Mo Money, Fewer Problems
Jonathan Adler of the VC points to a WSJ op/ed by Becker and Posner on the problems of increasing the minimum wage. Namely, it results in the increase in the cost of goods produced by unskilled labor, which are most frequently consumed by the poor. Which if true, then the increased spending power of those unskilled laborers would go right back to their employers, thereby offsetting any lost revenues caused by a minimum wage increase. I guess trickle down theory is a one way street.
Labels: Rabid Conservatives, Rabid Liberals
posted by Armen Adzhemyan at 2:25 PM
17 Comments:
Good point on trickle down. I'm sure that PART of the effect is mitigated, but obviously the part of it that goes into construction won't.
The more common argument against increasing the minimum wage is that the vast majority of people that work at that wage are not supporting a household, but rather are students and the like. Increasing the wage would only make those kids better off, it does nothing to help families that have an income based off a wage slightly higher than MW. It also (and no, I'm not going to go find cites) is true that the marginal product of those minimum wage workers is often even lower than the paltry wage that they get.
If someone has proof to the contrary, feel free to post it and make me look dumb, though.
Here's all the info and statistics you'll need for (http://www.epinet.org/) and against (http://www.epionline.org/) minimum wage hikes... These two confusingly named institutes seem to volley back and forth over interpretations of labor force data.
Let's all just keep in mind that 1) economics is not a science 2) economists have their political leanings 3) economists generally come from a narrow demographic 4) most often economists produce research that confirm their premises.
Posner clearly conservative. Becker conservative in most people's minds. Both have been in the ivory tower twice as long as most of us have been alive.
You could argue until you are blue in the face about the effects good or bad. If the aggregate studies are to be trusted, any effects are marginal at best.
Until there is clear evidence, I'll keep my ear to the ground and trust the people earning $5 an hour when they tell me that a raise would help them out.
"civil debate"
Where to begin? I'd be happy to engage anyone and everyone about min wage laws. I think they are cruel to the poor...and that somewhere along the line people have been fed some really bad logic. I think they are cruel because they actually hurt the poor. I'd be happy to lay-out the basic case if anyone's interested. For now, I'll just respond to the comments.
Armen-- A trickle by any other name is still a trickle. Unless the full amount trickles back up to employers (if min wage workers spent 100% of their increased wages on products made by min wage workers?), it would still only mean a partial return of revenues to the employer. This may be ok given the goal of min wage is to help the worker, not to help the employer...but it means that the compulsive nature of the min wage doesn't disappear even if a trickle up theory were to work. And the compulsive nature matters when the employer can legally respond to the minimum wage by making other changes. Those other changes are typically called "unemployment"...but that's just short-hand for any number of responses: job loss, loss of hours, loss of benefits (often by reduction in hours to the point that no worker is full time and therefore ineligible for benefits), increased work effort, etc.
McWho: I don't think that's the most common argument against the minimum wage, but I suppose it's part of it. Certainly, to the extent that teens living with mom & dad and earning cash (that is, not helping pay the bills) are minimum wage workers, we might not worry about them. But, of course, some min wage workers are supporting a family. The real question comes in with the obvious trade-off that *must* be faced with a min wage...some min wage workers are made better off (the ones who get to keep their now-higher paid job) and those who are made worse off (because they lose their job...or some other "unemployment" effect listed above). The real opposition to min wage laws by economists comes from the net negative effect of this tradeoff--because the demand for unskilled workers is elastic, the bad effects outweigh these good effects and so the net effect on min wage workers is negative. (I can explain this further if anyone actually cares about hurting poor people). Also, there are hidden effects that are extremely hard to measure: which min wage workers are more likely to suffer the negative effects? people of color? older people who are supporting their families (because they are the ones more likely to have been receiving full-time benes like health care)?
