Updated: May 9, 2021
Kriti: [00:00:00] Hey guys, welcome to WhyFI Matters!
So, there's been a lot of talk recently about increasing the federal minimum wage. And as a Biden administration starts to take their first steps into increasing the minimum wage, I've always assumed that this would be good for the economy. I don't think I'm the only person who's thought this. But over the past couple of weeks, I've come across several ECon Twitter posts and discussions by economists that say that the increase in minimum wages has broader implications.
And I was curious about this. So today I've invited Dr. Jonathan Meer to help us understand the history, the economics, and the broader implications of increasing the federal minimum wage.
Dr. Meer is a Mary Julia and George R. Jordan, Jr. Professor of public policy in the Department of Economics at Texas A and M university. He's also the department's director of undergraduate programs. He is a research associate at the National Bureau of economics research, and he's received his PhD from the department of economics at Stanford. He did his undergrad at Princeton where he received an AB in economics and a certificate in applied and computational mathematics.
His research interests include investigating individuals decisions such as whether to make a charitable donation and the reasons for making them. And he's had numerous publications on altruism and charitable behavior, labor education, and law and public policy. His paper on the effects of minimum wages and employment dynamics was published in the human resources journal in 2015 and has been decided by more than 450 articles. Also his commentary on the real cost of doubling and increasing federal minimum wage published an Economic 21 in January of 2020 was really interesting and got me even more curious about this topic.
So I'm super excited to bring him on the podcast today to talk more about this and I hope you enjoy the interview.
Hi, Dr. Meer, thank you so much for coming on WhyFI matters today. And I'm excited to talk about minimum wages, which is something that we, as teenagers are definitely very interested about and also sort of, understand the world from an economic lens and an economic perspective.
Dr. Meer: [00:02:38] Well, it's a real pleasure to be here. I really appreciate the invitation.
Kriti: [00:02:42] Yes. Thank you so much for coming. I'm super excited. Um, and I think before we, we get started, can you tell us more about your career as an economist?
Dr. Meer: [00:02:53] That's a great question. I am one of those weirdos who sort of knew what he wanted to do, when I was actually about your age. So roughly around the time I was a freshman or sophomore in high school, and I just sort of fell in love with economics.
This idea that things are so interrelated and that human behavior can be analyzed in this rigorous logical sometimes often mathematical way. And it was just, it was beautiful. And so I got really into it and I started taking some economics classes and learning more about it. This was obviously a very, very, very long time ago.
And I sort of never, never looked right or left, uh, about it, which, you know, again is, is kind of a weird thing to do, but, uh, I majored in economics at Princeton, and then I went straight for a PhD in economics at Stanford. And then I came to Texas A and M in 2009. So I've been here since then. I teach a large online principles of microeconomics class that reaches over 2,500 students a year. And I just really enjoy introducing people to economics.
Kriti: [00:03:54] That's amazing! Your path. And I think it's really interesting how you kind of knew what you wanted to do. And right now, for me, um, I think economics is something I've only recently gotten interested in, but I love how it combines math, which I really like.
And, um, But also I'm really into humanities aspects and my history courses and things like that. And that's all to do with human behavior and their decisions and why certain leaders did this in time. So I think economics is like a good marriage between the two. So it's something interesting for me and I'm sure a lot of my listeners, so yeah.
So I guess what would. What would your advice be to someone who wanted to pursue a career in economics?
Dr. Meer: [00:04:43] I think that you should be very broad focused about what you're interested in. I think that's one of the beautiful things about economics is it covers so many topics. There's this stereotypical idea that it's about stocks or, uh, interest rates or, you know, big movements of economies. And certainly those are parts of economics, but the things that I work on , for example , charitable giving and the economics of altruism and philanthropy, those are. I think really interesting, very human questions. Why do people give their money away? What drives that? Uh, what are the ways that we can encourage people to donate more? Those are all things that are analyzed through this economic lens. I also work on the economics of education, of things, things like how do we help increase opportunity. How do we make education more effective? And obviously those are some of the most important policy questions we can imagine.
And what economics brings to that is this rigor and logic and a framework for thinking through these ideas that I think allows us to try to make the best decisions we can. And even where reasonable people can disagree, people can obviously have different values. We can speak the same language to each other, and we can say, well, I'm willing to make this trade off, but not that trade off.
And I might say, well, I disagree with you, but I respect , the way you came to that point. And I think that's what economics really allows you to do. And you can study anything. Any question you can think of can be analyzed through an economic lens.
Kriti: [00:06:13] I think that's really interesting. In eighth grade, I had like a class, it was an elective. I forgot what it was called, but it's like the art of decision making or something like that. To be honest, it was kind of a boring course, but there were certain moments where I was just like, that's so interesting. And we watched a movie called 12 angry men, and all about decision-making. And I think economics, it's about, decision-making. Why people are doing this and it's cool how you can kind of talk about anything from an economic lens.
So I think going into minimum wages, um, so what exactly is a minimum wage?
