Obama's Minimum Wage Hike "Won't Meaningfully Help Economy"

Tyler Durden's picture

The US minimum wage has been a common news topic lately - increasing its sound and fury since President Obama's State of the Union proclamation of a rise in federal employee minimum wages to $10.10 (from $7.25). While obviously a contentious political issue, one question keeps coming up - will this help? As BofAML notes in a recent report, a simple back-of-the-envelope calculation suggests that the rise in wages from a minimum wage increase would amount to fractions of a percentage point on macroenomic data. There simply are not enough people working at (or below, since some jobs are exempted) the minimum wage to have a noticeable impact on the total wage bill and in the end, there are just too few people, earning far too little, at the minimum wage to meaningful affect aggregate macroeconomic statistics. So why is he doing it?

Via BofAML:

The Chart below shows the limited coverage of minimum wages upon the labor force.

According to BLS data, in 2012 there were just over 129mn wage and salary earners in the US, and a little less than 3.6mn were paid at or below the federal minimum on an hourly basis. In other words, only about 2.8% of US wage earners were paid at or below the minimum wage. This share has risen in recent years, likely due to increases in the statutory minimum from 2007 and 2009, as well as the recession pushing some workers into low-paying jobs. Even restricted to just hourly workers, of which there were about 75mn in 2012, according to the BLS, less than 5% are paid at or below the minimum.

To figure out the effect of a minimum wage increase on wages in the aggregate, we have to make a few approximations for unavailable data. First, the share of workers at or below the minimum appears to have been trending slightly lower — as one might expect as the economy recovers — but let’s be conservative and assume it still stands at 2.8% today. Next, we need to figure out the share of wages, not persons, being paid at the minimum. Since those at the minimum wage are earning less than those above, less than 2.8% of wages are at the minimum — in fact, well less.

Chart 1 shows the minimum wage as a share of the prevailing hourly wage for private production and nonsupervisory workers. We plot this measure as it has a long history, which shows that the current share of around a third is not particularly high. The average wage across all workers in 2013 was about US$24/hour — nearly US$4/hour higher than production and non-supervisory workers.

But, as Chart 2 shows, average wages vary significantly across sectors — as do the relative sizes of each sector, shown as the share of total private sector hours along the horizontal axis.

For the sake of argument, let’s assume that the minimum wage does increase from the current US$7.25/hour to the proposed US$10.10/hour. That is a US$2.85/hour increase, or 39%! Surely that has to be inflationary?

Not necessarily. As a rough approximation, US$2.85 on a US$24 average hourly wage is nearly a 12% gain. But with just 2.8% of wages subject to the minimum, the overall impact is a 0.33% increase in average hourly earnings. This is very unlikely to be noticeable at all in the wage, let alone the inflation, data. If we use the 5.5% from the prior paragraph, the impact would be doubled, but still less than a percentage point increase in average hourly wages. Of course, these are very simple computations, but this exercise gives useful ballpark figures.

The minimum wage increases that have been enacted at the state level this year are smaller in size — the largest, a US$1.00/hour increase, brings the minimum wage for New Jersey to US$8.25/hour. This is only a little more than a 4% increase in the average hourly wage, so even if 8% of the workforce was affected, the impact on wages would still be just 0.33%.

In the end, there are just too few people, earning far too little, at the minimum wage to meaningful affect aggregate macroeconomic statistics

So one has to ask - if the rise in the minimum wage has begligble effects on growth or inflation and has the potential to price some out of the employment market - why is President Obama so insistent on its occurrence?

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Music101's picture

Even if it would work in theory -- it wouldn't -- raising it too much and too quickly would simply create other imbalances and cause significant layoffs and corporate margin pressures. 

It's a WORLD OF DEBT!!! See Video Below "WORLD OF DEBT"!!


zaphod's picture

It won't help the economy, but it will help the Democratic Party. There is no other reason to do it.

Occams_Chainsaw's picture

Both parties are willing to spend any amount of YOUR money to buy some new vote slaves.


Long live the Free Shit Army!!!!

nmewn's picture

Lets just go full retard and make it fiddy an hour.

Entry level, menial jobs deserve a living wage and I've never had a $85 cheesburger in my life, so I want to see what it tastes like!


Skateboarder's picture

Like a plastic portion of cowhorsefox adorned with extinction-proof plastic sponges infused with flour particulates.

nmewn's picture

Thats right, this will give them the opportunity to perfect the chitilated horse nut with the pineapple glaze salad entree, to be carried back to the office in the re-procossed-recycled-heavily sterilized hand towel paper plates collected from the mens bathroom waste basket.

Its a win-win! ;-)

James_Cole's picture

In the end, there are just too few people, earning far too little, at the minimum wage to meaningful affect aggregate macroeconomic statistics

Lol, brilliant insight bofaml

Wonder if dropping the compensation of the Fin. sector would have a 'meaningful' effect on the macro economy? 

* spoiler * bofaml discovers the entire world economy would immediately collapse!

