Pethokoukis

Please, time to finally move beyond raising minimum wage

Image Credit: The All-Nite Images (Flickr)(CC-BY-2.0)

Image Credit: The All-Nite Images (Flickr)(CC-BY-2.0)

“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter,” Democratic political consultant James Carville said back during the Clinton administration. “But now I want to come back as the bond market. You can intimidate everybody.”

If that position is filled when Carville passes on, returning as the Congressional Budget Office would be a solid alternative. Thanks to the CBO’s new economic-impact analysis of sharply raising the federal minimum wage to $10.10, it’s doubtful Washington Republicans would vote for the centerpiece of President Obama’s anti-inequality agenda. From Potomac Research Group’s morning note: “A minimum wage hike is dead in Congress; there’s no chance it could pass the House.”

The agency’s synthesis of existing research concluded raising the minimum would lift nearly a million Americans out of poverty – but also cost a half million jobs. And of the 16.5 million workers who would get a pay raise totaling $31 billion, just a fifth of the increased income would go to families with earnings below the poverty threshold. “Raising the minimum wage probably reduces employment,” the CBO explains. “In the long term, that reduction in the workforce lowers the nation’s output and income a little … .”

To folks on the right, those potential trade-offs strongly argue against raising the minimum wage, especially during a depressed labor market. Now the CBO could be wrong about the employment impact, of course. Team Obama argues it is and will likely continue to push hard for the policy. Additional economic research will surely be produced, giving ammo to both sides. And the debate will continue. No rush, the poor aren’t going anywhere.

But why continue the debate? In its report, the CBO notes that in contrast to a minimum wage hike, “an increase in the [Earned Income Tax Credit] would go almost entirely to lower-income families.” So there you go. More bank for the billions of bucks. Let’s expand the EITC, especially to offer more support to childless workers. And then on top of that, add a wage subsidy. AEI’s Mike Strain:

If you earn $7.25 per hour, for every hour you work the government would cut you a check for 3 bucks. Easy as pie. Around 1.8 million hourly-wage workers over the age of 24 earned at or below the federal minimum wage in 2012. Let’s take the most generous case and assume that all of them worked full-time and lived in working-class households. With a wage subsidy of $3 per hour, we’re talking an annual federal expenditure of $11 billion.

The typical Democratic response to this idea is that while conservative wonks like the idea of wage subsidies, Republican pols not so much. Yet Senator Marco Rubio, who may well run for the GOP presidential nomination, has made wage subsidies one of key element of his anti-poverty agenda. The policy window may be opening here for an effective, anti-poverty idea that both Democrats and Republicans could (should) favor.

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

26 thoughts on “Please, time to finally move beyond raising minimum wage

  1. I dunno, wage subsidies. Let free markets work. I would like to see a CBO economic analysis on the impact of cutting in half the $1 trillion a year we spenvd in just three agencies: DoD, VA and DHS. Imagine putting $500 billion a year back into the private sector and cutting federal income tax rates…

  2. A worker employed at today’s minimum wage produces an hourly output worth…$7.25. Now government gives that worker–just because he exists–$3.00; the worker’s income is now $10.25/hr.

    Now suppose the value of the worker’s hourly output increases to, say, $10.00. He got better, more efficient with experience, training, whathaveyou. With the government’s subsidy, he’s already getting $10.25/hr. Even though the value of his output to his employer has increased more than 35%, where’s the employer’s incentive to give the man a raise?

    Then again, how many minimum wage jobs–which are, by their nature, low skill jobs–have room for a 35% increase in productivity? There’s no point in flipping burgers too much faster; the customers aren’t there. The lawn mowing crew already is mowing pretty much as fast as it can. The subsidy seems to pin the minimum wage worker at that low level, no matter what he does.

    I’m having a hard time seeing how a wage subsidy helps the worker get ahead rather than just get by a little better at the bottom. And there are other, more cost effective (at least for the taxpayers paying the cost) ways to help the man stay at the bottom, but have it a little easier there.

    Eric Hines

    • You have to keep in mind the people who get the additional money don’t park it in savings accounts or the stock market; they spend it. They pay the landlord, and the landlord treats his family to a weekly dinner at the Red Lobster– and now the wait staff have more customers to serve; their productivity increases. You get the idea.

      • @Cgregory – Your scenario sounds nice, and obviously would play well for the sound-bite raised, short-attention span American public, but here’s the fundamental flaw in the whole movement to increase the minimum wage, either directly by increasing it or effectively by supplying a supplemental subsidy.

        The problem is: How do you keep the wage increase (or subsidy) from not having domino effect increases in all higher wage levels, and eventually an increase in the prices of goods and services? For example, say you are someone in a $9/hr job. Now, what are you going to do when there is either a $3 raise in the minimum wage (or a $3/hr subsidy)? Are you going to just sit back and congratulate your labor brothers and sisters on their increase, and not demand a similar one of your own?

