Pethokoukis, Economics, U.S. Economy

Mr. President, there is a better anti-poverty idea than the minimum wage. Why are you ignoring it?

Image Credit: shutterstock

Image Credit: shutterstock

Barack Obama will use his State of the Union speech to again call for a higher minimum wage. And since Republicans seem unwilling to play along, the president will take executive action and unilaterally raise the minimum wage to at least $10.10 an hour for employees of federal contractors. Maybe in a few years the raise will affect, according to The New York Times, “several hundred thousand workers.” It’s really a move of signaling and symbolism rather than substance.

More to the point: how does raising the minimum wage affect labor markets, other than more money in the pocket of those low-wage workers with jobs? A 2013 study by Texas A&M economists Jonathan Meer and Jeremy West finds raising minimum wage levels may discourage firms over the long-term from hiring new workers.

And “Minimum wages: the effects on employment and labour-force turnover” by Pierre Brochu and David Green finds that for less educated workers, an increase in the minimum wage results in more stable jobs, perhaps, but fewer of them. They offer this useful context for policymakers:” … the policy debate should not just be about the employment rate effects of minimum wage increases but about the trade-off between good jobs with higher wages and more job stability versus easier access to jobs.”

Politician don’t like to talk about trade-offs, even though they are at the heart of politics. And is the possibility of fewer jobs in this economy an acceptable trade-off for a suboptimal policy that really has little effect on poverty? A 2010 study by researchers by Joseph Sabia and Richard Burkhauser found that state and federal minimum-wage increases between 2003 and 2007 “had no effect on state poverty rates.”

A much better idea is a wage subsidy that avoids distorting the hiring behavior of business. Even better, combine a wage subsidy with a lower minimum wage for the long-term unemployed. A possible compromise would be to (a) boost the federal minimum wage to $8.50 an hour – which would put it at all-time high, properly adjusted for inflation — and then (b) index the wage to inflation, and finally (c) top it off with a $1.50 wage subsidy, also inflation indexed. If Obama proposed some version of this, he might be surprised at the Republican response.

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

30 thoughts on “Mr. President, there is a better anti-poverty idea than the minimum wage. Why are you ignoring it?

  1. Because wage subsidies have had limited appeal in the few places they have been used and, one guesses, employers in Canada and Finland are more favorably disposed to “gummint” than ours. (Trust me. I am from the government and I’ll help pay for this employee forever.)

  2. I think we need more thought and less dogma. Here is the Economist on the radical notion that a modest minimum wager hike has a modest effect on employment.

    “In flexible economies a low minimum wage seems to have little, if any, depressing effect on employment. America’s federal minimum wage, at 38% of median income, is one of the rich world’s lowest. Some studies find no harm to employment from federal or state minimum wages, others see a small one, but none finds any serious damage. Britain’s minimum wage, at around 47% of median income, with a lower rate for young people, also does not seem to have pushed many people out of work.”

    http://www.economist.com/news/leaders/21591593-moderate-minimum-wages-do-more-good-harm-they-should-be-set-technocrats-not

    Not that O will get an increase through the House. The GOP: Thought-free since 1958.

  3. But Americans already have access to welfare and welfare is similar – people won’t take a job unless it pays significantly more than welfare.

    The real no nonsense solution is to get rid of the minimum wage and get rid of all forms of welfare. Make people choose between working for any job versus poverty and whatever handouts they can get from charities.

  4. Eliminate the minimum wage and child labor laws too…and laws against push-cart vending and curbside businesses…and drug and sex sales…
    I find most people have a version of free enterprise they endorse but not the real thing…

  5. How is it immigration, legal and illegal, is almost always overlooked when discussing poverty, inequality, and the minimum wage? WTF did liberals think would happen to wages at the bottom rungs when millions of peasants from foreign lands swarmed entry level jobs for almost half a century now?

  6. Obama isn’t ignoring anything: he has no interest in fighting poverty.

    The goal of the extremist Democratic Party is to maximize welfare and state dependency – which increases poverty – so that they may increase their power.

    It just so happens that he can neatly disguise this objective in the package of selling sweet-smelling bullshit to the ignorant and economically illiterate, increasing his support.

    The minimum wage and related income disparity/mobility discussions have nothing to do with poverty reduction whatsoever. They have everything to do with wealth confiscation and redistribution, power acquisition and expansion, and socialism.

    • Hey, you forgot the Trilateral Commission, fluoridation of water, the UN and …. oh yes, black helicopters. Can’t forget the black helicopters.

      • Turd,

        Intentional or not, liberalism is handsomely rewarded by its own failure. See Detroit where Obama received 98% of the vote in 2012.

        • Mitt carried Texas’ 13th district 80 percent to 20 percent. Did Dubya’s tax cuts buy those votes or would h*ll freeze over before those Texans pulled the lever for O? And Detroit is different how?

          • Seriously?

            According to a quick Google search, Texas 13th district is fairly prosperous with below national average crime. Once per-capita richest city in the US Detroit is bankrupt, full of freeloaders, nearly 50% illiterate, and perennial candidate for murder capitol of the US.

            Like votes for like. :)

          • It really is shocking, but entirely expected, that Turd is actually stupid enough to have posed a question like that in the first place.

            He is actually stupid enough not to be able to tell the difference between 50+ years of overt, large-scale leftist failure and preordained collapse from other completely unrelated scenarios.

            Unfortunately, he’s also just barely functional enough to pull a voting lever, like a trained monkey, to steal other peoples money.

            Pathetic, and simultaneously hilarious.

          • I’d say that supply-side BS is also handsomely paid by its own failure, except that if I were Harold Simmons I’d want my campaign contributions back.

          • Mesa,

            Yeah, I’m still chuckling about how clueless Turd has to be to not understand. And check out his non-sequitur about Harold Simmons. WTF?

            Unfortunately, the Turds of the world are going to have the last laugh as the leftist engineered idiocracy continues to gather strength. The Democrat dynasty is just beginning.

            Detroit is ahead of the curve, not an outlier.

      • Yeah, you’re right Turd, maybe we should just revert to monarchy.

        It’s far easier and cleaner to suppress “the enemy.”

  7. This proposal leaves out what is arguably the most important priority: a lower minimum wage rate for teenagers, the group with the highest unemployment rate by far. So let’s combine three priorities, not two, by some combination of lower rate, or subsidy, or both, so that employers have an incentive to hire the two most disadvantaged groups in the labor market.

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