Anonymous 3:29 on 1/27:
I think you are a bit off point. Correct: economics is not a science. What's the point? (1) My guess is that you keep your money in the bank (because you have faith in the economic models that predict inflation every year resulting from an increase in the mone supply and you don't want the loss in purchasing power that would result from keeping your money in your mattress). Why such faith in the models in some aspects of your life, but not in others? (2) Of course economists have their political leanings. So do people disagreeing with economists and yet who don't take the time to understand economics. Among academic economists (there are studies done periodically at the American Economic Association meetings, the leanings are remarkably to the left (remarkable given that most people think the opposite). But, also remarkably, the idea that min wage laws actually make poor people poorer has unusual support across the political spectrum within the discipline. It is one of the few things with such overwhelming concensus and crossing party lines. (3) No, they don't. The academic study of economics is quite open to people of various backgrounds, more so than many fields like law, because it does not have all of the financial barriers to entry that sometimes prevent less priveliged persons from entering--most graduate schools pay econ grad students quite well to go to school. So, for example, as a first generation college student with no money and coming from a small, unkown college, I decided to go graduate school in economics because they would pay me to do it. I could never have gone directly into an elite law school like Boalt (even after a couple years of work) because I never would have been admitted and I didn't understand that private loans were a possibility. I simply could not have imagined borrowing, annually, twice may family's annual income. Furthermore, it may surprise you to know that most of the people that I went to grad school with decided upon that course because they wanted to make the world better and fairer, especially for the poor and for developing countries. Most still believe they are doing that. (4) True...just like in every field I've ever come across.
I would love to address any arguments that anyone has about the economics of min wage. I sympathize with 3:29's sentiment that, when a poor person says he will be better off with a raise then we should listen. But that worker doesn't usually imagine himself to be the one who will get fired or will lose his benefits as a result. A better question would be to ask him whether he is willing to play a lottery in which some of them will get a raise and some of them will get fired. Anyone who doesn't believe this will happen should ask themselves why they are stopping with a mere 40% increase in the minimum wage...why isn't everyone advocating a minimum wage in the entire country of $500/hour. Facing that policy option...I think everyone realizes that the trade-off *must* kick in at some point...and then we just have an empirical question, not a theory question.
Stefani Smith
While your theoretical analysis of barriers to entry above was illuminatin, I'b be interested to hear your analysis of the following empirical report:
http://www.vanderbilt.edu/AEA/CSMGEP/about/history.html
Stefani:
I won't pretend that I really understand (or buy) everything you said about why the minimum wage hurts poor workers more than it helps them. The only question I am interested in is this: how would you help minimum wage workers who can't afford to pay their bills? It's one thing to talk about why something is a bad thing; it is a whole other thing to actually offer a solution.
I'm not an economist, but I had a thought that I would be interested in having an economist critique. What would happen if, instead of raising the minimum wage, the federal government subsidized workers who made less than $7.50 an hour so that every year at tax time, those who make less than $7.50 hour file their tax return with documentation of their hourly rate and the number of hours worked, and then the government sends them a check ($7.50-hourly rate)*(hours worked)? Obviously this would also subsidize businesses to a certain extent because no business would pay its employees between the minimum wage and the subsidization threshold, but are there terrible economic effects beyond that?
The whole minimum wage debate is interesting because both sides insist that their primary consideration is helping the poor (increasing their wages v. helping them keep their jobs), yet bad motives can be realistically be assigned to both sides as well (political manipulation to gain votes by implementing policies with net negative effects that the supposed beneficiaries may not understand v. oppressing the poor and helping the rich by keeping wages down). I guess my personal feeling is that if poor people want the minimum wage raised, we should do it. They are the ones who will bear the brunt of any negative or positive effects, so perhaps we should let them make the decision. However, we should carefully observe the effects so that politicians will lose credibility if things go wrong, but they try to push increases in the future to gain votes.
12:36, that's the Earned Income Credit. If your income falls below a certain threshold, the government IMPUTES paid taxes. So you get a refund that is higher than the actual taxes you paid. Stefani, Posner, and Becker are arguing that such a system is better at redistributing the wealth than a min. wage hike, which goes to La Mitioreta's question.
"They are the ones who will bear the brunt of any negative or positive effects, so perhaps we should let them make the decision."
Sounds like those elections where the red (aka poor) states vote for the guy giving tax cuts to the wealthy.
The only problem with the EIC is that it would be fairly expensive. Much more expensive than just telling companies to pay their workers more.
The problem with all kinds of social redistribution is that you have three aspects.
1. Keeping Cost Low
2. Attaining a Minimum Standard of Living
3. Inspiring People to Actually Work.
EIC's will inspire people to work, and achieve a higher minimum standard of living. The result is high costs through lost tax revenue.
Minimum Wage inspires people to work (unemployment is a different problem), doesn't cost much, and doesn't actually change the minimum standard of living (because of the unemployment problem as well as increased costs of living).
Welfare is the other common option. It raises the minimum standard of living, but it doesn't inspire people to work and is very expensive.
