Click here for The Case Against the Living Wage Part II
It seems that economics becomes a dirty word anytime a movement like the ‘living wage’ pops up. It is a moral obligation, or so we are told, and therefore we should not concern ourselves with petty concepts such as trade-offs or efficiency.
Instead, we are supposed to trust that a solution for injustice can succeed based on good intentions alone. Sadly, policies of this nature rarely ever work out as intended.
It is not that ‘living wage’ advocates actually want worse for students or employees of Northwestern, it is that they don’t know any better. Consisting largely of non-economics majors, these are students who feel guilty that they were, by no merit of their own, born into a life of privilege. The living wage provides an outlet for them to try to ’give back,’ promote ‘social justice,’ level the playing field, etc.
While noble (or cute, maybe?) in spirit, the petition’s morality is trumped by its reality. In practice the living wage will result in a blend of fired employees, different employees, and higher costs for students. To illustrate further here are eight talking points explaining why it is important to avoid the living wage petition.
Point 1:The true cost of something is what you give up to get it.
Introductory econ students are probably sick of hearing this. True costs are opportunity costs. Unfortunately for Matthew Fischler, leader of the living wagers, this concept has not resonated fully. As he told the Daily: “From the beginning of the campaign, we’ve been very clear … we’re only asking to fund the Living Wage if it doesn’t burden students.” Unfortunately any allocation of resources towards the living wage is an allocation away from something else that would benefit students. Whether it’s paid for by tuition, endowment, or budget cuts elsewhere, all of those costs trickle down to the student. That is of course unless the school simply fires enough employees to be able to save enough to pay a living wage, but even then students suffer in the form of lost service.
Point 2: Artificially increasing wages leads to lower employment. This impacts unskilled workers the most.
As Milton Friedman explains: “Minimum wage requires that employers must discriminate against workers that have low skills.” In fact, 79% of economists agree with the following statement: A minimum wage increases unemployment among young and unskilled workers. Or as the Northwestern administration has explicitly stated: if the University decided to increase its wage costs by $3-4 million a year and did not increase the student fees, then it is very likely that job losses would result.
This is because the University’s resources are scarce, and if labor suddenly cost more, they will hire fewer workers. As the following graphs nicely demonstrate, price changes in labor significantly affect how much labor is demanded, especially from the poor and the young.
Point 3: An artificial increase to a “living wage” with employment levels remaining constant equates to a direct transfer of wealth from students to employees. This means increased costs for students, who already face rapidly growing expenditures.
For every anecdote about a struggling Northwestern worker, there is one about a student at NU drowning in student debt. It would cost students living in dorms $1000 more a year to adopt a ‘living wage,’ a price many could not bare. The roughly $4 million ‘living wage’ price tag is about equal to the amount of money Northwestern earns on interest from student loans. If money magically appeared in the budget, why not subsidize low income students’ educations by eliminating that interest instead? Even if every student could bare the extra $1000 in cost, one must ask where that $1000 would have gone had it not been absorbed in extra costs? If there are students whose primary concern is Northwestern workers’ pay, why not let them donate their own money, and let the rest of us make our own consumption choices?
As the chart shows, students face enough costs already from higher education. A change in policy would result in further costs, or as the administration says: The money would need to come from increases in room and board fees and/or tuition… the estimated additional annual cost in room and board rates for those living in residence halls would be at least $1,000. Tuition costs for all undergraduates could be affected as well.
Point 4:Changing the wage of a job changes who looks for that job. If there are individuals who can work elsewhere for $12 an hour, they would normally not be interested in working at Northwestern for $10 an hour. If wages artificially increase here to $13 an hour, suddenly those earning $12 will want to be here, and those that were earning $10 will have to earn $10 or less somewhere else (if they could earn more somewhere else they would have already left). This means that the policy will end up not helping the people it was originally designed to help.
Point 5:Northwestern’s goal is not income redistribution.
Northwestern is an academic institution. When alumni donate to it they expect their money to go towards academic pursuits. When parents pay tuition they expect it to go towards the cost of their child’s education. Northwestern is not an institution that is responsible for income redistribution, and should not allocate its scarce resources in any way that should make it seem like one. People can donate to private charities on their own time.
Point 6: Many low wage workers do not plan on maintaining low wages their entire careers.
From an article that appeared in the WSJ 3/5/10: “Most readers remember the work habits they learned from their first job. Showing up on time, being courteous to customers, learning how to use technology—such habits are often more valuable than the actual paycheck. Studies have confirmed that when teens work during summer months or after school they have higher lifetime earnings than those who don’t work. So raising the minimum wage may inadvertently reduce lifetime earnings.”