Dr. Meer: [00:06:56] So minimum wage is a legal floor below, which you can't pay somebody , in terms of the number of dollars per hour. That's the way it's set in the United States. And some other places, it may be set it up weekly or a monthly level of a minimum of floor on the amount that you can pay.
So, it essentially says it is not legal to pay somebody less than $7 and 25 cents an hour, $10 an hour, or whatever that level is set at.
Kriti: [00:07:28] Uh, right now at $7 and 25 cents? So how did we get to this number? And can you talk to us more about the history behind minimum wages?
Dr. Meer: [00:07:38] Absolutely. So the federal minimum wage is $7 and 25 cents an hour, except for certain employees who are, tipped. So wait staff, bartenders, people like that. I bartended in college, so I'm very familiar with this. And for them, the level is $2 and 13 cents an hour, but tips have to make up at least. The level up to the minimum wage or else the employer is responsible for making it up. Now in, I think at this point 29 States and the district of Columbia have minimum wages that are above the federal minimum wage.
Some of them are actually quite high or moving to very high levels, including $15 an hour. And there are a number of local governments. The city of Seattle, the city of San Francisco, and a number of others that have minimum wages that are even a higher than their own States, prevailing minimum wage.
So how did we get here?
This is actually a really interesting history question and, and, I don't want to spend too much time on it, but it is a very fascinating history. Minimum wages became popular, more popular as an idea in the very late 19th century, early 20th century. And the first minimum wage in the United States was passed in 1912 in Massachusetts.
Now, the interesting thing about it is that at the time it was done in an explicitly racist and sexist fashion, by which I mean, it was the expressed purpose of the minimum wage to exclude non-white men from the labor force.
How do we know? Because in 1912, they weren't very shy about telling us why they were doing it.
So the head of the Massachusetts minimum wage commission, a man named Arthur Holcomb, who was a professor of government at Harvard, actually said explicitly that the minimum wage was intended to protect a white standards of living from the invidious competition of the colored races. And obviously that's very archaic language. But the idea was essentially this, some people, were willing to work for less than perhaps a white male was willing to work for or wanted to work for. Certainly we all want more to be paid more. So what happens if you reduce competition? Including competition among workers. Well, wages will go up.
There are fewer workers, the supply of workers is lower. So one way that they thought of doing that was to exclude, anyone who was willing to work for less than a certain amount from the labor force by making it illegal, to work less than that amount. It was also done to keep women out of the work out of the workforce.
In 1923, justice Oliver, Wendell Holmes., who's usually remembered as this brilliant jurist in a case called Atkins V Children's hospital, which was about a female only minimum wage. So this minimum wage was only applied to women. And he wrote it much more beautifully, even if the content of the words isn't very nice, but he, he came out and said that this law is there to keep women whose productive value in the workforce as measured by their wages is below this level. This is the level that the technocrats, the people making these decisions thought was the minimum necessary to live a good life, quote unquote, and if you couldn't earn that much, then you shouldn't be in the workforce. And so he just came out and said that in Atkins V Children's hospital. And so, during that time, this was the, this was the progressive era. Many of these people were the, the original progressives, their viewpoint was that the government should take a firm hand in planning society. And very often that meant deciding who was and was not allowed to work. And under what conditions were they allowed to work?
So let's fast forward, some number of year. I think modern day progresses. I would certainly never ascribe these these motivations to them. I think they mean very well. And I think in many ways, we're all on the same side here in terms of being concerned about poverty and mobility. And I, I want to circle back to that in a moment, but, it's still true that the minimum wage excludes people from the workforce, who's the product of their labor, perhaps through no fault of their own is worth less than whatever the wage that has been set by state legislators it is. And if it is, well, no, one's going to pay you a dollar to make you to make something worth 75 cents. It's not a comment on someone's value as a human being. It's a comment on how much the productive output of the work is worth.
So how did we get to seven 25? starting in, I want to say 1938 Congress passed a series of laws, setting minimum wages, expanding who was , who was covered by them and from time to time raising it to keep up with inflation.
So at this point, the minimum wage was last raised in 2009, which, and this is one of those things that makes me feel very old. You probably don't remember. Was the, the end of the, the great recession or rather the middle of the great recession caused by the financial crisis of 2008. And that was less than the federal minimum wage was raised.
There has been a lot of push over the last decade to raise the federal minimum wage in the absence of that, of movement in that direction. Like, like we discussed earlier, a lot of States and municipalities have raised their own wages to higher levels. And that brings us to today.
Kriti: [00:13:10] I think that was a lot of valuable information. I have a couple of questions about what you're just saying. First I'm just really shocked. Well, I'm not shocked. I know. I just think it's just so sad that that law in Massachusetts was made in like 1912 to purposely , make like black people and people of color not allowed to work.
And it reminds me of, Brown V board of education and how people in power, you know, white privilege, they're scared of this deconstructing and they're scared of losing their power. They find it a threat to see black people educated. Cause they think they're going to steal their jobs. And I think, it just reminded me of that.
Dr. Meer: [00:13:57] I think that's a really good, very much explicitly passed for racist, anti-immigrants in a phobic reasons, in a similar vein, the Davis bacon act, which is a law that requires government projects to pay quote unquote prevailing wages, which are generally set at union wage levels was passed because, construction. Of construction firms or other construction workers in construction unions in the New York area were angry that blacks from the South were moving North and we're willing to work for less.
