Prices are the conductors of the economic orchestra that guide resources from places where they have relatively low value to places where they have relatively high value. When these prices are interfered with, people are left worse off than if the prices had been left alone.

Art Carden, Associate Professor of Economics at Samford University, spoke as a part of the ACRE Distinguished Speaker Series on March 12 about this and other ideas. His lecture, “Free the Prices: How Public Policies Hurt the People They’re Supposed to Help,” discussed three common ways prices are interfered with by the government: price ceilings, price floors, and tariffs (special taxes on imported goods).

Price ceilings

Dr. Carden began by describing what an economic equilibrium is and how distorting prices can shift equilibriums and result in harms. Carden uses a recent example from his home state, Alabama.Tornadoes and heavy rainfall have led to a disaster declaration. In these situations, many people, and some legislators, argue for or implement price gouging laws. These laws are intended to protect vulnerable people. After a disaster, there is a big increase in demand for certain goods: gas, plywood, water, etc. There is also a decrease in supply due to the effects of the disaster. These two things working together cause prices to rise. More people want more gas, and there is less to go around. Price gouging laws prevent prices from increasing. On outcome is that people end up waiting in gas lines. They are paying with their time instead of with their dollars.

Allowing prices to rise gives suppliers the information they need to direct resources to those areas. At the “normal” price for gas, suppliers may not direct more gas to that area. If the price was allowed to rise, suppliers would get the information they need and would redirect their resources to the area in need, making people better off as the increased supply brings the prices back down once the extra need it met.

Price floors

Price floors also distort prices. One such example is the minimum wage. While many people believe the recent vote to increase Arkansas’s minimum wage will be a good thing for lower wage workers, Carden believes that it will end up hurting those who need help. Many economists believe that while raising the minimum wage may result in some reduction in employment, people accept that because the people who remain employed will see higher wages. Carden reminds us that wages are just one form of compensation. There are also things like flexibility, benefits, perks, and job satisfaction. A higher minimum wage requires people to take more of their compensation in wages rather than in other forms of compensation. And evidence does suggest that in places where the minimum wage is higher, people see fewer benefits, less flexibility, and harder and more intense jobs.

Tariffs

Lastly, Dr. Carden spoke about the harmful effects of tariffs. Using the example of the sugar industry, he explained why every time he leaves the US, he drinks a Coke that is made “the way God intended it.” That is, a Coke that has real sugar in it rather than corn syrup. The reason corn syrup is so often used in the United States is because the price of sugar is higher in the US than it is around the world, due to tariffs, so producers use a cheaper, lower quality substitute – corn syrup.

These tariffs are usually imposed as a way to make certain industries better off, however, there are unseen consequences with this policy as well. US sugar tariffs benefits Florida sugar producers but at the expense of Brazilian sugar producers. Without them, the sugar industries – and other industries – would look different as a result of freer competition and perhaps be even better.

More resources

Dr. Carden gave his lecture as part of ACRE’s Distinguished Speaker Series. To view the full lecture, you can visit our .

ACRE researchers have recently written several blog posts on the minimum wage as well as one . You can also watch BT����assistant professor of economics and ACRE Scholar Dr. Jeremy Horpedahl’s AETN interview on the minimum wage, .

To see more of ACRE’s work on the minimum wage, you can view our labor regulation page here.

By Aaron Newell

How is the new minimum wage increase going to affect Arkansans? After passing with 68% of the vote in November, the minimum wage will rise to $11 an hour by 2021. Some say it will provide Arkansans with a living wage. Others say it will force businesses to lay off employees. But what does the evidence say?

ACRE scholars and researchers have written about the larger effects of the higher minimum wage previously. Concerns about minimum wages include: low-skilled workers suffer the most; employment falls; and the number of hours per worker falls. What is less-agreed upon is the size of these effects. Previous studies looked at minimum wage increases that fall between 37% and 59% of the median wage. The Arkansas minimum wage in 2021 of $11 would be about 74% of the median wage in Arkansas (depending on wage growth over the next few years).

