Maximum Wage Potential

Like almost any policy debate these days, the minimum wage is often reduced to its simplest arguments. You care about workers or you care about business. Pick a side! If only it were that simple.

The goal of any labor policy is to create jobs that allow the most people to flourish. We have to look at minimum wage policy through this lens. 

For someone in good standing and earning less than $15, the higher minimum will be a welcome boost. And we should want this for those workers. It’s hard to argue that living on less than $15/hr is flourishing.

But like any simple policy idea, there are complex trade-offs. The most important one is fewer jobs. Last week, the CBO reported that a federally mandated $15 wage would indeed eliminate 1.4 million jobs in the future. It’s hard to argue that if you raise the price on something you will eventually get less of it. And a broad overview of the research confirms it. Of course, in Seattle where the average starting wage is already close to $15 it won’t have a big impact. But go to any small town in rural America and the impacts will be profound. And in recessions, wages are rarely cut, but layoffs are frequent making us more susceptible to bigger shocks.

Part of the reason the labor movement argues so forcefully for the increase is it helps current workers. Future workers don’t have a lobby! Nor do the workers that “might” lose their job. 

The bigger problem is the wage increase does not solve the root issue. Sustainably higher wages come from one thing: skill development. Entry level software developers get multiples of the minimum wage because their skills are rare. But for the low skilled, there is one proven way to get valuable skills: a first job. By reducing the number of first jobs we cut off the career ladder for a ton of folks. 

Think about an economy with only two companies. Company A has lots of employees and they all make $15/hour. They have reliable work but there is no path to make more - no career in sight. Gig work comes to mind. Company B offers starting pay of $12/hour but presents multiple paths to build skills for promotion that pays $20/hour and more as you progress. Yes, they could also start at $15 but the data proves there will be fewer roles. At my time at Rackspace we often saw passionate high school graduates learn on the job and progress to senior system administrators making six figures. The starting wage just tells such a small part of the story. 

This is the real world. The best way to get a job you really want is to take some steps along the way. Experience matters. A track record of reliability and responsibility leads to more of it - and a bigger wage.

We lack a clear metric to measure this kind of labor mobility. We need companies that create jobs but more importantly build skills and create career paths. How do we identify, praise and create more high labor mobility companies? Maybe the right metric to judge companies on should be the wage at 3 years of tenure. Did you help someone grow to earn more? If you work at Uber not much will change in that time. This lack of dynamism is the real problem with gig jobs - they are not career jobs (and most people don’t think of them that way anyway).  

Entry jobs are the on-ramp to a career. How do we widen that ramp, not narrow it?

I wrote a whole post on a Jobs First Economy. This approach is all about building human capital. Cutting off the workplace is no way to do it. We can even have the $15 minimum in a smarter way. Let’s just use the earned income tax credit to ensure $15/hr pay. It has the same effect but removes the disincentive to hire. Why isn’t this solution on the table? (likely because it would be a big handout to rural, red states). 

We need a whole raft of policies to widen the career on ramp and foster skill development in our workers. How else can we do it? 

  • Remove costly regulations (ahem, GDPR) that give big companies a huge advantage and have led to the lowest business formation in decades. Small businesses create jobs. 

  • Incent and reward the creation of employer driven training and certifications for pre-employees as a counter to the college path. Google is showing the way here.

  • Infrastructure anyone? Yes, the next bill to be debated is a jobs filled building booms - but let’s get it going asap.

I am sure there are hundreds more ideas. But, policy focused on first opportunities and building skills is how we get better outcomes that will last. We need to get laser focused on it. Raising the minimum wage feels good and will help some in the short term, but fixing the core problem is going to take more nuanced conversation. Once again, we don’t seem capable of digging that deep. 

Good Reads 

  1. Cutting taxes can work. But there are limits. Spending can work. But there are limits. How left and right orthodoxy make the same logical mistakes.

  2. When Vox is publishing anti-teacher union rants, it is clear you may have gone too far. 

  3. Another strong case for the foolishness of replacing industrial meats with industrial plants. The devastation of modern mono-cropping remains massively underreported. 

  4. Solar and wind will continue to grow, but their density will limit them long term. I am excited about modern nuclear, but the news on utility scale geothermal is exciting. Energy innovation is the only real way out of our climate crisis.

  5. Most people tend to favor John and George. But Ian Leslie gives Paul McCartney the love. It worked on me. And Sina the drummer demonstrates and explains the hidden mastery of Ringo (“the most underrated drummer in rock”).