Feasible peak to minimum wage?

A number of US minimum wage advocates seek regular increases in the minimum wage. As a matter of political and economic feasibility, how high can the hourly minimum wage be set? I assume this would be expressed as a percentage of median hourly wages.

It's unrealistic to expect the minimum wage to always be increased relative to inflation. The mathematical ceiling is the median wage. If a true "minimum" wage is also the average wage, then it is also the de facto maximum wage.

When will an underground labor market develop? At what level will popular support diminish or disappear, if ever?

• You need to narrow this question substantially. You're asking way too much and it makes it unclear what you're looking for. – Avi Apr 2 '14 at 23:25
• S/He's basically asking what the ideal minimum wage is. Also seems like s/he wants some background on it too. – Shahar Apr 3 '14 at 1:39
• There is no maximum minimum wage. If you increase the minimum wage higher than the worth of a job, then that job will just be eliminated (moved overseas, replaced with a machine, etc.) If you raise the minimum wage high enough, inflation will lower the relative buying power (I.e. if a job is still worth doing, but now it costs more to perform that job, the price will increase to factor in the new production costs.) So as a percentage of the median hourly wage, it would be 100%. As an aside, less than 5% of the population makes the federal minimum wage. – user1873 Apr 3 '14 at 2:31
• I'm trying to ask in a diplomatic manner how high is high enough. Is there a point where a majority of the center-left (in the US) will think that the minimum wage need not be increased? Because it appears to be arbitrary. But I wanted to say it in a less belligerent manner. – NL7 Apr 3 '14 at 14:30
• It's an ideological value judgment, so the 'enough' is ideologically subjective. If most people support an increase to \$X, but a supermajority oppose an increase to \$Y, where do those relative boundaries fall? Because the current debate focuses on small increments and some people perpetually argue for 'more' without regard to an end target. – NL7 Apr 3 '14 at 18:12

Disclosure: I'm a social democrat.

If you're asking for the minimum wage at which point people would stop supporting it almost completely, I can't give an answer because that's opinion. What I can give you is how society would react to an increase of the minimum wage.

At this point, raising the federal minimum wage from \$7.25 to \$10.10 would allow the overwhelming majority of people with wages below \$10.10 to earn more money. Jobs directly lost from the minimum wage increase would be an insignificant percentage and, overall, the economy would grow. I say this because the wage hasn't been raised in a very long time.

However, if the wage were to be increased (at a faster pace than inflation, that is), the number of jobs created (due to the multiplier effect) would reduce and the number of jobs lost directly would increase. There would be a point were an increase in the minimum wage would actually kill jobs and prevent economic growth.

So, from an economic point of view, we should increase the minimum wage as long as there's economic growth.

On the other hand, we have to think about the people who earn the minimum wage. Do they live well? Can they afford healthcare? Do they have an equal opportunity to succeed in life? To solve these problems, people must have what is called a living wage. In the US, a living wage (for an individual) can vary from state to state, being as low as \$8/hour in some states or as high as \$12/hour in others.

So, from a non-economic point of view, we should increase the minimum wage to a living wage.

Combining both, you can give priority to one over the other:

"Raise the minimum wage as long as it doesn't prevent economic growth" (essentially ignoring the living wage)

or

"Raise the minimum wage as long as it doesn't prevent economic growth or is below the living wage." (putting the living wage as the base for the minimum wage, and then increasing it for economic gain if possible)

There's an argument to be made that raising the minimum wage to the living wage would never prevent economic growth, since people will automatically spend that money and pour it back into the economy. However, I don't know to what point that applies, since the cost of living can be very high in some places and not directly benefit business.

First, medium wage is not the ceiling - when raising lower/minimum wages, the average wage will tend to rise as well, thus the current average/median/etc wage is not a ceiling.

However, the main obstacle for rising minimum wages is unemployment - high minimum wages result in low wage workers getting paid more; but low minimum wages result in more jobs. Depending on the local situation, one problem may be more important than the other.

