Please, there is a better way to help workers than the minimum wage, and everybody knows it

CT Senate Democrats (Flickr) (CC by 2.0)

CT Senate Democrats (Flickr) (CC by 2.0)

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.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

51 thoughts on “Please, there is a better way to help workers than the minimum wage, and everybody knows it

  1. There is a another reason people would support a minimum wage. If the value of your labor is at or somewhat above that minimum, it protects you from competition from those who labor is worth less than the minimum. If, say, a teenager looking for part-time employment can offer to work for $6/hour, it becomes harder for me to obtain $8 or $10/ hour. Establishing a minimum wage that prices that teenager out of a job is just fine with me.

    • Sam, If you are still working at a wage that is threatened by a teenager looking for his/her first job, you should spend some time reflecting on where you are going in life. The minimum wage is meant to be entry level. I respectively suggest you expand your horizons a bit.

    • Being left out of the scholarly discussions on this issue is the ‘control” factor that the government can excerise without a hard cost figure imposed(as in a “minimum” dollar amount per hr)…how about the simple supply and demand?…if you start decreasing the illegal labor market supply by enforcing deportation and illegal border re-entry the natural demand will force the labor rates to rise…i would rather the market dictate this across the lower skilled labor spectrum than an arbitrary goverment imposed rate….my feeling is that wages in all skill/talent sectors would rise as the botttom sector starts to rise.

      • The Immigration reform act of 1965 was enacted during the Great Society reforms. It seems to me a great irony that the government should open the door to foreign competitors for the jobs that poor Americans, black and white, needed to climb up the economic ladder. How many Americans learned to depend on government subsidies while men like Ted Cruz’s Cuban father were working their way up in the world?

      • This is exactly what they want, the gov’t running the show on wages. They talk about subsidies and who will end up paying for them?? Not the same folks who will “manage” them. That is where the manipulation is wrong in principle and theory.

      • Hunger and/or want are powerful motivators. “We” are not responsible for teaching work ethic, if it hadn’t been taught at home.

      • And how do we develop the work ethic among those kids if we price them out of the market?“…

        That’s a job for the parents of the unskilled kid…

  2. In the 1990′s, some MSAs had a demand driven minimum wage approaching $10/hr. In this MSA, workers that could show up for work and perform at the minimal level at simple tasks commanded $9/hr.
    I guess it gets boring for economists to keep referring to the relationship of supply-demand-price.

  3. So let me get this straight…. I am worth $8 an hour, but the Government will pay me up to $20. In order to ever find the skills to get off the dole, I have to jump from $8 an hour job to a job that the private sector pays $20 for without subsidy. And my incentive to ever do more than the minimum amount of work and learn new skills to get the $20 an hour without subsidy is…….. ?

    • I think they’re suggesting that when choosing among bad ideas, this one seems less bad in some respects.

      You have that same disincentive from today’s welfare system. In some states (Hawaii and Massachusetts are the worst) with high welfare benefits you’d have to earn $40,000 in wages to be economically better off than collecting all the different welfare benefits (Medicaid, TANF, WIC, SNAP, etc.). What’s your incentive to work there?

      • Sam,
        Looks like you have worked it all out. Oh… sorry to have used the word “WORK”. Let’s all find a place where there is such a thing as “a free lunch”.

        Used to be that people actually worked for a purpose. I don’t know… putting food on the table, making a better life for your children, self-esteem, etc, etc, etc.

      • Indeed, the old slogan, “No pain, no gain.” should be applied here. If you never get hungry, then you won’t work to get food.

    • Amazed,
      I see what you mean. None of the info. provided here addresses what happens to the wages of the people earning between $8-$20/hr. If everybody who was below $20/hr now gets $20/hr, the only incentive to improved performance would be assessing the probablity of making measurably more than $20/hr in a short period of time through advancement. If you think you will peak out at $22/hr after 10 years of added effort, why bother.

  4. 1. If you don’t even *mention* Dube — hands-down the most rigorous/controlled/statistically solid research out there on MW — you’re cherry-picking evidence in a big bad way.

    2. Yes: EITC rocks. Expand it hugely (and fix what’s wrong with it). Eventually replacing some other welfare programs.

    3. MW and EITC Taste Great Together! They mutually correct for incentive and incidence failings of each. There are win-wins in economics.