Job turnover is higher in low wage jobs. Many times low wage jobs offer a starting point for individuals who would otherwise be employed. Some work up to higher positions at the same company while others learn skills that help them find new higher paying work. By forcing some out of those jobs through an artificial wage floor, we are denying them the learning opportunities of a starting job.
Point 7:Defer to the labor economists.
We’re just college students, how much do we really know? Why not defer final judgement to those who have devoted their life to studying the effects of wage changes on total welfare. President Schapiro got his PhD studying labor economics, and he is adamently opposed. That is coming from a man who has devoted his life to fixing social justice problems. That not only suggests what we students should think about it, but it also is a hint that Northwestern will never have a living wage policy adopted.
Point 8: There are plenty of ways to help workers at Northwestern.
If individuals at Northwestern really want to help workers and develop a sense of community, why not devote time to interacting with them as opposed to simply complaining that the school do something. One idea is to set up education classes to teach skills and help stimulate intellectual hunger among workers, but there are probably plenty more if people put some thought into it.
Cody Kittle < all the workers on this campus
Brilliant article. Every point made in this piece is succinct and proves that the idea of the living wage is a brain-child of socialism.
the only reason people are in favor of the living wage is because they are the same students (english majors) who will be earning less than one in the real world. The good news is, either way, they are screwed
I would hate to how you would like the world to be run.
It seems as if I am missing a “see” in between to and how. Also, I agree with most of your arguments economically. They are just completely heartless and could use some compassion instead of just disregarding it completely. However, I disagree with your 6th point I don’t think that NU employees are in their first job and will just move up whenever. I think and know in some instances that these jobs are not a choice but a necessity.
Yes, because clearly the world would be better if it were run by compassion. A society built upon helping everyone would be amazing and works perfectly.
“In USSR 800,000 people were officially recorded as shot during the Soviet period. But up to 30 million people are estimated by Western historians to have died between 1918 and 1956 in Stalinist repression, civil war, famine and collectivization, although the true figure may never be known.”
http://www.dpcamps.org/russianpow.html
Mhmmm, compassionate.
Our brains can think, not our hearts. So I’ll take a heartless leader who disregards compassion over a social crusader making decisions from an organ thats only function is to pump blood through the body any day.
Geoff, you’re a moron. The presence of a heartless leader who disregards compassion is exactly what occurred during the Soviet Occupation of Russia whether it be Stalin or take your pick.
Just as you state that Econ 101 students must be fed up with “true costs are opportunity costs”, so too do their colleagues in elementary statistics groan when they hear the old, “correlation does not imply causation.”
Your graphs do not help your point. Are there any other economic factors you can think of besides the hikes in the minimum wage from 2006-2010 that may have contributed to teenage unemployment?
Yes obviously there are other factors that contribute to unemployment. Freakonomics is my favorite book and I couldn’t agree more. I should have used the word ‘illustrate’instead of ‘demonstrate’ in introducing the graphs, as they are not the core part of the argument, only their to illustrate what the intuition suggests. Going through published papers and regressions in an article of this nature would be a little tedious for readers (and me), thus the fall back on the survey of economists and the explanation of the intuition (and the quote from the University).
As always, thank you for the thoughtful comment.
This was a well done article. I think it is actually leaps and bounds beyond the rest of the stuff that usually appears on here (no offense to anyone). You made well crafted arguments. Just a few points however.
The statistics/charts that you used were well done but comparing black teens/teenagers to an actual “career” or long time job that these workers are nominally forced into depreciates your argument. The impetus behind the facts are there and often times (especially the workers in for instance norris) do have a higher turnover. BUT in the economic times these jobs are often held onto. Looking to the great depression (only using this example because it compares to the state of affairs today) it was during this time that worker organization erupted and longer lasting jobs ensued (now this is in part to WWII/new deal and all of that). But i think noting that might be useful. Still though, turnover does happen (but the lowest grade workers – janitorial staff and the long time dining staff in the dining halls – do not fit in the statistic of job turnover).
I think point 5 I think is good for a political type stand but irrelevant to your arguement
Point 6 is faulty because again you try to draw comparisons between teenagers with higher social mobility and long term access to the workers who see these as their permanent jobs
Point 7 is also a political comment, wisely placed, but does nothing for your argument. If there were “experts” and this really always and consistently equated one way of doing things then there wouldn’t be a wide range of opinions on labor. just saying
Overall though i think your article was well written and well done. You actually thought before demeaning workers and it shows that we often shouldn’t overlay an economic argument for workers lives with compassion/moral value. But Those were just my opinions. Thoughts? Backlash?