So how can you exclude them from the market? You make it illegal to employ them for less than what you would have to pay a unionized white worker. And then that shifts the balance of the jobs away from the African-Americans, who we're moving in the great migration from, from the South to the North, in the, in the decade, following the civil war to it just excludes them from the labor force.
Kriti: [00:14:55] Yeah. And so you said, people are not willing to pay someone, say a dollar, if the product would be 75 cents and it's based off of what defines their skill?
Dr. Meer: [00:15:10] The fancy name for this as value marginal product of labor, but that's , let's not get bogged down with the jargon.
The idea is simply this. What is the value of what you're producing? How much is it worth? How much is it worth? It's worth, what someone's willing to pay for it. Okay. Again, this is not a comment on someone's fitness as a human being. It's just a comment on what people are willing to pay for something. And we can take, let's take an extreme example.
Okay. LeBron, James puts a ball through a hoop. He does it incredibly well. I love to watch him do it, and he makes tens if not hundreds of millions of dollars a year. Okay. Someone else. Playing a different game. Let's just pick a different game that that pays less professional table tennis. Okay, why don't professional table tennis players get paid tens of millions of dollars a year. Hey, are they not as good a human being as LeBron James? I doubt it. I think he's, I think actually, look, I think LeBron's a wonderful person, but I doubt that it's because there are better people.
Uh, is it because they are less physically skilled than him? Well, they're less physically skilled at basketball, but they're more physically skilled the table tennis. The reason is people are willing to pay a lot more to watch LeBron James play basketball than they are willing to watch somebody played table tennis, or to watch somebody play chess or to watch me mow my lawn.
Why isn't lawn mowing a professional sport, right? So this is all about , the demand that people have for the product. And people have an immense amount of demand for basketball. Football baseball and less so for other sports, it just reflects their preferences. So then what does that mean? Part of the reason why people are paid at different amounts is because of what they're able to produce and what value that has in the marketplace.
Again, not value as a human, but value in terms of the product that they make. And so if a restaurant owner. He is willing to pay $10 an hour to have the tables bust a little more quickly, but the government says. You must pay this person at least $15 an hour. Well, then they might say, Hmm, can't really do that.
It's not worth $10 an hour. To me doesn't mean the busters is a bad person. It's just not worth $10 an hour to me. So we won't have bussers and either the wait staff will have a bit harder. Or people will bust their own. People will bust their own food, which has become increasingly common. And when I was your age, you know, that there were a lot fewer counter serve restaurants.
And, you know, that's sometimes the reaction that I get to this is like, Oh, are you too good to take your tray to the garbage can? Of course, I'm not too good to take my tray to the garbage can. I'm perfectly fine doing it. However that job used to be done by somebody that used to be does that used to be someone's job and it's not about, Oh, I'm so spoiled.
I can't do it. It's about. Somebody used to have that job. And we see automation replacing certain jobs. You know, there are burger flipping robots in San Francisco. And I think right now there are novelty, but I think whatever can be automated, becomes worth automating as the price of labor goes up.
And I should say, that's not all the minimum wage. It's not just the minimum wage. There's a lot of other aspects of that out the least of which is that automation is becoming cheaper, but. The upshot is when the price of something goes up, we buy less of it. And that's true for labor. Also, when the price of labor wages goes up, we purchase less of it.
And so what does that mean for people's outcomes? Now, does that mean that nobody benefits? Of course not some people who keep their jobs earn more. They have more money in their pocket, but what we're often forgetting about are people with very low levels of skill, like teenagers, again, not because they're bad people because they don't have very much experience.
We're thinking we're forgetting about people who are maybe marginally attached to the labor force. Um, maybe they have a spotty work history. Maybe they have a felony conviction. A and so, if your choice is, pay this person $15 an hour, or perhaps hire somebody else because so many people want jobs at $15 an hour, how hard is it going to be for a teenager to get their foot on that first rung of the job experience ladder or someone with a felony conviction or someone who just for whatever reason doesn't have, doesn't possess the skill level or the experience level to be productive enough to make that wage.
Kriti: [00:19:44] Right. So how is this affecting high school students like me because we're entering the job market and how will an increase in minimum wages affect our job prospects. And what would your advice be for us?
Dr. Meer: [00:20:01] So the labor force participation by teenagers has fallen off a cliff in the last 15 years. Don't hold me to the exact numbers, but I want to say it's cut by more than half , and now those were preexisting trends. When I was your age, lots of people had jobs with summer jobs where, you know, part-time after school jobs or so on. It was, it was really just not uncommon. And again, I am. Quite a bit older than you, but not that much selling. We're not talking about the fifties here.
Right? We're talking about the 1990s. Um, so what's happened. Well, part of it is there are absolutely differences in social norms. There are a lot more people who , where the parents are, you know, very concerned that the. Kids should just be studying and, and that's fine. Um, there are also more, I think the value of leisure has gone up. So video games are a whole heck of a lot better than they were when I was your age. And so sort of
Kriti: [00:20:56] You are spending their time doing that.