    • EITC is Aldous Huxley in spades. Please call it what it is. It is an earned income tax (EIT). Our politicians new they could never sell it as a tax. The more you earn, the more you are taxed. And that is above and beyond your already established tax bracket. Give me a break!

      Abolish it!

  5. Stop tampering with wages, period! For every action there is a reaction, and wage subsidies would deter many people from working harder or obtaining training and savvy to move to higher paying jobs. Since most of the minimum wage workers are younger, inexperienced people, the destruction of their incentives and ambitions would mean serious, long term harm. As for the subsidies, what are all thpse food stamps, free school lunches, Obamaphones (and now free gasoline, I hear) for?

  6. Simply reduce current levels of immigration (1 million a year). This will tip the balance of supply and demand in the labor market. Their will be no need to worry about the minimum wage since wages will rise by natural competitive forces.

    • That is a logical fallacy.

      Wages are based on the worker’s productivity. Should we restrict immigration, to your point restricting the supply of workers, we will have in no way affected productivity. A worker is still worth his output.

      If restricted supply drives the price of workers above his productivity, businesses will look to technology or other ways to replace the expensive worker. After all, there really is no need to staff McDonald’s the way they are when one could order on the internet or via in-store kiosk. All you need is a security guard.

      That is simplified, but the point is people are paid (very close) to the value of what they produce by the free market. Full stop.

      • A supply-demand curve is now believed to be a “logical fallacy”? The existence of an unlimited supply of workers willing to work for the minimum wage (or less) has no effect on the ability of low-skilled workers to earn more than the minimum wage? Somebody’s been drinking the corporate Kool-Aide.

        • supply demand curve is now believed to be a fallacy, seriously? just because some ivory tower wing-nut claims something as inane as that, even in communistic china supply and demand are market pressures.

      • Worker productivity is a nebulous thing to measure. For example since productivity (in its rawest form) is simply OUTPUT (sales in dollars) divided by INPUT (labor in dollars), if a company simply raises its product prices, worker productivity has theoretically increased.

        My point being that if restricted supply of labor drives up the price of labor, companies will first try to increase prices and longer term will try to offset the higher price of labor through capital investment, labor training, and various other initiatives.

    • Don’t think that will work either. How ’bout starting by enforcing the laws that are in place first. It has been a long time since we did this regardless of administrations. We now have ICE suing the O admin to retake control of what they are constitutionally required to do. Huh? O needs to take a holiday and leave us alone!

  7. If they are working there is no problem. We don’t need to subsidize their wages with a negative income tax, we need to encourage them to get a second job by cutting taxes.

  8. Let’s just face reality: having the government manipulate the employment market will work about as well as, say, Obamacare. Politicians are ALL about “rewarding our friends and punishing our enemies” (Obama quote). If their friends don’t get rewarded very much, but their enemies get thoroughly punished, politicians will be fine with that.
    There IS NO free lunch out there: employers don’t have some pot of gold they can tap to pay for this largess. I am on the board of a company that employs 500 people, all above minimum wage. What higher wages for entry level people do is compress the wage scale for the long term employees, because we only have so much money available for labor. And DON’T tell me to take it out of profits: our profit margin is less than 1%.
    What needs to be done is to relax some of the more onerous burdens of government regulation and reduce corporate taxes, which are the highest of the industrialized nations. The last thing to be done is to have our elected liars dream up “fixes”.

  9. Who would pay this wage subsidy? We all know the wealthy actually pay little in taxes and we’ve destroyed the middle class. We’re now to print money or borrow it from China to subsidize the corporations labor costs?

    • I am not sure what your definition of wealthy is, but the top 10% of income earners pay 80% of personal taxes. Is that not enough for you?

      • Define your terms. That top 10% to which you refer is the top 10% as measured by the number on tax returns. How does the number on the tax return compare to people’s actual income or wealth? How much did Mitt romney orWarren Buffett pay compared to their employees? Who is going to eventually pay for all the deficit spending? To put it another way, who will generate the real wealth necessary to repay debt and pay this wage subsidy, if such a stupid idea were ever to be enacted?