A forthcoming paper, co-authored by BT����Associate Professor of Economics and ACRE Scholar Thomas Snyder, BT����Assistant Professor of Economics Weici Yuan, and BT����alumnus Senayt Rinkevich, looks at a specific question regarding minimum wage increases: Will Arkansas’s minimum wage increase create more welfare dependence?

The paper, “Do Minimum Wage Increases Affect SNAP Benefits?”, by the B.E. Journal of Economic Analysis & Policy, investigates the relationship between minimum wage increases and Supplemental Nutrition Assistance Program (SNAP) participants and benefits.

The paper suggests that high minimum wages, such as Arkansas’s, lead to more SNAP participants and expenditure.   A high minimum wages may create a barrier for job-seekers because it eliminates low-paying jobs. Employers may not be willing to hire as many employees if they are forced to pay higher wages.  This barrier may force some potential workers to depend on SNAP instead of their own income.

More specifically, the paper found that minimum wages above $8.58 became counter-productive, controlling for other factors such as the economy and the population within each state.  Specifically, they point out:

“Minimum wage increases are associated with fewer SNAP recipients until the real minimum wage surpasses $7.29 in 2009 dollars; further increases in the minimum wage are associated with more SNAP recipients. In current dollars as of September 2018, this turning point is at $8.58. Twenty states have minimum wages higher than $8.58.”

Arkansas’s minimum wage is now $9.25 per hour but will increase to $10 per hour in 2020 and $11 an hour in Jan. 1, 2021. $11 in Arkansas is 74% of the state’s median wage, which will be one of the highest minimum wages in the entire country. Arkansas may experience a reduction in SNAP participants because of a booming economy or improvements in areas of education and technology, but this study predicts that the large minimum wage increase will cause more people to depend on SNAP than it otherwise would have if it did not increase the minimum wage.  In conclusion, they argue that:

“Increasing the minimum wage can only decrease SNAP enrollment at very low minimum wages. At relatively high minimum wages, increases can cause more welfare dependence. Policymakers may have better tools to combat poverty than the minimum wage.”

For a copy of the working paper, please contact Dr. Snyder.
To see other blog posts we have written about the minimum wage in Arkansas, go here.
For more reading about labor market regulation in Arkansas, go here.
To see more of Dr. Snyder’s work with ACRE, go here.
To see Dr. Jeremy Horpedahl’s AETN interview on the minimum wage, .  

Would a higher minimum wage be a win for the little guy? Would it help families struggling to earn a living? Would companies let workers go? These are the questions in front of voters in November.

A minimum wage is a price floor for low-skilled workers. Businesses must pay at least the minimum wage. Companies can pay more, but they can’t pay less. The higher wages come out of the companies’ pockets. Minimum wages don’t affect highly skilled workers because they already earn above that amount. If you know of an experienced accountant, electrician, or software engineer working for less than $11 an hour, please let me know.

When hamburgers become more expensive you buy fewer of them. Companies do the same with workers.  Businesses will hire fewer workers or give workers fewer hours. In fact, found that these workers suffered after their minimum wage hike.

When you talk to PhD economists about the minimum wage, you don’t get much disagreement on the fact that employment falls. Economists generally disagree about the size of the employment fall. The question is how many workers will lose their jobs and how many hours will workers lose. The number of hours per worker tends to fall faster than the number of workers. It is sometimes easier to cut peoples’ hours than to fire them directly.

While there is some disagreement on how many workers will lose their jobs and how many hours will be cut, previous studies involve a minimum wage between 37% and 59% of the median wage. The Arkansas median wage is $14.82. The proposed Arkansas minimum wage of $11 would be 74% of median wage. The higher the minimum wage compared to the median wage, the bigger the impact on unemployment and lost hours.

Compared to our median wage, Arkansas would have the highest minimum wage in the U.S. The median wage in Hot Springs is about $13 an hour. The proposed minimum wage would be 85% of the median wage.

When you combine the proposed minimum wage with the higher minimum already enacted in 2015-2017, we are increasing our minimum wage by 50% in six years. That’s a big jump.

