Both BloombergBusinessweek (reporters Peter Coy and Susan Berfield) and the Financial Times (columnist Edward Luce) are out with pieces supportive of raising the minimum wage. While I understand the desire to give low-wage workers a raise, selecting the minimum wage as instrument of choice is a curious. While critics can be apocalyptic about the economic impact of raising the minimum wage, basic economics suggests doing so will make it more expensive for businesses to hire young and low-skill workers.
For instance, a 2013 literature review by David Neumark, J.M. Ian Salas, and William Wascher concludes “that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.”
And a study in September from Texas A&M economists Jonathan Meer and Jeremy West finds while raising minimum wage “may not cause an immediate shock to employment, as is often feared,” it does discourage firms over the longer-term from hiring.
What’s more, a 2010 study “Will a $9.50 Federal Minimum Wage Really Help the Working Poor?” by researchers Joseph Sabia and Richard Burkhauser found that a federal minimum wage increase from $7.25 to $9.50 per hour — higher than the $9 that President Obama has proposed — would raise incomes of only 11% of workers who live in poor households. Even Coy and Berfield acknowledge some of the policy’s imperfections, writing that “a higher wage floor would undoubtedly price some marginal workers out of the market.”
These studies aren’t some secret. So why do so many smart people keep advocating for a higher minimum wage? The best answer I can come up with is that they think it is more politically likely than the better economic answer: wage subsidies. I recently chatted with economist Noah Smith on this very topic, as part of a discussion of what to do if automation seriously depresses wages in the future. Smith:
The whole reason to keep people in jobs in the first place, to keep people working would be that people feel valuable from working. But a better proposal … is actually wage subsidies, government wage matching, also called a negative income tax. We would be putting our thumb on the scales between humans and robots to keep humans in work that in a perfectly free market they wouldn’t be doing.
When a company offers you wage, the government matching would have already done behind the scenes. Someone comes and offers to pay me $20 an hour, the government is paying $12 of that. I would be making $8 an hour, but I would feel like a person who making $20 an hour. Unlike the Earned Income Tax Credit where you get a check from the government based on how much income you earned, I think people would feel a lot better in term of the framing of it if the government matched their wages instead.
That is why people really dislike handouts but really love the minimum wage even though it doesn’t make any sense economically. The minimum wage really distorts the economy more than handouts. … Actually you could get a really efficient wage subsidy if you had local governments subsidizing local wages with land value taxes and then you could tune it to the local cost of living. But now we are getting into the realm of policies so smart they will never actually be done.
Some less adventurous versions of what Smith proposes:
1.) Economist Edward Glaeser would alter the EITC by making it a clear and transparent wage subsidy to all workers making less than $9 an hour.
2.) AEI’s Michael Strain has advocated allowing firms to hire the long-term unemployed at less than the current minimum wage and supplementing their income with an EITC-like payment.
3.) Management consultant Oren Cass, a domestic policy adviser for the Romney presidential campaign, would use the payroll tax system to create a direct-to-worker wage subsidy. Cass: “The effect in many ways would mirror a substantial increase in the minimum wage. But whereas a price control would to tend to decrease the size of the labor force, a subsidy would tend to increase it.”
Of course, wage subsidies are an on-budget, transparent cost — which politicians hate — while the costs of the minimum wage are shifted onto business and hidden. But the costs exist just the same. The debate over how to help low-skill, low-wage workers needs to be a bit more policy forward and explore options that in the past may have seemed unlikely.