Dr. Meer: [00:20:58] People are spending time doing that, but there's no doubt in my mind that a big part of that is the increase in minimum wages over the last 20 years or so. It just makes it more expensive to hire. To hire anybody, but someone who needs to be trained, not just in doing whatever the job is, because the job is usually fairly unskilled, but you know, it's your first job. There are things about working that are different than school or the home, and it's costly to the firm to train you up. It's very hard to figure out who's going to be a flake. Who's not going to be a flake because there's very little in the way of job history.
So what can you do? Well, it's, it's tough . Try to find a way to distinguish yourself in terms of skill, but certainly when you're applying for a job, do everything you can do to signal that you would be a hard, reliable worker. Show up five minutes early , act in a very professional manner. Do your best to sort of suggest that you are going to be a hard worker who is going to produce enough value.
this sort of gets to the heart of my biggest problems with the minimum wage. And it's not about , well, I just want firms to have more profits. This is that's completely irrelevant to me.
What I care about is economic opportunity and relieving poverty. So, does the minimum wage do a good job of alleviating poverty and increasing mobility? Well, we want any sort of policy that does that to do two things. First, we want it to be well targeted to the people who need it. We don't just want to give out money to everybody. Bill Gates doesn't need a check from the government. We want it to be targeted to people who actually need help. And the second is that we want to preserve incentives to work and to be hired. So of course, are there incentives to work? With a higher minimum wage. Absolutely. But the incentive to hire is reduced. And more to the point , we're talking about teenage employment here. The children of upper middle-class families don't need antipoverty relief. And so to the extent that what the minimum wage is doing is driving marginal people out of the labor force, like someone with a felony conviction, a single mom who's returning to the labor force after taking care of her kids who maybe need some flexibility in her schedule. Those are the people to whom we want to target anti-poverty relief. My kids when they get a bit older, if they get a job , they don't need antipoverty relief. And when we look at who actually earns the minimum wage or even close to the minimum wage , it is very often the teenage children of middle class and upper middle class families.
More they're more people who earn the minimum wage are children within their household than are a primary earner. Right. And so to me, the minimum wage fails as anti-poverty policy, which again, is what I care about. This is not about profits for businesses. This is about helping people and not just helping people by transferring money to them, but helping them by opening opportunities.
Kriti: [00:24:11] Right.
Dr. Meer: [00:24:12] Which required job experience.
Kriti: [00:24:14] So, how are we supposed to help a lot of these people, like people who have been convicted of a crime, a single mother, how are we supposed to help them get a job? If it's not increasing the minimum wage? Is it lowering the minimum wage? Cause that seems like it's a step backward?
Dr. Meer: [00:24:36] so first of all, I'm so glad you asked and if you want to learn more about policies to help people with felony convictions, my colleague, Jennifer Doleac, has done some really excellent work on, on this topic. And I direct you to her research. Gosh is she's one of the foremost crime economists in the world, and I'm very lucky to have her as a colleague.
So what can we do? We should subsidize people's wages. The earned income tax credit without getting too deep into the weeds is a program that transfers money to top up people's earnings when they live in low income households. So, the single mom who is earning, maybe $15,000 a year working part time, she would get a transfer, but a college student working over the summer, as a camp counselor, and they're still living with their parents who earns $15,000 a year, they would not get this.
Kriti: [00:25:31] So, sort of putting it into context for everyone, certain situation. But like, isn't that going to be hard to do? Like, how are you supposed to track down?
Dr. Meer: [00:25:40] The IRS knows . So, so this is, we already have this program. It's actually the biggest antipoverty program that we have, that's not targeted to the elderly or run through for health insurance. It's the earned income tax credit, the EITC , I want to say it's about $80 billion a year, which, you know, used to sound like a lot of money. But, people are throwing around trillions these days. And the way it works is , at, as you earn more labor income, the IRS gives you what's called a refundable tax credit. So they'll, they'll give you back all the taxes you paid plus extra, and the amount tops out for someone with three children. So it's dependent on the number of children that you have. One of the things I'd like to see us do is expand it more to childless people. But it can be almost $7,000 a year. So it's, it's quite a bit of money. It can be really about a quarter of people's income, possibly even more. And if you couple that with some of the other , child related antipoverty programs that we have that's that are run through the tax code, like the child tax credit. We actually transfer a lot of money through the tax system. The other thing that's really important to me about this is that it's shared sacrifice. So who should be responsible for taking care of people who only earn a certain amount in the labor market. Should it be their employer? Who's already giving them a job or should it be all of us? And to me it seems obvious that it should be all of us and frankly, it should be run in a progressive manner in the sense that high income people pay a lot more in taxes.
So tax me for this stuff and transfer it that way, rather than saying, for instance, the immigrant owners of a family restaurant, you who may not be particularly high income themselves will know they're the ones who are responsible for providing a quote unquote living wage. And if we're talking about living wages, does that mean that these employers should be discriminating on the basis of someone's family situation. Should a married mother of two get paid less than a single mother of three, because she quote unquote, I'm making air quotes here, quote, unquote, you know, needs it less. And so, you know, people shouldn't, people should be paid on the basis of the value of what they produce.