So basically, the best you can do is 2 out of 3. Hence why EIC's are popular among some economists. If we are going to pour money into social welfare, it seems like the best option available.
9:26am on 1/28--Thanks for the link. I'll look at it soon (when I'm not sitting in class!) and hope to have something intelligble to say. Please be patient because empirical work takes time to read carefully.
La Mitotera: You have a great question...and Armen addressed this a little above. I usually hear two responses to this (and I adhere to one of them). One answer is that, even if there is no better solution, we shouldn't undertake something that actually hurts the people we're trying to help. The second asnwer is the EIC--a tax system based solution--is a possible and far superior solution. I discuss this below also...but here I'll mention some of the benefits of EIC over min wage. The EIC supplements (through the tax system) the poor person's income without the need to compel employers to do something against their wishes. The result is that the employer has no reason to modify its hiring/benefits/etc. decisions and so there's no classic income/unemployment tradeoff. Antoher benefit is that the EIC can easily accommdate very desirable exceptions (so a worker supporting a family of 5 can get a bigger EIC than a 16-year-old middle-class worker who is earning extra spending cash). Another benefit is that it spreads the burden of this social policy across a larger group of society, and doesn't ask the poor themselves to pay for it. For example, as a person who hasn't eaten in a fast food restaurant in a decade, I don't pay as much of the burden of min wage (through higher burger prices) than someone who frequents such places. But through the regular income distribution of tax code, I would pay my (progressive) share of the EIC. Anyway, see additional comments below. But the EIC is the preferred method among economists for raising the spending power of the poor for these (and other economic incentive) reasons.
12:36pm on 1/28: See comments above and below, and Armen's response, too. I will add that the EIC and a direct wage subsidy are very different, so the two shouldn't be conflated. The EIC does not distort the employer's incentives in the way that a direct subsidy would. The EIC just goes right into the tax system and the employer is never directly dealing with a penalty or reward for hiring a low income worker. A subsidy, on the other hand, would affect the employer's incentives directly: hiring a person below the threshold will result in a payment to the employer...so there would be a range of wages where the employer would prefer to pay an officially lower wage in order to qualify for the subsidy. So there are weird effects, including disincetive to pay a higher wage...not so good.
McWho: The EIC is not more expensive than the min wage. Period. What you mean to say is that the *distribution* and appearance of costs is different. The costs of the min wage is paid by employers, those workers who suffer the "unemployment" consequences, and those who buy goods/services made by min wage workers. The EIC is paid by all of society according to the progressive tax system. So the apparent costs of the EIC might be higher because you can point to a particul provision of the tax code and say, "this is lost revenue." But all the hidden costs of the min wage are very real, and even worse (in equity) to the extent that much of the costs are actually paid by the poor themselves. I think it's very cruel to say that the min wage "doesn't cost much" simply because it's not paid by you...it's paid for by the unfortunate guy who just lost his benefits (because his employer knocked him from 40 hours to 20 hours and hired another 20 hour worker). I will certainly grant that the politics of EIC and min wage are different. The EIC is preferred by economists because it actually accomplishes the goal...helping the poor. The min wage has those nasty properties of (1) currently having less political support (because liberals are so busy backing the min wage!) and (2) actually hurting at least some (if not more) of the people it's trying to help. But the EIC does not cost more to society or the economy than the min wage accomplishing the same degree os aid to the poor.
I will add that the EIC accomplishes redistributive policies in the same way that the current progressivity of the tax code does. As it currently statnds, no one argues for redistributive policies by telling employers that there's a cap (max wage) that employers can pay high income workers. Instead, employers can pay workers any salary they want and then society embodies redistribution policies through the tax code. This is because we all recognize that a wage cap would create weird incentives. Once a worker reached the cap, the employer would start compensating the employee in other ways: like increased non-wage benefits, bigger offices, better computers, longer vacations, food in the office, etc. This already happens to some extent (any who's been a summer associate sees this) because of the progressivity of the tax code. But it happens far less than it would if there was a wage cap at, say, $150K. The reason that a wage cap is an inferior method of redistribution is the same reason that a min wage is an inferior method of redistribution: inteferences with the price system create more distorting effects on behavior (and therefore greater social costs) than non-price inteferences. It's simply not true that all methods of accomplishing social change are interchangeable.
