Raising the Cost of Hiring Unskilled Workers by 50% is A Bad Way to Fight Poverty

After my prior post, I have summarized the chart I included from Mark Perry to the key data that I think really makes the point.  Household income is obviously a product of hours worked and hourly wages.  Looking at the chart below, poverty seems to be much more a function of not working than it is of low wages.  Which makes California's decision to raise the price of hiring unskilled workers by 50% (by raising their minimum wage from $10 to $15) all the more misguided.

click to enlarge

Note the calculations in the last two lines, which look at two approaches to fighting poverty.  If we took the poorest 20% and kept their current number of hours worked the same, but magically raised their hourly earnings to that of the second quintile (ie from $14.21 to $17.33), it would increase their annual household income by $2,558, a 22% increase (I say magically because clearly if wages are raised via a minimum wage mandate, employment in this groups would drop even further, likely offsetting most of the gains).  However, if instead we did nothing to their wages but encouraged more employment such that their number of workers rose to that of the second quintile, this would increase household income by a whopping $13,357, a 115% percent increase.

From this, would you logically try to fight poverty by forcing wages higher (which will almost surely reduce employment) or by trying to increase employment?


  1. Matthew Slyfield:

    Any sane/rational person would prefer to increase employment. Which is exactly why the government prefers to force wages higher.

  2. mlhouse:

    One of the biggest issues that limits the income of lower income individuals is the overtime laws. The easiest way for an individual to earn more income is to work more hours. If you work 40 hours per week and then increased your number of hours worked to 50 you would have a 20% increase in gross income. In many cases working the extra hours per day might be worth it because of the upfront cost you already put in: dressing, commuting, and by avoiding the prime traffic time the incremental time away from home would be less than the incremental hours works.

    Many businesses might find this advantageous because it also best utilizes their labor fixed costs, makes their work force more effiecient and flexible, and having shifts that are more than 8 hours might significanlty improve productivity (less set up/take down time, getting more production out of prep time, etc).

    But most businesses avoid overtime like the plague because of the increased cost of variable labor. When you have to pay the time and a half or more the marginal profitability often sinks into the negative.

    This would, in many cases, be a win-win for employees and business. THere are few ways that lower productivity workers can improve their earnings to this level. But we are stuck with archaic labor laws that makes the economy inefficient and many workers poor.

  3. sailor116:

    Honestly, this mostly seems to be a chart leading to the conclusion that averages suck for predictions.

    For example, I don't see any way to distinguish between nurses earning $12k by working 480 hours/year @ $25, laborers @ $8 working 1500 hours/year, and so on.

    Neither do I see any info on single parent households w/ young kids--which would tend to explain a lot of the "no wage earner" stuff. (Daycare costs can easily exceed net work income, so those folks rationally don't work.)

  4. Incunabulum:

    I've had to deal with that before. I worked for a CA company as a local consultant/labor for when they had a contract in my area (AZ).

    Their normal schedule of work would be to come out on Sunday night, Work 8 hours a day only, 5 days a week (M-F), then head back Friday night.

    Because the hotel bill and the per diem for the extra day out here was significantly less than the overtime bill would have been if they had come in and worked *10* hours a day and left Thursday.

    Still 40 hours worked, but CA apparently has to pay overtime if you work more than 8 hours a day in addition to it triggering at 40 hours a week.

  5. WillusM:

    Curious that 63% of 20% of households have no earners, yet the unemployment rate is below 5%. In fact, adding across all quintiles we see fully 24% of households have no earners.

    It's almost as if, almost, the unemployment rate is a pretty bogus statistic.

    Unrelated: the comparison between wage rate and earners rate impact will be even more dramatic if we use $15/hour instead of $17.33 ($648 versus $13,357).

  6. zengda:


  7. morganovich:

    unemployment is a tricky thing to measure.

    the widely used u3 aggregate (the one you are citing) has some significant potential issues as it excludes from the labor force anyone not actively looking for work. so, if you get so discouraged you stop looking for work, voila, you are not unemployed anymore.

    clearly, this can cause issues. counting everyone is tricky too though. some people are retired or going to college or getting a grad degree etc. some are simply stay at home spouses raising kids or simply with no need to work. while they may be jobless, they are not really "unemployed" in the sense where one would worry about them or that they are worried.

    you really have to take a mosaic view of employment to get a good picture. no one stat really works.

    i like u3, u6, nonfarm payrolls, and labor force participation rate. between them, you can start to get a useful picture.

  8. MJ:

    I think you're right. This is the CPS supplement that hasn't been worked through to identify only those in the labor force. The 24% figure almost certainly includes full-time students and retirees.

  9. Bruce Zeuli:

    The hardest working folks I ever employed (in CA) got around these overtime rules by working multiple jobs. I would say 50% of our entry level workforce put in more that 65 hours a week across multiple jobs. They would commute from far way to start work a 7:00 am and then stay in San Francisco working until 11:00 PM on their second job. Another one of those unintended consequences I guess.

  10. Dan Wendlick:

    It's not even 40 hours any longer. Since the Affordable Healthcare act benefits cut in at 32 hours, employers now limit to less than that. In fact, now the standard is a 28 hour cut-off, so they don't get tagged with a "willful evasion" case by cutting off too close to the limit.

  11. Gil G:

    Hence the cure for poverty is paying them nothing.

  12. Not Sure:

    Paying them nothing? Exactly what the government is telling businesses to do: Fire (or don't hire) workers who cannot generate more than $15/hr. profit for the business.

    Pretty stupid, but when it comes to government policy, what else can be expected?