Companies will be forced to make tough choices. They can cut other employee benefits . They can stay open fewer hours to lower their labor costs. Companies can close some locations and let those workers go. A firm can require the same amount of work, but have fewer employees to share the workload. Companies can use more capital, such as self-checkout equipment, rather than hiring cashiers. Automated kiosks don’t get paid the minimum wage. Expect to hear “unexpected item in the bagging area” every time you go to Walmart. But not just Walmart, lots of stores will move quickly to automated tellers.

Of course, raising the statewide minimum wage encourages some businesses to move out of Arkansas completely, as the cost of doing business would be too high compared to neighboring states. On the other hand, it would encourage some low wage workers to move into Arkansas.

The impact on teens is especially strong.  Arkansas is proposing to increase their minimum wage by about 30%.  This large wage hike could decrease teenage employment by 9%. Employers will be less likely to hire inexperienced workers. But teens can’t become experienced without a chance at a job. This means that some teens won’t get the chance to learn the sorts of work skills they don’t teach in the classroom.

People start out as low skilled workers. Your first job flipping burgers was your entry to the economic ladder. Research suggests that higher minimum wages prevent some low-skilled workers from getting their start. These long-term effects are even more important than the short-term effects.

We have been very fortunate to go so long without a downturn in the economy. Voters should ask themselves if a minimum wage will help or hurt during the next recession. Will a recession exacerbate all of the other issues with a minimum wage?

Some workers will certainly benefit from the higher minimum wage. They will keep their job and their hours. Some workers will lose their jobs or have their hours cut dramatically. They will suffer. Some business may be forced to shut down. The question before Arkansans is whether the benefits outweigh the costs.

How high is too high?

That’s the question BT����Assistant Professor of Economics and ACRE Scholar Jeremy Horpedahl considers in two recent media appearances regarding raising the minimum wage in Arkansas.

Arkansans will vote on whether to continue to increase the minimum wage in Arkansas . to $8.50 per hour, and the increase took place in three steps from 2015 to 2017. Cumulatively, the increase from $7.25 to $11 per hour is a roughly 50 percent increase over 6 years

In a published in the Chicago Tribune and other papers on October 23rd, Horpedahl notes that this latest minimum proposal would give Arkansas the distinction of having the highest minimum wage as a percentage of the state’s median wage.

Horpedahl said:

At $11 per hour, Arkansas’s wage would not be the highest in dollar terms, but it would be the highest in the way that matters: At over 70 percent of the state’s median wage, it will be slightly ahead of California in 2021. Currently Arkansas’ median wage, the amount earned by the person in the middle of the income distribution, is $14.82 (compared to just over $18 nationwide). An $11 wage in Arkansas, one of the poorest states in the country, is similar to a $15 wage in California, which they will have in 2022. The percent of the median wage is more relevant because it tells us how many workers will be impacted and by how much. There has been a lot of research by economists on the minimum wage, but one this high is well outside of the range of anything studied before.”

Horpedahl also discussed the consequences of raising the minimum wage in an appearance on “Arkansas Week” on the .

Arkansas would be in uncharted territory from an economic perspective if the minimum wage was raised that high in Arkansas, according to Horpedahl.

Horpedahl said:

This type of increase and this high…we’ve never seen it before. We don’t know how large the effects will be on employment and cost of living. This is a 50 percent increase in labor costs for businesses over just a six year time period. No state has ever tried anything like that before. As an economist, that worries me that we’re kind of in uncharted territory.  There’s a lot of potential downsides. If unemployment goes up a lot…if workers don’t get that first step on the job ladder, then they’re not going to have all the skills we need. We’ve had nine years of pretty good economic growth. We’re going to have a recession coming up pretty soon. If we’re implementing the highest minimum wage ever right in the middle of a recession, that can cause very big hardships for a lot of workers and families in Arkansas.”

For a short primer on the history and economics of the minimum wage, go . is a summary of the views of the two economists Horpedahl mentions in his op-ed, who disagree about a lot regarding the minimum wage, but agree that very high minimum wages are largely have not been studied. As , the only research on very high minimum wages comes from US territories, but there is very little research and it’s hard to say if these small, undiversified economies are comparable to a state like Arkansas.