And it's so strange to me to tie anti-poverty policy to your employer. Your employer's giving you a job. And if they've dealt with you, honestly, that's the extent of their responsibility for you. We, as society should be collectively responsible for alleviating poverty and again, doing so in a manner that preserves economic opportunity and targets it to the people who actually it.
Kriti: [00:28:35] This is kind of a stretch, but actually tomorrow I have a history test on like the French revolution. And one of the leading causes to the French revolution is that in France, they were split up into like, three portions of society. It's like the third estate was made up of a lot of the peasants in France and they were the ones paying the most taxes. The, any aristocrats, any person who is a nobility, any of the clergy, they weren't paying any of the taxes. And there are the people who are, who have the most money. Of course the people, the third estate they revolted and the revolution happened in all of that. But it's just reminds me of like, I don't think it's the same, because you're not saying that the rich people should be paying more taxes. You're saying that as a society, everyone should be kind of working towards helping these people, the third estate.
Dr. Meer: [00:29:38] Fair enough. Thankfully, our class divisions are not really a stark as 1788-1789, France. So let me just make one quick point, which is very important because there's a huge misconception.
The American tax system is incredibly progressive in the sense that higher income people pay much more in taxes than even lower income people. So that the top 1%. Pays about as much taxes as , the bottom 90% of the income distribution. Of course, these are not the same people your year to year. Someone who is in the top 1%, one year, 10 years later, they may be retired.
Again, reasonable people can disagree. I agree about the, the right level of taxes. What I'm saying is, It is not necessarily true that the minimum wage is a progressive policy in the sense that it transfers resources from high income people to lower income people.
It may very well end up transferring income from customers who are not necessarily high-income people to the teenage children of upper middle-class and upper-class people that's not really very good anti-poverty policy. It's a very blunt instrument. It doesn't differentiate between , my kids and a single mom, who's working hard to get by.
And again, it's just from a philosophical perspective. So strange to me that we would tie anti-poverty policy to your employer. That's, it's just such a weird thing. If you want to tax rich employers, tax the rich owners of corporations more and transfer that income to lower income people, you know that let's talk about the optimal way to do that. The most efficient taxes, what are the right levels? That's a very reasonable discussion to have.
But if you set out to design a system to keep people in poverty, to push marginal people out of the labor force, it would look a whole heck of a lot like the current anti-poverty system in the United States, coupled with a high minimum wage.
Kriti: [00:31:36] Okay. I think that was really interesting! So you're saying that businesses like the, the management of a business. They're not the people that should help these people, but what should it be the federal government then?
Dr. Meer: [00:31:51] it's a combination of, of the federal government, state governments, local governments.
It's so bizarre to argue that your employer should be responsible for making sure that you have enough to eat.
Kriti: [00:32:01] Right.
Dr. Meer: [00:32:02] Your employer should be responsible for paying you reasonably and accurately on the basis of what you agreed to. And as long as you have free voluntary exchange and you have other choices of other places to work, then why should they be responsible for making sure that you have enough food to feed your family. That's a collective responsibility to me. And it's, it's very strange, I think to argue that it should be put on the employers.
Now we could talk for hours about , why that argument might be or what happens if employers do have more market power, but I want to let you choose your own adventure in terms of where you take this conversation.
Kriti: [00:32:46] I actually want to talk a little bit about the paper published in the 1990s by two economists David Card and Alan Krueger. Just for the audience. So they took New Jersey and they already, um, increased their minimum wage to $5 and 5 cents. And then they compared it to neighboring Pennsylvania whose minimum wage was at $4 and 25 cent. But the outcome was that there was no like difference, like employers In New Jersey weren't they weren't hiring less and it kind of like contradicts your take on minimum wages if I'm right. So can you tell us more about this study and what was so groundbreaking about it and how is this , helping economists today think about the pros and cons of increasing or decreasing a minimum wage.
Dr. Meer: [00:33:46] Sure. So, this famous paper by David Card and Alan Krueger, you described it very, very well.
Let me just make, , a slightly , further point that hopefully will help your listeners get a better sense of this methodology, which is called difference in differences.
Okay. So suppose we just looked at New Jersey before and after the minimum wage increased, and let's say employment went down. Well, we couldn't then conclude that the minimum wage reduces employment, because we always have to say compared to what that's? Where economists always ask compared to what? Maybe the economy went sour and that's why employment went down, had nothing to do with the minimum wage. Maybe people stop eating burgers and so that's why, there was just less hiring to be done and so that's why employment went down in New Jersey. So, what did they, what did Card& Kruger do? They said, okay, can we find a comparison for New Jersey. Someplace where the minimum wage didn't change. And what we're gonna do is we're gonna make this assumption that in the absence of the minimum wage, New Jersey would have evolved the same way Pennsylvania did. So if people stopped eating burgers as much, that would be true in Pennsylvania and New Jersey. If the economy went sour, that would be true in Pennsylvania and New Jersey.
