Market forces, not political decrees, create sustainable wage increases

Three stories caught my eye over the last weekend.

Wages are up

The first was a story in Twin Cities Business magazine titled ‘For the First Time in a Decade, Average Wages in Minnesota Appear to be Increasing‘.

Data from the Minnesota Department of Employment and Economic Development show that after years of stagnant pay (median wages actually declined by 1 percent between 2003 and 2014), Minnesotans’ median wages started to climb the following years, growing 4 percent between 2014 and 2016

“They were pretty flat, and then all of a sudden, in 2015, ’16 and ’17, they’ve started taking off a little bit,” said David Senf, a DEED labor market analyst.

Average weekly wages in Minnesota showed no significant growth, hovering between annual averages of $990 and $1,010 between 2004 and 2013. After a gradual increase in the last few years, they hit $1,081 in the second quarter of 2017, according to the most recently available data.

Another encouraging sign: Whereas high-wage workers had been seeing greater gains in pay, in the last few years, workers making below median wages are finally starting to see gains.
“(In) the 90th percentile wages, there’s been steady gains over the last 16 years, whereas the other groups were pretty stagnant until just recently,” Senf said.

Gains at the bottom could be partly responsible for lower poverty rates in recent years: between 2014 and 2016, poverty rates dropped from 11.5 percent in 2014 to 10.8 percent in 2016.

To what do we owe fatter paychecks? Low unemployment, Senf said.

Employers feel the pinch

This would seem to be a good news story for Minnesota. But then I read the second story. This appeared in the Star Tribune titled ‘Minnesota is feeling the pinch from a record number of job openings‘.

How can Minnesota be feeling a pinch when wages are, after years of stagnation, finally increasing? In fact, it is Minnesota’s employers who are feeling this pinch.

Minnesota is on the verge of not having enough workers.

Two Stooges Sports Bar and Grill in Fridley employs about 40 people, but co-owner Greg Asproth thinks it needs another five to eight. He is advertising for them, but getting few responses.

“Sometimes you just kick in and do more whether you’re an owner, a manager or an employee,” he says. “And sometimes you’re short-staffed and there’s nothing you can do about it.”

The restaurant, which also has one of the largest and most popular pool halls in the Twin Cities, has been open for 30 years, long enough for Asproth to experience several turns of the economic cycle. But not like this one.

Employers find themselves in a pinch unlike anything they’ve encountered for decades. Many are eager to hire, with the economic expansion now well into its ninth year. At the same time, participation in the labor force is steadily shrinking as baby boomers move into retirement.

Many are opting to leave jobs open rather than offer more money, as persistently low inflation makes it difficult to charge customers more.

This final point is a little confused. When considering hires, employers do not think about the general level of prices in the economy, they think about the profit they will gain from that hire. If an employers expects a hire to add $Xph to revenue, it will pay that employer to hire that worker at any wage up $Xph. At any wage above that, the employer would be adding more to their costs (the wages) than their income (the revenues) so they would lose money on the hire. No employer who wanted to stay in business would hire a worker on this basis.

As the supply of workers falls relative to the demand for them, their price – wages – increases. The rising wages in the first story are a result of the tightening labor market in the second story. This is basic economics. It is what we are seeing in Minnesota and elsewhere in the US.

But this does not mean that all employers will pay these higher wages. A bar’s managers might be able to hire staff if they offered the same wages as, say, Target. But if their expectation of what these new hires will add to revenue has not increased, neither will the wages they offer. And if Target think Worker A will add $15ph to their revenues while the bar owner thinks they will add only $12, you would expect to find higher wages in Target and workers going there. Of course, this is little comfort to the bar owner.

Who needs minimum wage laws? 

The final story was also in the Star Tribune, titled ‘Minimum-wage battle is far from settled in Twin Cities

Over the last few years, as reported in the first story, wages have been pretty stagnant. There have been frequent complaints that they have not kept up with the rising cost of living and that people have become worse off as a result. One popular remedy for this was an increase in minimum wages.

This is bad public policy. But, more than that, it is also, now, irrelevant public policy. Markets have within them mechanisms to raise wages. As we see from out first story, this is now starting to happen. And, despite ludicrous claims for a victory for ‘activism’, it is happening because of market forces, not because some politician has waved a magic wand.

John Phelan is an economist at the Center of the American Experiment.