  10. The most articulate, level headed, and pragmatic individual I have ever read on the minimum wage, Dr Thomas Sowell, says we should abolish the minimum wage entirely. I support that fully. It harms people at the low end of the economic sector and in many cases keeps people from ever entering into the work force because their labor is not worth the cost of their being hired.
    The minimum wage is also racists because the vast majority of unskilled labor comes from the black community and as such they will never be hired to even get a step up on a career ladder of any kind. They will be perpetually doomed to the “safety hammock” which threads are coming apart under its own weight.
    For some serious enlightenment, watch Milton Freidman on YouTube and you will get a great common-sense education in economics. A business cannot pay people more than they are worth and expect to stay in business.
    Finally, anyone whose skills are only capable of producing minimum wage should have no business being married much less having a family. Therefore, this horse squeeze about not being able to support a family of four while making the minimum wage is ludicrous.

  11. If good paying jobs with excellent benefit packages are what we say we want then why not use the tax code to incentivize employers to provide those things. For instance, how much more of a tax credit should we provide (in addition to the deductions of wages & benefits) to get more people employed with good pay & benefits? 5%, 7% of costs, etc. The government then doesn’t have to write a check to anyone or worry as much about fraud

  12. Joe, Good question but wrong answer. Only in America could the rich people who pay 86% of all income taxes be accused of not paying their fair share by people who do not pay any income taxes at all. Joe, what is your tax contribution?

    • See my answer above as to who the wealthy are. But, there is something really strange going on when all a country’s economic policies are geared toward depressing wages, but then a “conservative” proposes the solution is to rebalance the equation with transfer payments. What makes anyone think that those who pushed through the low-wage policies in the first place will voluntarily bring the wealth they gain through those policies to be distributed to low-wage workers? Why are the wealthiest counties in America now surrounding Wasgington, D.C.? The rich and powerful are lobbying to increase their share even more. A serious proposal to rebalance the economy would center on rebalancing the supply demand-balance for labor. That requires immigration enforcement, sensible trade, and anti-trust enforcement. Bigger government only creates bigger problems.

  13. We have 3.7 million vets getting monthly disability checks…sueely they can be placed into subminimum wage jobs since their income is already supplemented…same for SSDI

  14. The merits of Pethokoukis argument about the problems with minimum wage are less clear than he claims.

    “Arindrajit Dube of the University of Massachusetts Amherst, T. William Lester of the University of North Carolina at Chapel Hill, and Michael Reich of the University of California, Berkeley, closely analyze employment trends for several categories of low-wage workers over a 16-year period in all counties sharing a common border with a county in another state where minimum wage increases followed a different trajectory.

    They report that increases in minimum wages had no negative effects on low-wage employment and successfully increased the income of workers in food services and retail employment, as well as the narrower category of workers in restaurants. …”

  15. Eliminate all Minimum Wage Laws in one year steps . This would create a flow of new jobs for all those willing to work . This would re-create a ladder of opportunity for the unskilled and young . This would instantly infuse growth in the GNP and tax collections .

  16. The Swiss are also arguing about a minimum wage, which is just emerging at the canton level.

    A few figures on Switzerland: Overall unemployment rate, 3.3 percent; Youth unemployment, 8.2 percent.; gdp/capita (PPP) $44,000 (vs $49,000 in the US); NEUCHATEL’S NEW MINIMUM WAGE: $21.75/HOUR; PERCENTAGE OF WORKERS AFFECTED BY IT: 4 PERCENT.

    Wages climb; prices follow. Life goes on. I thought I read somewhere that some inflation would be a welcome change. Oh yeah. I read it here.

  17. Under such wage subsidies, we will end up with more low wage restaurant and retail businesses and less high tech and manufacturing businesses and related jobs.

    This is because in micro-economic theory (and basic accounting) the true cost of making a burger or selling a pair of shoes must be included in the price of the product or the subsidized lower price of the product or service will lead to misallocation of economic resources. This in turn will drown out opportunities for manufacturing and other high tech jobs and businesses.

    The politicians and business people in the subsidized industries may like this policy, but this is a VERY BAD POLICY IDEA from a micro-economic point of view.

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