Thank the gawds we have bofa to explain such things to us. 

johnQpublic's picture

even at ten an hour, an ethnically challenged female makes far more per year just collecting government moneys for staying home and increasing the population of poor downtrodden uneducated fatherless n'er do wells

czardas's picture

The difference is that today folks think it's "OK".  When I got to the US in 1980 few would have publicly stated that living off welfare was "OK" and acceptable.  Now taxpayers are paying for ads encouraging folks to become dependent and politicians praise the notion of reliance on the state.  How much further can we decline?

Occams_Chainsaw's picture

C'mon bro....let's go $100.....we can all be ritch bitches!

nmewn's picture

I'll see that and raise it a hundred...the sky is the limit when Obama is talkin the talk with our money!

Right? ;-)

A Nanny Moose's picture

I've never had a $85 cheesburger

You've never had friends with airplanes?

Canoe Driver's picture

Cheeseburgers are going for $85 and more, all over Manhattan.

dynomutt's picture

Oh, that'd be true a couple of decades ago, but nowadays, those minimum-wage earners will simply be out of luck, unfortunately. This is just the kickstart needed for some SV angel-funded startup to automate the shit out of all of those burger-flipper jobs. Perverse incentive to the rescue!

AlaricBalth's picture

"...why is President Obama so insistent on its occurrence?"

Votes in 2014

It plays well in Peoria.

The Dunce's picture

Bullshit.  Let's face facts.  We have a bullshit service economy.  That won't change.  So we need a wage hike.  Word to your mother.

Hal n back's picture

it woudl be interesting to see the across the board min wage of 10.10 and how it would  affect a company like AMZN and its 110,000 employees. I think that sort of raise woudl wipe out AMAZon profits. Amazon and vendors cannot pass thru the cost in creases as it woudl not be compentitve with many brick an dmortar stores. Then all AMZN woudl need woulf be for all the states to levy sales tax on on line.


Say good bye to the 600 PE AMZN and possibly AMZN



James_Cole's picture


Wait..are you saying amzn has profits? Shit, all this time I thought it was bullshit accounting..


dynomutt's picture

See kivasystems.com
That's handled.

jerry_theking_lawler's picture

This is all assuming the numbers you are dealing with are REAL....in this goal seek day and age (see ADP) the numbers are probably fake....and inflated.

Grande Tetons's picture

So one has to ask - if the rise in the minimum wage has negligble effects on growth or inflation and has the potential to price some out of the employment market - why is President Obama so insistent on its occurrence?

Answer. So that the sheep will think the system is looking out for them. 

NoDebt's picture

Yep.  When every problem has a government solution, you're already long past screwed.  We might not be in hell yet, but I'm pretty sure I can see it from here.

Grande Tetons's picture

I am sitting here with the wife and kid and we are roasting marshmallows without a fire. Yep...having hell so close is kinda handy. 

mofreedom's picture

Where are you taking me in this odd basket?

Hell for you and yours, hell for me and mine.

I am the devil B H O!

JLee2027's picture

Personally I say raise the Minimum Wage to $50 an hour and set off the hyperinflation bomb overnight.

Skateboarder's picture

Corollary: So that accelerated unemployment and withdrawal from labor can create more welfare dependants.

A Nanny Moose's picture

No. Because gummint has been increasingly in charge of edewkayshun, since 1900. Think long and hard about it.

Ident 7777 economy's picture



So that the sheep will think the system is looking out for them.  "


 . . . Warning: Objects in your rearview mirror may appear as wolves . . . 


Miffed Microbiologist's picture

So does this mean our ration of chocolate will go up a gram per week? Well, if so I'm all in.


LetThemEatRand's picture

The whole minimum wage debate is nothing but theater designed to make the Blue Team seem "worker friendly" when they are anything but, and to give the Red Team voters something to rail against while both parties rape us all blind.  Too bad the sheeple are too fucking stupid to see it. 

A Nanny Moose's picture

Too bad the sheeple are too fucking stupid to see it

Who was responsible for edewkayting the sheeple?

kralizec's picture


...who ceded authority to progressives...

...and once schools were turned into K-12 daycare centers, too many parents gave up giving a damn...

...so in the end the answer to your question ultimately ends with us.

(Not that all are complicit, The Great Reckoning will sort out all the accumulated dirty laundry!)

GCT's picture

Spot on LTER!  Both parties do their best to take whatever they can from us when it is not an election cycle.  During the election cycle they promise more shit then they can deliever on.  The dumbass sheeple then vote for the one who promises the most feed.  Once the cycle is over they go on about the business of taking more of our rights. By the way for those that want to make a case about it for one side or the other, both sides of the isle do their best to make your life miserable.

 People are so gullable it is simply scary.

dexter_morgan's picture

Why is he doing it........DUH - because it sounds good and will warm the cockles of the left leaning folks. And, BONUS, nobody will ever bother to calculate the negative effects it will have, or if they do it will be buried, explained away with shit  like the the Kock Bros. or some other bogey man commissioned it, so therefore it must be ignored even if factual.

No downside for the king. Reality doesn't seem to matter these days.

Cognitive Dissonance's picture

"In the end, there are just too few people, earning far too little, at the minimum wage to meaningful affect aggregate macroeconomic statistics."

