Biden plans to increase the minimum wage to $15 hourly - the pros and the "not so obvious" cons.

Updated: May 9

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 th