So this is by no means perfect, but this is the basic idea. We're going to use Pennsylvania as a control group for New Jersey that's getting the quote unquote treatment of a higher minimum wage. Okay. This was, as you say, a groundbreaking paper about 28 years ago. And it is still sort of a touchstone for people who say, aha, the minimum wage doesn't matter.
I should say, what did they find? They find that employment did not go down in New Jersey. Okay. So , there are so many things wrong with this paper. We could be here for a long time, discussing them again. 30 years ago, it was state-of-the-art. It was an important groundbreaking paper. It, it , made real headway and it, and it sparked this debate and discussion.
But it was a telephone survey of a couple of hundred fast food restaurants in New Jersey and Pennsylvania. Most of the New Jersey restaurants that they called, we're actually closer to New York than they were to Pennsylvania, but they were all scattered across the state.
The ones in Pennsylvania were on the East side of the state, but it's not like that. One of them was on the New Jersey side of the board and the other one was on the Pennsylvania side of the border. And even if they were suppose the minimum wage went up a hundred yards away. Well, if all of your workers say screw you, I'm going to walk a hundred yards away and try to get a job over there. What do you have to do? You have to raise your own wages.
And some recent work using data from the city of Seattle, by Jacob, Victor, and , Katrina Jardim and their team, the Seattle minimum wage project has shown that that's very much what happened is that basically. You can't use the very nearby areas as a comparison group because the, um, they have to raise their wages also because of competition.
So let's get, let's get back to Card & Kruger. So one problem was, is a very short run study about nine months apart. About a minimum wage increase that had been known more than a year in advance. So everyone knew it was coming right. And then they only measured the sort of nine months apart. Again, it was a telephone survey and work by David Newmark and William washer that followed up on it using much more sophisticated data showed essentially it look, it's a whole heck of a lot of noise that's going on here, but, and I'm glad you asked me about it because one, it's a very famous paper that everyone still points to. Despite the fact that , it's really not the best thing we should be pointing to.
This is a really important point to me. Job counts in the short run are not super interesting to me. What do I mean by that? I mean, like, literally count up the number of people who have a job and look at it, six months or a year later. And maybe I would actually say the preponderance of the evidence in the literature shows that these sorts of minimum wage increases that we have had over the last 10 or 15 years, don't really affect employment in the short run.
Okay. Now you'll notice I put a lot of modifiers on that. Okay. So we're talking about relatively small increases, 50 cents or a dollar at a time. We're not talking about seven 25 to going to 15 more than doubling. So we're talking about small increases that are usually phased in over two or three years. So everyone knows they're coming. And we're going to look at employment today and employment a year from now employment two years from now.
So what's the last thing an employer is going to do is fire somebody. What they're much more likely to do is reduce hours of work or find other ways to make up the difference. Maybe they'll raise prices a bit if they can. But of course, if prices go up, people buy less of it, which means there's less demand for the product, which means you need fewer people to make it. Maybe they'll invest more in machinery, like kiosks at McDonald's for ordering or app based, ordering. It certainly pushes in the direction of automation in the longer run what's been shown to happen is that , restaurants that are very labor intensive, that is to say they use a lot of workers go out of business and are replaced with restaurants that are less labor-intensive.
So a lot more of busting your own tray, counter serve instead of table serve things like that. And again, I am not too good to stand at a counter and order my food. It does make dates a lot more awkward. I would think if you have to stand there, but that used to be somebody's job. And so all of those things mean that employment counts are less likely to be affected even though workers might be working harder, which can make them a bit worse off. Some of their benefits can be reduced. And I'm not necessarily talking about things like health insurance though, with my colleagues, my friends, Jeff Clemens and Lisa Conn, we've shown that there's a reduction in the provision of health insurance when the minimum wage goes up.
But just things like discounted or free meal. If you're working at a restaurant, they used to be, they used to be my food when I was a college kid and I was working at this restaurant bar , I'd get, I get a free meal with every shift. Now. I don't think they were legally required to provide me with that. And so, you know, that's something that was worth some money and you'd, it would never show up in a government data set. It might show up in a survey, but surveys are tricky. And so there's all these other aspects of a job other than just do you have one? Yes or no. And how many dollars an hour does it pay?
And those things are going to adjust in ways that can make workers worse off. It can make consumers worse off, it can make the employers worse off and are really hard to pick out in the kinds of data sets that are used by most researchers.
Kriti: [00:40:44] So,the paper had a lot of flaws to it kind of
Dr. Meer: [00:40:49] but let's be fair. Many of these, the critiques that have come out in the last 25 years.
Kriti: [00:40:54] Learn from them.
Dr. Meer: [00:40:55] Absolutely. And that's how that's, that's science. That's how we work.
Kriti: [00:40:59] Yeah. So, I hope I'm understanding you correctly, but you were talking about how, if you compare like this year, if increasing the minimum wage to next year, say if I increase it to like, uh, 50 cents more. This like comparing it year by year is not the best thing to do. And you wrote in like a paper, you wrote an analogy about a yard stick and a swimming pool. I don't know if you could maybe explain it a little more and if you were kind of relating back to this Metaphor.