        And what do you think the $10/hr, $15/hr. $20/hr, etc. workers going to do? If those below them are getting 38%+ wage increases, do you think they are going to settle for a 2% increase?

        And how do you think employers are going to fund all of these increases? Out of their own profits? And once they have to raise the prices of the goods and services they sell (and other employers elsewhere have to do the same since they are also facing the same employee wage increases), what do you get? Everybody with higher wages, but everything costs more so no one has really made out in getting ahead?

        Or do you have a magical solution to address all of these unintended (and unconsidered) consequences?

        • You assume that textbook economics is on target in all circumstances when it is not. The job market is not efficient when there are many more applicants than openings. When labor’s worth is dictated by supply and demand rather than productive contribution, a modest minimum wage hike has modest consequences. The UK adopted a minimum wage in 1999 and set it at 46 percent of full-time median wages. The result on jobs according to a Warwick U study:

          “To sum up, the evidence for the UK presented in this paper indicates that the effect of the introduction of the minimum wage on the probability of employment is insignificantly different from zero for all four demographic groups and in all three datasets used.”

          http://wrap.warwick.ac.uk/1560/1/WRAP_Stewart_twerp630.pdf

          The paper addressed job loss rather than prices, but employers would look to both to trim costs, and likely to payroll first.

          To your point on wage compression, which the proper terminology for upward pressure on wages above the minimum, the minimum is less of a factor here than in the UK at 38 percent of median hourly pay. And nothing has changed in the job market. Some senior workers may feel chapped that their premium over minimum pay is less, but the reality is still way more applicants than jobs to fill and considerable pressure to suck it up and soldier on.

          • Stewart’s paper appears rather selective. It only covers the time period from the introduction of the minimum wage (April 1999) thru the end of the year. It never directly addresses the overall employment picture of the UK at that time. What did that picture look like? In fact 1999 was a year of increasing employment, look at the figures;

            1993 | 13.4%
            1994 | 12.2%
            1995 | 10.8%
            1996 | 9.8%
            1997 | 7.4%
            1998 | 6.3%
            1999 | 5.8%
            (Boyer and Hatton 2002: 667).

            We know the US had its lowest unemployment rate (3.6) in the last 50 years during 1999. It appears the UK was also rapidly moving towards full employment at this time. I would assume that under these general employment conditions a minimum wage law would have little impact, if any. Unless, of course, the minimum is set significantly above prevailing wage rates for low wage/low skill workers.

            Even after the introduction of the minimum wage in 1999 the unemployment rate in the UK continued to go down for 5 more years.

            I’d like to study on the effects of a minimum wage enacted during a time of increasing unemployment rather than the opposite. Until then it might be best just to compare employment rates across the EU between those members with or without such a wage.

  3. Well, there’s minimum wage and there’s living wage. How much does it cost to keep your nose above water for food, clothing, shelter, utilities, etc.? MIT has a “living wage calculator for cities and rural areas in America. It includes the cost of everything but health care. How do the present minimum wage or the proposed minimum wage serve families in your neighborhood? Are they too high, too low, just right? Check it out:

    http://livingwage.mit.edu

    • After looking at the living wage link, I was surprised to see that the calculation or assumption for a single mother with 3 children would have the highest tax and therefore require the highest living wage. Wouldn’t it be fair to assume that she would have the most returned to her in a tax refund whereas the 2 adults with no children would bear the highest tax burden and therefore require more a living wage. For Ocean County NJ, I thought it was off in all cases too high for some categories too low in others. They are not in line with factors used by the courts to determine things like child support guidelines. If 2 adults earned 14.90 an hour they would be living in a tent. If a single mother with 3 children earned 75k I’d marry her.

      • The person with “the highest tax” does not require the highest living wage. The person with the greatest expenditures requires the highest living wage. Taxes are only part of those expenditures. Tax rebates like the Earned Income Credit do not appreciably reduce the hypothetical single mother’s income needs, as can be seen by referring to the graph at the bottom of this site: http://www.ctj.org/pdf/taxday2011.pdf

        her total tax burden is not out of line with any other income group’s.

        You might want to make your own computations for your locale and communicate them to the author of that study. As an MIT prof, she was probably aware of what would happen if she fudged the study, and she’d probably appreciate any fine tuning.

  4. I just love that sign in the middle back:

    “CAN’T SURVIVE on $7.25. WE DEMAND: $15.00/hr”

    Sums up all the logic of this movement in a pithy slogan:
    1) $7.25/hr isn’t a “living wage;” it’s more like $15/hr so that’s why we’re demanding it
    2) We don’t have to be any more productive than we currently are in these minimum wage jobs; it’s our “right” to have a $15/hr wage rate
    3) “Why?” – Just because! There doesn’t have to be any economic justification to support it.