A classic example of missing the trees, but seeing the forest. Yes...it might not make much of a difference on macroeconomic statistics BUT it will make a big difference to those 2.8% of US wage earners who were paid at or below the minimum wage.

Clearly the author of the above article has never worked a minimum wage job other than possibly as a very young adult in high school. I find the statistics above are out of context and misleading. Not saying that raising the minimum wage is a good thing. But any time you look just at statistics you aren't looking at people.

NoDebt's picture

With all due respect, CD, you're dead wrong on this one.

I could go on for thousands of words on this subject, but I won't.  The minimum wage and "means tested" government entitlement programs are inexorably linked.  They're almost indistinguishable from eachother in their effect.  And the net effect is WORSE than a zero-sum game.

Down-vote me, argue against me.  I don't care, I got broad shoulders.  Think it through as you see fit.  It's basically a question of "using what criteria do we decide when to flat-out carry people?"  

Extra credit thinking:  is income level the best yardstick to use to determine who gets carried on the public dole?

Done.  Out.  Your ball.

Cognitive Dissonance's picture

No need to argue with you because I agree with you. Minimum wage hikes under these circumstances are not productive or helpful. Class warfare is what is being stoked here, the true purpose of Obama's initiative. And we here as well as other supposedly enlighted websites are falling for it hook, line and sinker. I would like to see those statistics adjusted for inflation, official or otherwise. And soon enough the middle class will find itself working for minimum wage. Then there will be no more class warfare because the war will be over.

NoDebt's picture

"And we here as well as other supposedly enlighted websites are falling for it hook, line and sinker."

Let's agree, right here, right now, to stop feeding the beast on this issue.  Not everyone is falling for it.  I'm not.  Apparently, you're not either.  What others think.... is their business.

Too many straw men.  Too many counter-factual arguments.  Too many opinions offered in ways too subtle to see through the sarcasm or reverse psychology.

Just SAY IT.  Lay it out there.  MOST of us already know the truth.  So let's just SPEAK IT, using plain language (or at least obvious saracsm, as is de rigueur on ZH).  

LetThemEatRand's picture

The minimum wage is designed to kill small business and (together with EBT etc) mask the effect of enriching a few oligarch CEOs by passing legislation enabling them to profit from sending jobs overseas or giving them to desperate immigrants.  

A Nanny Moose's picture

Let me universalize for you....

Every action be government, is committed with the sole purpose of reducing/eliminating comptetion.

Thoughts? Comments? Questions?

MeBizarro's picture

What?  You honestly don't think that this the endpoint of any relaltively mature market with a handful of companies/single company won't seek to eliminate meaningful competition?


FreedomGuy's picture

I will give you a different argument against minimum wage. Government does not "own" people. People are free to work for whatever wages they please whether it is $5/hr or $500. You have the right to be unemployed as a corollary. Government also does not own private businesses nor is it responsible for business performance. What you or anyone else wants to work for including benefits, conditions, etc. is up to you. Government has no say in this private contract.

To fight minimum wage on most any other basis is tedious and neverending at best. Conservative free market types will tend to get beaten as collectivist-statists are always capable of outbidding you for votes and good press coverage.

James_Cole's picture

People are free to work for whatever wages they please whether it is $5/hr or $500. You have the right to be unemployed as a corollary.

Right, you're free to work for whatever rate you want. You'll end up homeless in the process, but whatever, your choice man!! 

But for sake of argument, let's take a quick 'back of the envelope' scorecard on who owns what. Banks own... all the commodities, almost all of the businesses, definitely all of the governments...hell, they even own the currencies!

And you own? Actually nothing, you don't even own the shit you think you own (stop paying taxes and find out). So yeah, work for whatever wage you want. Oh, can't make up your mind between $5 & $500? - don't worry, the benevolent 'market' will help you decide. 

Freedom never been so free bitches!!

DRT RD's picture

Think wage compression. Next think tax incease.  

I have said it before, raising the minimum wage is nothing but a tax increase on business.  Everybody else wants a raise too.  When an individual earns more, payroll taxes go up. It is just this simple.

A lot of people seem educated way beyond their intelligence.  

Fuck the FED!!!



mofreedom's picture

You make me a dollar, I'll give you $0.65, and if you're not found out to have squeezed the Charmin, I'll give you profit sharing in the form of a Christmas bonus.

I did build THAT!!!

SheepDog-One's picture

Unfortunately it will certainly have just the opposite outcome and just result in the loss of a lot of these peoples jobs.

Shizzmoney's picture

The Fight for $15 is a great thing, because maybe the people can finally come around to admitting TO THEMSELVES: that the Fed and their TBTF Banker Butt Buddies have completely destroyed the currency (just so they can prop asset prices up).

People can't comfortably live on less than $15/hour anymore.  Think about that shit for a minute.

RKDS's picture

 Nobody wants to actually understand why this stuff happens.  If the Federal Reserve banks stopped printing money and propping up the stock market to please themselves, inflation would be kneecapped.  That kneecapping would go a long way twoards quieting the calls for higher wages far beyond the realm of minimum wage.  But, no, we've got to keep coddling the rich and the banks while acting surprised and indignant that people suffering from the results of such monumentally stupid policy are upset...