• The median wage is the mathematically possible maximum level for a minimum wage. That does not mean it will ever be achieved, just that it cannot be exceeded. If the minimum wage is set at X wage, and it's a true minimum wage without exceptions (e.g. for the young, the unskilled, the poor), then nobody is making below X, hence the new median must be at least X - and will only be X if over half of workers make X. So the definitional maximum is median wages, without need to consider inflationary pressures. The practical ceiling is lower. The political ceiling may be lower still. – NL7 Apr 6 '14 at 18:10
• The 'political' part is not a ceiling - simply there's some optimum minimum wage level that maximizes the benefit to low earners. Above that optimum, the layoffs/reduction of new jobs would hurt their income (for the whole class) more than the increased salaries benefit those of them who remain at their jobs. A particular example is EU expansion - some fringe politicians in the poorer countries advertise a concept of setting their minimum wage the same as, say, France - which in reality would leave large parts of the society jobless, as their employers can only close shop in that case. – Peteris Apr 6 '14 at 19:13

If a true "minimum" wage is also the average wage, then it is also the de facto maximum wage.

If the average wage is the minimum wage, the highest wage is also the minimum wage - by definition. No wage can be lower than the minimum and thus if any one person had a higher wage then the minimum would be below the average. That means everyone would be earning a minimum wage, or everyone is equally poor.

It wouldn't surprise me if that indeed is utopia for some people.

There seems to be some confusion about the claim that if the minimum wage is the average wage that it is also the highest wage. Consider an economy with three workers, making 3, 4, and 5 units of currency respectively. The minimum wage (effectively) is 3 and the average is 4. If the minimum wage is set to be 4, then either the 3 will increase to 4 or stop working. If the wage increases, wages are 4, 4, and 5. The average is 4.33. If the job is lost, the wages are 4 and 5. The average is 4.5.

Now, if the minimum wage is set to 4, everything is fine and stable. But if the minimum wage was set to the average wage, the minimum wage increases to either 4.33 or 4.5. Same decision. The jobs not paying the increased wage can either increase or stop. So wages might be 4.33, 4.33, and 5 for an average of 4.56. Or wages could be 5 for a trivial average of 5. Or somewhere in between. After repeated steps of this, wages go to 5 for everyone still working.

This is just a mathematical tautology. If the minimum and average are equal, then the maximum has the same value.

When will an underground labor market develop? At what level will popular support diminish or disappear, if ever?

When a substantial portion of the laborers are priced out of the market by the minimum wage. You see some complaints now about high schoolers being priced out, college interns being priced out, retirees being priced out ... etc. It would not surprise me if illegal immigration is in fact driven in part by the labor shortage caused by lowly skilled natives being priced out by the minimum wage laws. If it is indeed a material factor, you can see the wave of anti-government, anti-illegal-immigration sentiment as confirmation of that underground labor market.

You mentioned also inflation. that's an interesting topic and rarely explored in the academia. Minimum wages have traditionally not been a meaningful driver of inflation, due in large part to their being a small component. If a larger and larger portion of the labor supply comes from minimum wage earners, and minimum wages are tied to inflation, you can see a multiplier effect there where run-away inflation is quite possible -> higher minimum wage -> higher inflation -> higher minimum wage .....

The potential breakage there is the employers decision, collectively, to automate, thus diminishing the demand for minimum wage earners.

As someone argued in those minimum wage debates, the persons who got hurt the most by minimum wage laws are precisely the group that the minimum wage laws intend to help.

• Re "If the average wage is the minimum wage, the highest wage is also the minimum wage": Consider the set `{3,4,5}` the average of which is `4` and the highest number of which is `5` -- clearly `4` does not equal `5`. – agc Dec 14 '18 at 6:10
• @agc If that set is wages, then the minimum wage is 3, so the average wage is not the minimum wage. – lazarusL Dec 14 '18 at 14:04
• If the minimum wage is raised to 4 (and the 3 wage goes to 4 or disappears), then the new average wage is above 4, so the average wage is still not the minimum wage. – lazarusL Dec 14 '18 at 14:59