Dr. Meer: [00:41:36] Thanks for teeing me up with that because I've always liked this idea. Suppose that you were trying to measure the water level in a swimming pool and you're doing with a yard stick, so it's not the world's most accurate thing. And you measure it, you write down your measurement and then you throw a giant brick in the the swimming pool and you stick your yard, stick in and you measure it again. It, well, the brick is not that huge compared to the swimming pool and the water's kind of sloshing around, the wind's blowing and the water splashing, and you get your measurement. Maybe it's higher, maybe it's lower and you write it down and you compare it to your previous measurement.
And then you conclude, well, maybe it went down, maybe it went up and you throw in another brick and you take another measurement. And you compare the measurement again, but you don't compare it to the original measurement. You compare it to the second measurement you may made, and you keep doing that and you keep throwing bricks in the pool.
And sometimes the difference between each brick is positive. The water level has gone up. Sometimes it's negative because it was splashing around. And, you got some water in your eye. It's kind of hard to see the yard stick. And after 25 bricks in there say, okay, I really can't say anything about this. I guess bricks don't displace water. So let's roll a $15 an hour boulder into the pool because we can conclude the bricks don't displace water. And honestly that is the state of pro $15 an hour argument right now is that because these older papers with their imperfect methodology and that's not, that's just the way it is their imperfect methodology. They're focused solely on the number of jobs because the labor market's more sophisticated than just a yard stick in a swimming pool. There's hours of work. There's all of these benefits. There's, who's getting employed. If all of the baristas , they were teenagers and now they get replaced with English majors because English majors need jobs too. that's substitution of one kind of labor for, for another.
So all of those things fall by the wayside and this very crude comparison is used to justify something that is so far outside of our level of experience. But the uncertainty only runs in one direction because when something gets more expensive, we consume less of it. And that includes the amount of labor that an employer is going to purchase.
So the only question is how bad is it going to be? Who is it going to affect him by how much? And what are the sort of secondary fallout of it? Like are a lot more people going to work off the books, like for cash. Which , some people like, especially if they're teenagers, but that means you don't have, if your employer harasses, you. Yeah, you have no recourse because you're not really employed. if you get hurt on the job, you're not entitled to workers' compensation. If your employer fires you, you're not entitled to unemployment insurance. You're not contributing to social security. So you're not building up building that, that amount up and all of those things, things are not great outcomes. No, but I think that they're, they, they are coming down the line. If the minimum wage gets to that high.
Kriti: [00:44:40] Okay. So you're talking about this #fightfor15. And I know that the Biden administration is proposing to increase the minimum wage. So why is it 15? What's the significance of this number?
Dr. Meer: [00:44:55] So in 2013, president Obama proposed at $9 an hour and congressional Democrats followed up with 10 10. And because it's very important to give politicians credit for being honest, president Obama said that they picked 10, 10, because it was catchy and easy to remember.
Which tells you a lot about the amount of science that went into this, but I mean, that genuinely let's praise politicians when they're honest, maybe they'll do it more often. So very briefly there was like a three-month period in 2014 when we're 12 was the number, but 12 doesn't roll off the tongue nearly as well as fight for 15, that fits really well in a hashtag. And that is the science that has got this number. That is that's it, that's it. Anyone who tells you otherwise is full of it. There's absolutely no science, that went into it. It is fight for 15 because that makes for a good hashtag.
One really important thing to note. There are places in America , New York city and San Francisco, and so on where $15 an hour, probably isn't that far from the prevailing market wage, because it's expensive to live there, which means there aren't a lot of low wage workers, which means, the supply is low. So the price of, of labor goes up.
But 29 States in 29 States, if you take all the hourly workers, half of them, earn less than $15 an hour. And even in some high quote, unquote high cost States like California, New York, people who live in more rural areas of those States. And there were plenty of them.
Kriti: [00:46:24] Right?
Dr. Meer: [00:46:25] The prevailing wage in those places, more than half of the hourly workers are paid less than $15 an hour.
Kriti: [00:46:31] No. Yeah. Like in Chicago, I think the minimum wage is $12, but then if I go to like, I dunno, champagne, Illinois. It's like not the same, of course.
Dr. Meer: [00:46:42] Very different. And so, I do not favor any minimum wage at all. I would like us to, to transfer resources to people through the tax and transfer system. And allow because no, one's going to work for a dollar an hour. So the market wage, if you got rid of the minimum wage tomorrow, the market wage in San Francisco would not be $3 an hour. It would probably be about what it is right now. The market wage in college station, Texas, which is where I am home with Texas A and M , would not, I don't think it would go down very much.
Because that's just where supply and demand sort of intersect for low wage labor. But the , the places, these lower cost of living places. I think would be their labor markets would be destroyed by the minimum wage.
Now, does that mean that people stop working? No. They just stopped working on the books. They start working for cash, which means they're not paying any taxes. They're not contributing to social security. They're not having social security contributor on their behalf. There. They don't have any of those protections. We discussed like unemployment insurance and safety regulations and harassment, you know, protection from harassment, legal, uh, legal outcomes. And I think that. It's very difficult to argue that that's a better world.