Thanks for the article
Thank you for such an insightful comment. Two thoughts:
1. The graphs are there for illustrative purposes on what the effects of wage floors are on unskilled workers. Since teenagers are generally unskilled, they serve as a proxy for unskilled workers in general of all ages. Other proxies are not as easily available because a workers skill level has so many inputs as he/she gets older. The bigger picture is that floors in prices for labor require that employers discriminate against workers with low productivity, who are generally the very people the price floors aim to help.
2. I’m not quite sure what your point is about job turnover but I’d like to note that the “longer lasting jobs” resulting from organized labor result in a lower hire rate of workers and significantly larger frictional unemployment. France, for example, has some of the best job security in the world because the unions are so strong, but it also is one of the hardest places to find work when unemployed. Countries with more job turnover have lower unemployment levels and lower time spent searching for jobs on a per person basis for people who are unemployed.
Thanks for the comment, they are always appreciated.
Another note on this – the graphs on teenage unemployment versus higher minimum wage are completely beside the point, and misleading. There are many more factors to consider when assessing teenage unemployment rate. Moreover, is the purpose of a living wage really to protect teenagers who are often dependent on other sources of income anyway? No, the living wage is to protect workers with families from descending into poverty.
The graphs also ignore the fact that the last two years, when unemployment rates skyrocketed, had less to do with the higher minimum wage than with the almost complete meltdown of the economy.
Teenagers are a proxy for low skilled workers. You are not protecting people by forcing them into unemployment.
The point about the graphs not having enough data is a good one. I’ll see if the BLS has data going further back and try to graph against minimum wage. In the meantime here is an article with some good research to quell concerns, http://online.wsj.com/article/SB10001424052970203440104574402820278669840.html
Have you thought about sending your article to the Living Wage Listserv (if they have one)? That way, some of those misguided kids can go on with their daily lives, and stop making me feel like Northwestern students are idealistic, self-righteous and silly.
I agree that it’s important to look at the realities of what a living wage policy might mean. Unfortunately, this article is riddled with logistical inconsistencies and pick-and-choose economics. Let’s take point 2, for instance (“Artificially increasing wages leads to lower employment. This impacts unskilled workers the most.”)
Layoffs are only one of many ways in which businesses can and do respond to any additional costs associated with living wage mandates. Raising prices, increasing sales, changing production techniques, increasing productivity, and redistributing income within the company are all effective. In fact, evidence indicates that it is precisely these alternative adjustment channels that organizations prioritize in the face of higher minimum wage mandates. Businesses faced with higher minimum wage mandates do not behave in the manner predicted by competitive models, and average firm employment does not decline but may in fact increase slightly following minimum wage increases (e.g. Katz and Krueger 1992; Spriggs 1993; Card and Krueger 1994; Card and Krueger 2000 – http://press.princeton.edu/titles/5632.html)
Milton Friedman is clearly talking about a system-wide price floor that is not applicable to the way in which a single institution determines worker wages. True, in both cases there is a maximum amount of money in the system. Some of it is allocated to pay workers. If all other expenditures in the budget remain the same, it is an obvious truism that higher wages would mean fewer could receive wages: if the university increases costs and does not increase revenue, job losses would result. However, this does not take into account the flexibility of current spending.
Ceteris paribus is implied in the statement, which is why the paragraphs that follow it only focus on a wage floor with all else equal and in my other points I consider the case in which a wage floor is implemented with no layoffs. That is interesting research, but it is also irrelevant to the second point, which you reiterated for me: “If all other expenditures in the budget remain the same, it is an obvious truism that higher wages would mean fewer could receive wages.”
My point exactly.
The Card and Kreuger studies are very often cited by those sympathetic to the minimum wage. The reason, however, it is so prevalent is because it is among the minority in academic studies that show the minimum wage does not significantly affect unemployment. The minimum wage is obviously something that has been studies ad nauseam, and I dont have the determination right now to go and peruse all the major studies on it, but I believe a significant majority of the literature published and a significant majority of economists conclude that the minimum wage has a negative effect on employment.
(See Harvard economist NGM address the Card, et al study here: http://www.economics.harvard.edu/files/faculty/40_bglobejune01.html )
I think centuries of mainstream economic thought also support the logic of a minimum wage causing unemployment.
I do agree with cody’s concession that some of the graphs posted are in some ways misleading. RC also makes a good point that the minimum wage argument is not directly relevant because we are talking about an individual firm here not a whole economy.
But the economic logic follows indirectly I think. If you are concerned with the employment and welfare of low skilled, low income workers you should be against the living wage because raising workers wages from ~9/hr to ~13.50/hr (~50% increase) will have significant consequences to who you hire. In the end it will result in the university or sodexo hiring a more skilled workers for longer hours who actually get 13.50 on the competitive market, thereby displacing the lower skilled part time worker who “needs the job the most”.
cody kittle, good work sir