Thursday, November 06, 2014

Ruminations on the Minimum Wage: Pulling out the lowest rung on the ladder of progress?

On November 4, Nebraskans overwhelmingly voted in favor of Initiative 425, which will increase the current $7.25 minimum wage to $8 by January 1, 2015, and then to $9 by January 1, 2016.  Supporters of this initiative touted the need to boost income for working families.  Perhaps this law will do that for some workers, but few heads of households rely solely on a job that pays only minimum wage.  Most workers have advanced skills and accordingly they receive more than minimum wage based on the market demand for their skill sets, not based on a legal prescription of their worth. 


But lots of young people start out in jobs that don’t require many skills, but pave the way for future growth.  Many of us in the Midwest may recall getting up early in the summer to “walk beans”, which, contrary to rumors by city folks, did not involve a leash.  It was hard work, usually supervised by the farmer who owned the bean field, requiring the removal of invasive weeds from the desirable crop.  We started early because the sun got hot and the work got more difficult later in the day.  But that meant walking through dew-soaked plants, getting wet and sticky, attracting a fair share of bugs, and sometimes even getting a minor injury from an errant hoe or corn knife.   We muddled through with our friends, sometimes having a good time while experiencing the discipline of perseverance, as well as the satisfaction of looking back at the field free from weeds.  In a few weeks, the farmer would know if you were following instructions, as those who cut off his weeds in a haphazard manner often saw them grow back.  The skillful and diligent, on the other hand, removed the root and left a clean field behind. 


What has become of walking beans today?  Few, if any, do this work.  The same is true of other jobs kids used to do.  For example, my colleague told me of growing up in Texas and earning $.50/hour (that’s fifty cents, not dollars) washing cars at the service station or the car dealership.  Other jobs like this included service station attendants, which are rare as hen’s teeth today.  And what about human pin setters in the bowling alley? 


All of these jobs allowed young people an opportunity to get their start in the world of work.  They did not require an advanced degree or technical training.  They provided an opportunity to generate some spending money, while at the same time teaching us punctuality, cooperation, and diligence.  And most importantly, we learned that the real world had real expectations that we had to meet in order to succeed.  None of us expected to stay at those jobs, and in fact their difficulty provided a powerful incentive to stay in school and make something of ourselves.  But I am profoundly grateful for those formative opportunities available to us low-skilled but eager workers.    


Today we substitute capital in order to eliminate many of those low-skilled jobs.  My nephew, Matt, uses a giant mechanical sprayer to apply herbicides that kill weeds in the soybeans more effectively than high school kids, and at a fraction of the labor cost.  Better living through chemistry?  Perhaps. Likewise, mechanical washers have replaced those kids washing cars, which don’t require so much supervision.  And Brunswick made mechanical pinsetters, changing the labor market there.  (My antitrust students told of their adventures in an old-fashioned bowling alley, where it was customary at the end of the game to fill the holes of a bowling ball with dollar bills and roll it to the pinsetters.  Doesn’t that sound more delightful than just shrugging while the machine trudges on?)


So what does all this have to do with the minimum wage?  Humans sometimes innovate purely for thrills.  But more often, innovation is driven by the realization of cost savings.  As wage costs go up, it makes sense to substitute capital when it is more cost effective.  That is not all bad, as it surely creates new jobs in the sector that manufactures and services the capital improvement.  But those jobs are not usually the same kind of entry level jobs, but instead require considerable training and perhaps advanced degrees.  That is all quite wonderful, really, because it allows us humans to do more interesting things than walk beans or wash cars or set pins with our time.  But there are also consequences, particularly for the least-skilled, the young and inexperienced, who don’t get the same opportunity to start out in the world of work, and thus must scrap and scrape even harder to develop marketable skills.  And they must also do this without the formative experiences teaching them basic skills, like punctuality, dedication, and perseverance.  (Schools are ill equipped to do this for many reasons – and that can be the subject of another blog.)


This is a real problem.  Consider this inconvenient truth:  public school graduation rates in Nebraska average 78 percent.   Of course, this average masks significant variation, as some rural schools manage to graduate nearly all students, while urban ones do much worse.  Where are the dropouts going to become gainfully employed?  Will we have enough low-skilled jobs to match their skill sets, and to allow them to start building upward?  (And of course, some of the graduates are in equally bad shape, given low learning outcomes.)  These young people don’t yet have skill sets to build the capital that is replacing those low-skilled labor jobs.  How will they get them if they cannot get on the ladder of upward mobility? 


If we continue to raise the minimum wage, it stands to reason that we will further reduce the number of low-skilled jobs available, as capital continues to substitute for labor.  Will we soon be speaking to a synthesized voice saying, “Welcome to McDonald’s, may I take your order, please?”  Some may welcome this, but I would rather interact with that cheery young person and know that he or she is getting a start in the world of work.  And someday, she may be running that store -- or running for the Senate.  (Congratulations to Iowa Senator-elect Joni Ernst, who once worked in fast food on her way to better things.) 


Sure, there may be some winners from a legal edict to raise wages. But there are always unintended consequences to enacting laws that disrupt market forces.  Those who love making speeches and touting their big-hearted concerns for their fellow man often don’t contemplate the negative impacts on the very people they profess to care about.  There is real value to having a low rung on the ladder of the world of work that can be reached by anyone with ambition and the will to succeed.  Unfortunately, those people are most likely to be hurt by the initiative when the lowest rung is raised beyond their reach.  Perhaps those 40% of Nebraskans who voted no may be the ones who really cared for these people after all.




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