Kriti: [00:47:56] It is very difficult. So I guess your final thoughts are we have to somehow remove the minimum wage and how would we be able to do this? Would it have to...
Dr. Meer: [00:48:10] I don't think there's political will to do that, but what I think is really important is that we should not get fooled into thinking that good intentions makes for good policy or good outcomes. I don't think that we should be satisfied with #slacktivism. It's a lot easier to say, just raise the minimum wage than it is to think how do we come up with the tax revenue to transfer this money in an intelligent way. In a way that shows up on the government's books, rather than just ordering someone else to pay more. And I think that we have to be cognizant that the, so the real solutions may be difficult. But the thing that is very hard for me is that, there is so much support political support for the minimum wage.
And I think that it very often hurts many, not all, but many of the people that it's intended to help. And that that's what upsets me because at the end of the day, I don't own a business that hires a lot of it would really not affect my life, but I would maybe pay an extra dollar for a hamburger or something that really doesn't bother me very much.
But I do think that we would see a catastrophic increase in the unemployment rate of for example, minority men without a high school degree where the employment rate is already shocking, just staggering, a bismal, a national embarrassment. And it, it, it boggles my mind how someone can look at that problem and say , what would make this better legal for them to work for less than $15 an hour?
They don't have jobs now. How can we make it better? Let's make it cheaper to employ them not more expensive through wage subsidies and other programs that actually increase their opportunities and to put more money in their pocket rather than decrease their opportunities.
Kriti: [00:50:12] Well, this is really interesting. I'd love to talk more about this and I've learned so much just this past hour or so, but can we transition into like financial literacy a little bit more? So what are your thoughts on financial literacy, for teens?
Dr. Meer: [00:50:30] I think it's incredibly important. Uh, so important and there are so many bad ideas out there.
And especially when you get to college. And I tell this to my students in my, in my principles, micro class , credit card companies are out there with flashy ads saying , basically here's free money and it's so easy to dig yourself into a hole.
Kriti: [00:50:53] Where are they out there?
Dr. Meer: [00:50:53] They're out there for you guys too. I mean, it's really just, just a small amount of effort. You know, half an hour of talking to your parents or going on YouTube for basic sound personal finance advice can make a huge, huge difference in not getting yourself into a hole.
Kriti: [00:51:14] I think that's that sums it up and that's what I hope my podcast is helping people with.
Um, but yeah, I guess finally, what would your advice be to your 16 year old self? And it can be in terms of anything?
Dr. Meer: [00:51:28] I love this question. I think that the, the quick answer would be. Talk less and listen more.
Kriti: [00:51:36] That's the line from, that's a line from one of my favorite musicals, Hamilton.
Dr. Meer: [00:51:42] Okay. Is it, is it so, okay, fair enough. I did not steal it from Hamilton. I'm not really a musicals kind of guy, but it is, it is absolutely crucial. I would say this and it's something that I am, I have done a bad job at, at times in my life. But I'm trying to communicate for example, to my kids. Which is that, I'm having a hard time remembering whether I've ever regretted being nice to somebody, but I can absolutely tell you that I have regretted being unkind to people. And so defaulting to being kind, even if you don't necessarily feel like it, even if it's not the easiest thing to do is. I think it's going to help you sleep better at night when you get to my age.
Kriti: [00:52:23] No, I think that's great advice. And actually it was talk less smile more, but it's kind of similar lines.
Dr. Meer: [00:52:30] Nah, I did. I did smiling. I did. As a teenager is just fine. I think just, listen, listen more, listen more. Be curious about other people.
Kriti: [00:52:38] Yeah, that's great. That's great advice. so yeah. Thank you so much, Dr. Mir for coming on my WhyFI Matters today. It was so interesting to talk to you. I feel like I'm geeking out over like these papers now and things like that. So I think this was really fun and your opinions and your views on minimum wages is very interesting. And it's great for us teenagers to hear two sides to the story. So thank you so much for coming.
Dr. Meer: [00:53:07] Thank you for having me.
Kriti: [00:53:09] So that's the end of the interview and I learned so much during this interview and it's just really, it's always really cool to learn from professors of economics on the podcast.
I find it really fascinating how there are pros, but also just so many cons that kind of come along with increasing the minimum wage, as we learned today. So, I think it's really important to really understand the full story before saying, hey increasing the minimum wage is great!
So for more information about this topic, Dr. Meer's contact information is in the episode description. Also let us know if you come across any cool articles about the increase in the federal minimum wage or even if you want to learn more about Biden's economic policy. and you can let us know by going to our contact at our website, which is at www.whyfimatters.com and you can shoot us an email from there.
Also, I forgot to say this last time, but thank you so much for listening to WhyFI Matters because we now have over 50 episodes, which is so crazy and super exciting.
And I can't wait to expand my financial knowledge and grow my entrepreneurial spirit and continue this journey with you. So thank you so much for listening and I can't wait to talk to you next time.
Links for this episode:
Dr. Meer: https://econ.tamu.edu/jonathan-meer/