm of normal human experience (3) on a small number of people but help a lot of others. I say within the realm of normal human experience because that’s exactly what we’re talking about here. Losing a business is awful but people bounce back from it every day. Many of these folks will likely go on to have new, very successful business endeavors.
To give an over-stylized analogy, it would have been incredibly silly in America’s early days to have opposed the expanding public education system just because a few private school owners would lose their business.
3) We can genuinely feel bad for those that lose businesses without negating the fact that this policy would be a huge win for the stability, prosperity, and long-term prospects of our country.
Thought 2: Uncertainty is an underrated argument for how increasing the minimum wage could increase employment
Ok this one is going to involve some Supply—Demand graphs and for that I apologize. Additionally, I can’t take full credit for this idea, as the general premise was shared with me by a friend back in college who themselves had heard it from a professor.
Most of the folks who are in the “this would be devastatingly bad” camp have this image seared into their brains.
For those that may need a refresher, the curves above are built by aggregating the preferences of individual market members. So behind the supply curve is really millions of individuals’ supply curves, and behind the demand curve is millions of businesses’ demand curves.
The way to read this particular graph is that the government instates a minimum wage (W_min) at the red line when previously people were paid a market wage (W_eq) at the green line.
The quantity of those employed goes down (the movement from N_eq to the left-most red line) and the number of people who want jobs at the prevailing wage goes up (the rightmost red line).
N is for the number of people employed, other folks use Q for quantity.
If this happened that would be really bad! But of course real life is not so simple as perfectly linear supply and demand curves. One of the ways it deviates is that in real life we have to grapple with uncertainty.
I’d contend that if I asked a small or mid-sized business owner to give the range within which they were 90% certain that their profit would fall next year we would be talking about huge swings for most sectors. And that’s not just true looking a year ahead, it is true for some folks looking at quarters or months or even weeks.
The business has to contend with business-specific conditions (did the new menu get good reviews on Yelp?), locality-specific conditions (will the Space Force headquarters be built in our town?), industry-specific conditions (is fast fashion no longer relevant?), macroeconomic conditions (wait so will people have $600 or $2000 in stimulus to spend on our personalized putters?), and plenty of others sources of uncertainty that all occur on very different time horizons.
If we now bring back in that Supply—Demand graph but only look at ONE business at a time, we might imagine it looks something like this, with each of these demand curves being an estimate the owner gives today to their business’s current state, just with each using different (reasonable!) assumptions:
And if we aggregate up millions of these we get something like this, where any point on the orange line is market-clearing, and where the actual location on that orange line is not based on economic factors but rather on random chance or exogenous factors like cultural norms:
Using this graph we can imagine adding a minimum wage that increases the employment from a hypothetical starting point (W_“eq”) to a minimum wage (W_min), while also increasing the total quantity of people employed (Q_“eq”->Q_min):
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So as to not belabor the point I won’t repeat myself for the labor supply side, but hopefully it should be clear that uncertainty can also play into expectations for the worker-to-be and their expected household expenses (and job preferences), and therefore we’d see an impact on their curve. My intuition is that this effect would be less important than that on the demand side, so I feel okay not exploring it further.
For what it is worth you can also get to something approximating this model by assuming that the business owners have poor estimates of the value of their own time and are just trying to maximize their take-home despite possibly being perfectly content with less money. In that scenario we have the same thick line to represent levels of demand that could possibly sustain the business over time and also make the owner content. The minimum wage here just forces the owner to give up more of their slice of the pie but they don’t choose to shut down or sell the business.
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For those wanting more, Noah Smith has a pretty good post* that covers the $15 minimum wage and why he believes it is safe (and presents a different model for how the minimum wage might increase employment).
The Links
Read more* We are entering the part of the year when folks give up on their New Year’s Resolutions. If yours involved reading more, I’ve linked a nice little guide. One of the great joys of developing a habit of reading is that you get so much more out of the same books. Reading a book across a week rather than two months allows you to pick up critical references, themes, etc. and makes the whole process more enjoyable.
Speaking of books, a mystery is afoot* Someone is stealing a ton of unpublished manuscripts. Nobody can figure out why. I like to imagine it is a voracious reader that wants to show off to their friends by making “predictions” about what is going to happen in the books.
Trains = vibrations = geological information* I just love stories like this — taking something that was going to happen anyways and making it valuable. Humans are really remarkable.
Lagniappe
I’ve really been enjoying taking a long walk after dinner. You should give it a try if you don’t already.
Graph(s) of the week
[WSJ] Maybe it is because I have been somewhat tuned out this past week, but it seems to me like we haven’t discussed the Nashville explosion (and its aftereffects) enough.
Keep the faith,
Harrison