Tuesday, March 31, 2015

Do minimum wages translate into higher prices?

When the minimum wage increases, something has to give.  Companies have the option of cutting work hours, passing on the wage increase to customers, receiving smaller margins, or some combination of the above.

Most minimum wage research has focused on employment and hours worked.  Stanford economist Tom MaCurdy has a forthcoming study that represents the first careful look at prices.  MaCurdy finds that when the minimum wage was increased 21% in 1996, it induced a 2% increase in the price of food consumed away from home.  The prices of retail services, groceries and household personal services also went up.  Combining all of these effects, MaCurdy found that the overall price increase was greater for families in the bottom 20% of the distribution than for those in the top 20%.

What does this mean for low-income families?  MaCurdy shows that minimum wage earners are distributed evenly throughout the income distribution; one in five households has a member receiving the minimum wage.  In low income households minimum wage recipients are more likely to be primary earners, whereas they tend to be secondary earners (think teenagers) in high income households.  So if low income households receive the same boost in earnings but pay higher prices, they actually end up worse off.  MaCurdy concludes:
... more poor families were losers than winners from the 1996 hike in the minimum wage. Nearly one in five low-income families benefited, but all low-income families paid for the increase through higher prices.

Friday, March 27, 2015

A challenge to Piketty

French economist Thomas Piketty has become a media celebrity as a result of his "Capital in the 21st Century."  One of his central claims is that capital income grows faster than labor income, which necessarily dictates growing inequality over time.  Piketty does show this to be the case in the US and a number of other countries over the last 40 years.

A recent study by an MIT economist featured on an WSJ blog takes a closer look at capital income.  As it turns out, capital income is not limited to capital gains, interest, and dividends.  It also includes housing, and this is where it gets interesting.  If you break capital income into two components (housing and all other forms), the data show that all of the upward trend in capital income is the result of housing appreciation.  In other words, who is getting wealthier?  It is not the idle rich; instead it is homeowners.

This has important implications for the societal implications of growing inequality.  Ownership of stocks and bonds is relatively concentrated in the upper income brackets, whereas most Americans are homeowners.  If the returns to capital are being distributed in the form of rising home prices, then the impact on inequality across households will be relatively minor.

Thursday, March 26, 2015

Some triangle restaurants find minimum wage not enough

Yesterday's N&O ran an article about how some RTP restaurants have decided to start paying more than the minimum wage.  Is this the result of a sudden infusion of social consciousness?  Maybe in some establishments whose owners feel strongly about social justice.  But why now, as opposed to three or five years ago?

Any full explanation of these pay raises has to include the fundamental forces of supply and demand. The restaurants cited in the article are not greasy spoons; Pizzeria Toro and Monuts Donuts get rave reviews on Yelp, TripAdvisor and Urbanspoon.  And to maintain the quality that their customers expect, these eateries need workers with experience and strong customer skills.  Higher wages reduce turnover and attract top job candidates.

Some restaurants also are starting to pool tips, with the goal of getting more cooperation among the wait staff.  Such a move also alleviates the risk of getting stuck with a table of stingy tippers.

Assuming no action at the federal or state level on the minimum wage, I envision a situation where those just getting started find minimum wage jobs in chains and small generic establishments.  Those who like the work and are talented move up to higher paying positions.

Sunday, March 8, 2015

Race against the machines

Over the Christmas holidays I read Erik Brynjolfsson and Andrew McAfee's "The Second Machine Age," an ultimately optimistic view of where IT is taking us.  I say ultimately because as the machines get smarter and more productive, there is going to be significant displacement of labor.

Traditionally economists have viewed technological change as an essential element of economic growth.  Although there are plenty of examples of workers being displaced (ask John Henry the steel-driving man), the economy has historically been able to absorb and reallocate them fast enough to avoid mass unemployment.

Now Brynjolfsson is not so sure that mass unemployment can be avoided, as reported in a recent WSJ piece.  Although self-driving cars are years away from U.S. interstates, an Australian mining company is already using self-driving trucks and automated trains.  Some experts think that between a third and a half of today's jobs will become obsolete by mid-century.  MIT economist David Autor fears that those that will be left will be either very high skill or very low skill.

The good news -- breakthroughs in health care and education, new jobs that we cannot yet imagine, opportunities for more free time as machines do more work for us.  Maybe even folding laundry?

Monday, March 2, 2015

Wages up at restaurants

Yet another front page WSJ story about wage increases, this time in the restaurant industry.  Job growth in restaurants and bars had outpaced other sectors since the economy started to recover in 2009.  But wage growth stayed very flat until the last six months of 2014, when restaurant pay went up by 3%, twice as fast as a year ago.

The article cites the experience of Pi Pizzeria in St. Louis which raised wages to reduce the quit rate and attract stronger job candidates.  Apparently many of those who had been cooks and waiters while waiting for the job market to improve are now finding better opportunities outside of food service.  Part of the story also seems to be good old-fashioned supply and demand.  More people are eating out (restaurant spending was up 11% last year way more than any other sector), thus putting pressure on restaurants to expand staffing.  In some states the minimum wage has increased, putting additional upward pressure on pay.