Sunday, November 12, 2006

Minimum Wage

Nancy Pelosi, the woman expected to take over as Speaker of the House, promises to propose legislation to raise the minimum wage. Cliff Lyon, the proprietor of One Utah will be thrilled since he has advocated (without providing supporting citations) for the minimum wage to go up in comments on this blog.

Meanwhile, some economists continue to point out that raising the minimum wage doesn't really do a good job at helping poor people. Frank McIntyre, an economist at BYU, wrote about the issue recently in Times and Seasons. He writes that the minimum wage, "Is very poorly targeted towards the poor we are most interested in helping. In fact, the benefits are essentially randomly distributed across the income distribution."

He proposes an alternative solution involving the Earned Income Tax Credit. From what I can gather, it is sort of a negative tax that shows up in your weekly paycheck.
So what would this look like? Well, take everyone below say $9/hour and pay them a subsidy of 20% (or whatever) of the difference between their current wage and $9. They still have a good incentive to fight for better wages, because they get 80% of it. And they still have the incentive to work lots of hours, because they don’t hit a benefit takeaway like exists in the current EITC from $15,000-30,000.
Employers receive the money from the government and it goes directly into the paycheck of the worker. (I don't follow the 80% part of Frank's argument.)

Times and Seasons also put up a side link to a post citing economic research (and a graph!) that shows the minimum wage doesn't actually cause an increase in unemployment. This may or not be true, though the graph in that post is less than compelling, because so few people actually work at the minimum wage.

A couple of comments on Frank's post were particularly insightful. One commenter, "sr", wrote the following in opposition to replacing the minimum wage with a government wage subsidy.
There is a real sense of dignity that comes from having your salary paid by the people you serve (instead of the government). This is something conservatives should be able to understand. My impression is that poor people consistently indicate that they prefer minimum wage increases over other forms of poverty assistance. If my impression is correct, then as an economist, you must place some value on their preferences.
A very valid point to my mind. DHofmann, another commenter responded by saying, "I’m sure they do. You can’t pay the cable or satellite TV bill with food stamps." That link goes to a really eye opening report about how many luxuries many (not all) "poor" people in America have.

Frank responded with the following in two separate comments.
Minimum wages are not actually good for poor people. They are good for a few poor people and bad for the rest of them (ie, for the vast majority of them). They spur unemployment and raise the prices for everyone, and precious little of that money actually goes back to the poor. The program I discuss here helps poor people using the income tax system, which means that it is paid for overwhelmingly by the rich. It also does not encourage unemployment, rather it encourages employment.
Certainly there is an issue of diginity here. But, as you may have noticed, this is not a welfare handout. This program would come through their paycheck, just like the minimum wage. The main difference is that now the government reimburses the employer for the higher wage he is providing. In fact, perhaps that would be the way to make you happy, just have the money go to the business as a tax credit for hiring these workers. The market result is that the money gets passed to the worker just the same. This solves the preference argument, although let me point out that the preference you mention is almost surely saying that people prefer wage bonuses to welfare style handouts like food stamps. The program I proposed oringinally is no such thing– show me that they prefer wages coming through line A on their paycheck as opposed to line B and then you’ll have an argument! Then you would want to consider the preference effect on people who were disemployed because of the minimum wage.
It looks to be almost certain that the minimum wage will be raised. I'll admit that I am somewhat uncomfortable with the minimum wage--though I'm also uncomfortable with exploitive wages. (This is one reason I'm opposed to undocumented workers: they get no protection!)


Anonymous said...

Why should anyone "get protection"?

Bradley Ross said...

I think most people in society can agree that laws provide many useful protections. Don't you want the protections of the laws that keep people from taking your property or refusing to pay you after you've given your labor. Don't you want laws that will enforce the terms of contracts? Frankly, your comment is a bit puzzling to me. Care to elaborate?

Scott Hinrichs said...

The Wall Street Journal editors point out in this article that raising the minimum wage has very real costs to society. It relates to the old Econ 101 supply-demand relationship, making entry level jobs more scarce. Thus, it hurts some of those it purports to reward and it makes it more difficult for teens to get into the work force. It decreases competitiveness and hurts productivity. Unions support it because it provides a bargaining chip for increasing unionized wages that are much higher than minimum wage.

That all being said, there is a valid argument for having a mandatory working wage. All we have to do is look back in history to the latter end of the 19th Century and the beginning of the 20th Century to see the problems created by widespread underpayment of workers by businesses. The realities of that time period cannot be ignored by those that promote the let-the-market-decide-all-wages (willing worker-willing employer) paradigm. Things are much better today, but one argument goes that part of the reason for this is our attention to a working wage.

I can frankly see arguments on both sides. The minimum wage is going up, no doubt, but we should be honest about it. Saying it will help the poor outright is somewhat disingenuous. It harms them at least as much as it helps them. In fact, if it helped solve poverty, why hasn't it ever solved poverty when it has been raised in the past?

Of course, promoters know that they probably won't win the hearts of the people to their cause simply by saying that there may be some long-term salutory effects. They rely on a more raw emotional appeal to win support, and that appeal is based on faulty arguments.

Cliffs Blogger Profile said...

There are in the world people who are experts on these matters. If we are honest with oursleves, we will defer to them demanding from oursleves only the challenge of determining on which side of the argument THEY fall. Otherwise we force oursleves into an argument about conspiracy and agendas.

Here ya go

Over 650 economists, including 5 Nobel prize winners and 6 past presidents of the American Economic Association, believe that increasing federal and state minimum wages, with annual cost-of-living adjustments for inflation, “can significantly improve the lives of low-income workers and their families, without the adverse effects that critics have claimed.”

Bradley Ross said...

Cliff, I don't think you're totally out to lunch here. Like Reach Upward, I think there may be a place for the minimum wage. I particularly like the fact that the minimum wage can help compensate for the imbalance of power between employers and the class of people that usually work in low-paying jobs.

I just read the executive overview of a government report on the subject back in '99. These were the key findings from the last raise in the minimum wage.

* A disproportionate share of minimum wage workers are teenagers and most do not live in poor families.

* A sizable portion of minimum wage workers are poor parents.

* Negative employment effects, if any, appear to be slight and are difficult to detect.

* Minimum wages curb employer-provided training opportunities for low-wage workers and may reduce educational attainment for some at-risk groups.

* Moderate minimum wage increases will not reduce poverty rates.

Bradley Ross said...

RU, thanks for the link to the interesting article from OpJour.

y-intercept said...

I dislike minimum wage increases because they tend to hurt the small marginal companies in favor of well financed big box type stores. Minimum wage increases raise the bar of entry for starting a business, effectively shutting the marginalized members of society out of the business community.

Bradley Ross said...

Interesting point, Kevin. So your argument is that people who hate Wal-Mart should also hate the minimum wage? I'm not sure you'll find many people holding both positions, but an interesting line of reasoning nevertheless.