Michael Schramm: Maximizing the minimum wage

By Michael Schramm, Columnist
Published January 13, 2015

While raising the minimum wage has always been a relevant topic, it’s garnered more attention since fast food workers began protesting for $15 hourly wage.

Michael Schramm

I’ve heard numerous opinions on the minimum wage, ranging from people wanting $15 wages to those that think we shouldn’t raise the minimum wage at all. The minimum wage should definitely be raised yearly to keep up with inflation, but raising it to $15 isn’t a feasible option.

A $15 minimum wage is like communism: a good idea in theory but bad in application. I think everyone likes the idea of the lowest-income citizens doubling their wages, but this actually only hurts these citizens. The basic model of labor supply and demand shows this.

Since higher wages are incentive to work more, the supply of workers increases as the wage increases (i.e. the supply curve slopes upward).

Contrarily, as the wage increases, producers cannot afford to pay for as much labor, decreasing the demand for workers in the market (i.e. the demand curve slopes downward).

This means that the markets will adjust until they reach the one wage where laborers demanded equals laborers supplied. At this point, suppliers are producing as much output as they want, and laborers are working as much as they want.

This doesn’t happen if we have a minimum wage higher than the equilibrium wage.

Setting the minimum wage solidifies a specific wage, meaning that the market can’t move to an equilibrium position. We’re stuck with an excess amount of job seekers, and as you can see from the chart below, this means that a high minimum wage will drive some people working at the equilibrium wage to unemployment.

The Michigan Daily

(Levi Kipke / The Michigan Daily)

At least to me, the loss of jobs alone is justification not to significantly raise the minimum wage. A minimum wage should be helping those on the lower socioeconomic end, and while some would benefit from the increased wages, others would be forced into a lower class and be unable to find jobs.

This idea isn’t just abstract; it’s proven in application.

SeaTac, a suburb of Seattle, recently raised its minimum wage to $15 dollars per hour and has seen clear consequences. The local hotel closed its restaurant, laying off 15 workers in addition to a night clerk and maintenance worker.

Additionally, as seen in the labor supply model, the increase in wage causes an increase of laborers seeking employment. The Clarion Hotel has received an influx of applicants from outside the city seeking the new wage, and as some of these people have more skills than current employees, the hotel must consider laying off less-qualified workers to hire better workers, only further stratifying minimum wage workers.

Those still employed at the airport also incur costs of the increased wage. A woman working at the airport exclaimed her disdain for the changes, revealing how her shiny $15 wage came with the loss of her 401(k), health insurance, paid holidays, vacation, overtime opportunities and available food while working. She also must pay for parking and receives less in tips. These losses minimize the benefits of her increased wage, indicating that the extra money she’s receiving is less than the difference between her new and previous wage.

Now, all of this may lead you to believe I’m against raising the minimum wage, but this isn’t completely true. There’s a difference between raising real wages and nominal wages, and I support raising nominal wages so real wages stay the same.

Let’s just super quickly define real and nominal wages. A nominal wage is the numerical amount of money that you receive. $12 is always greater than $11, and $11 is greater than $10.

Real wages are how many goods that your nominal wages can buy you. For simplicity, assume the average price of goods in an economy is $2, and you receive $11 per hour. Your real wage is $5.50 per hour, because it’s relative to what goods cost.

Real wages are more important than nominal wages. If you could choose between receiving $15 per hour when average goods cost $2 and $100 per hour when average goods cost $50, it’s more economically sound to choose the $15 option. Even though $100 is more nominal money, you can buy more goods with $15 per hour, which is the purpose of work.

It’s also important to note that the increase in the average price of goods — called inflation — occurs almost every year in an economy. The Bureau of Labor Statistics compiles data to discover how much inflation occurs each year (I won’t bore you with how they do this).

Given this information, it’s important that a worker’s nominal wage is tied to increase yearly by the same percentage as inflation. If this didn’t happen, workers would lose money each year. Even though their actual paycheck wouldn’t decrease, they would be less wealthy given that everything around them costs more money.

Tying the minimum wage to inflation won’t hurt companies, either. Since the average prices of the products they sell increases, they’re bringing in more nominal revenue. Providing the excess of this revenue to workers only redistributes the wealth so companies aren’t benefiting from laborers’ losses.

Now, this is certainly a lot more complex in application than in theory. Not all companies increase their prices by the average amount. It is, after all, an average. So work would need to be done to more accurately figure out the price increases across different markets to minimize error.

But this system could work very effectively. Scaling the minimum wage to inflation helps workers hold onto their already-low incomes.

This information also explains a lot of the misconceptions that exist around raising the minimum wage. Many websites, even the Bureau of Labor Statistics itself, state that raising the minimum wage won’t cause people to lose their jobs. But their evidence relies on studies examining prior increases in minimum wage.

When you examine the real values of these past wages, they are close to the real value of the current wage, only being a dollar or two greater than or less than our current real minimum wage of $7.25. These small differences aren’t comparable to the larger differences that occur with a minimum wage of $15.

I’m a huge proponent of helping adults who are struggling to live on the current minimum wage. I really am. An adult working a minimum wage job is a constant struggle, but we need to focus on policies and ideas that will actually help these people. Raising the minimum wage will only create new problems for people living on minimum wage. Instead, we need to advocate programs and trade schools to help these people move into higher-paying positions.

Michael Schramm can be reached at mschramm@umich.edu.