This is somewhat of a response to Stefani Smith. My impression is that she argues that min. wage hurts the poor because it is a price control that interferes with the proper function of the market. My response is that one should "not blindly reach[] for the standard off-the-shelf neoclassical model to answer policy questions".
http://www.econbrowser.com/archives/2006/12/the_economic_de.html
That link has a good summary of all the economic arguments surrounding the minimum wage.
Some other links are:
http://gabriel.mihalache.name/econ/2006/12/unemployment.php
http://macroblog.typepad.com/macroblog/2006/12/modern_labor_ec.html
I think the answer is that some interpret THE DATA such that raising the minimum wage is beneficial for workers, others say that it is bad.
The neoclassical model states that it is bad for workers; newer theories suggest a mixed bag.
12:56 on 1/29:
I'm sorry if I give the impression, and I will consider it a possibility, that I blindly grab "off-the-shelf neoclassical models." However, I don't believe that I do. As I posted above, almost everyone I know makes decisions which implicitly rest on precisely these models and *they* (you?) do it blindly (in that they do not know *how* it works) but just do it because it works. Those are the best empirics I know. Just a few examples...It's standard neoclassical models that predict bank/interest rate behavior that predicts your savings account and borrowing practices. It's the same standard models that have allowed people on N&B to predict what will happen with new associate salaries when ST&B NY jumps to $160K this year. These models consistently do the best over time to predict our economic behavior, an admittedly difficult thing to do. So it's a tall order to say that models that predict exceptionally well in most areas of our economic lives somehow break down in one or two isolated areas. It would seem that the burden of proof would be on the person arguing that this is a "different" situation--a burden that is easily met when dealing with externalities (like pollution) and public goods (like parks and national defense), but a burden that is very hard to meet when talking about a pretty straight-forward labor market. [I *will* try to get to the cites you mention...everyone keeps giving me homework assignments to read other people's work rather than actually doing some 'splaining of their own.]
Here's the ultimate empirical test that I put to anyone who says that min wage laws are a superior policy option. If you're right, why are you being so tight-fisted and only advocating a 40% increase? If these models you cite indicate that raising the min wage will improve workers' lives, why not do it for everyone and why stop at a mere "living wage"? Why not raise the minimum wage for everyone, everywhere to something like $150K/year, or $500K/year? What, in these models you cite, would indicate that such a minimum wouldn't work? If you really believe that simply passing a law saying that employers must pay workers more will actually improve the plight of the poor, shame on you for advocating such a pittance.
It seems that people on both sides of this debate often oversimplify things. Here are a few thoughts for anyone still reading this thread:
(1) Stefani is right that raising the minimum wage will tend to create unemployment where demand for low-skilled workers is elastic. This will happen where such workers can be replaced by technology, outsourcing, and other factors. However, it isn’t always the case – it depends on the industry, the job, etc. A great many low-skilled workers will benefit from a modest minimum wage increase without being laid-off. For them, this is a good thing (note also that a great many low-skilled workers have been replaced due to outsourcing and technology even without a minimum wage increase in recent years here in the U.S.).
(2) Given that raising the minimum wage will tend to both increase the standard of living for those affected that do not lose their job, and increase unemployment, the real question may not be whether to increase the minimum wage, but rather WHEN and by HOW MUCH. One of the main concerns in raising minimum wage is increased unemployment. It seems, then, that during a recession, increasing the minimum wage would compound injury for workers already suffering. However, when unemployment is low (such as now) and when many of the jobs that the economy is creating are Wal-Mart™ jobs anyway (again, now!), the negative effects of an increase may be largely offset. Raising the minimum wage isn’t always a good idea, but it may be right now…
(3) Some of the workers covered by the minimum wage are high school kids, but, many aren’t and really do need this money. As with point (1), there are empirical debates as to how many minimum wage workers are high school kids and how many are single mothers, etc. One thing to note here, though: if we do increase the minimum wage by any significant amount, more people who are supporting families will begin to be covered by it.
(4) Economics may not be a science, but it is at least a very useful tool in improving people’s lives.
(5) It’s nice to see a policy debate on this blog without people yelling at each other, cursing, calling each other fascists, etc. Maybe you guys mellowed out a little over break. Cheers!
Hey SS,
Generally speaking, there could be a market failure in the market for unskilled labor. The links I provide above detail numerous possibilities. Cheers, 12:56
I can think of a few off the top of my head.
Low mobility of labor in low wage jobs.
Low knowledge of other options
Low negotiating power against larger corporations.
All could hurt market equilibrium.
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