    • Productivity is high enough that there isn’t enough work for everyone, so not a real issue. A universal basic income would give everyone a solid economic floor, and a limitless ceiling.

        • Productivity is high enough that there isn’t enough work for everyone….

          Yeah. Couldn’t possibly be that the “recovery” is stalled; no GDP growth is running through the roof. Oh, wait….

          As to your “libertarian” solution, not so much. Calling it one doesn’t make it so. With the solution being to impose a government intervention into the market place on all the players in that market (accepting arguendo the success of Reason‘s need for doing away with the other welfare programs), there’s not very much of an actual libertarian bent there.

          It’s internally illogical, too: A guaranteed income would reduce the humiliations of the current welfare system while promoting individual responsibility. and [O]ne of the tragedies of the current welfare system is that it strips welfare recipients of their dignity while treating many of them like children, and functions on the underlying assumption that somehow being poor means you are incapable of making good decisions.

          Sure–by replacing the present version of welfare with another version of welfare, one whose purpose flows from the assumption that somehow being poor means you are incapable of making good decisions and so they’re children who cannot do for themselves without Government’s (read: Know Better Politician’s) “help.” Nothing in there that allows, much less encourages, individual responsibility.

          Eric Hines

          • There are three ways to increase the wages of the lowest paid.

            One is unionization. One is government redistribution of income through such things as an Earned Income tax credit. One is raising the minimum wage.

            The first, of necessity a democratic process, is inherently messy and sometimes quite volatile. In the second, there are the administrative costs, which means a less efficient way of getting income to the people. The third avoids the messiness of the first and the administrative headaches of the second.

  5. The argument against minimum wages is to propose a minimum wage of $50 or $100 an hour. Then almost EVERYBODY gets a raise, consumer spending clearly goes through the roof, and the whole country breaks out in rainbows and butterflies.

    If there is logic behind a minimum of $10 an hour, why doesn’t the same logic hold for $50?

  6. Halsey, take a look at the MIT living wage study. Depending on household size, $15 might not be a living wage. In my town, a single parent with one child needs $19 to stay off welfare, but would still need CHIP (Medicaid for children) to avoid sinking into debt.

    Halsey and Vinnie– As ours is a demand-driven economy, it depends on people spending money to drive the production of goods and services. Economists are in agreement that the economy is in a slump; the only disagreement is how to get it out. Some say, have the government provide stimulus directly by hiring people to fix bridges, roads, schools, etc. Others say, give the money to Wall Street (“quantitative easing”) and it will lend it to banks which will lend it to manufacturers, etc., who will hire people to make things, etc. But both are in agreement that people who don’t get paid very much don’t have much to spend, which keeps the economy flat.

    And both agree in general that when people have too much money, they can distort particular prices (like the successful Somali pirates, who have driven the price of their local cocaine equivalent sky-high), which can cause inflation, but that inflation’s not the problem we face at this time.

    Giving 16.5 million people an extra $3 per hour is probably going to mean a whole lot of stores are going to make a whole lot more money when that ($3x 40 hours x 16.5 m x .71) $1.4 trillion dollars hits the street.

    As for everybody else wanting a pay hike, well, nobody in the bottom 80% of the population has gotten a pay hike since 1972, so why shouldn’t they at least WANT a raise? And if their place of business is getting more business, it would seem reasonable for them to get a raise if they’re doing more work. Have you thought about when the last time was that you got a raise?

  7. I’m certainly not able to express my thoughts as eloquently as those previous but I would be remiss without sharing my thoughts from the perspective of someone who is unemployed. This unemployment is by choice as I felt a career change was needed. Because this was voluntary I do not receive government assistance, and I can’t even imagine receiving it due to my decision to not be a productive citizen for a short period. This is common sense that doesn’t appear to be common.

    During the interim I will be picking up temporary employment. A higher minimum wage would certainly help me in taking care of my family during this transition,
    but it will certainly come at a much higher cost to my family in the future. There is a cost to everything! Regardless of who provides a subsidy of $3/hr./person, your employer or government cannot and will not do it for free. We cannot, as a society, expect others to equalize our economic standing regardless of our decision to be or not to be productive. (I realize this is a general statement, and I’m not referring to those whom experience economic difficulties through no fault of their own. But let’s be brutally honest- there are far greater numbers of those that feel entitled and choose to be subsidized regardless of the consequences.)

    I haven’t followed any prominent university studies or conversed with the great economists of our time. I just believe we as citizens have a tendency to over-complicate many of the issues surrounding us today. What’s wrong with hard work, being responsible for our actions, and wanting nothing but the best for our prosperity. Stop living for the moment, start living within our means, and STOP allowing the government to be the great enabler of being unproductive. Common sense is not dead. Thanks for at least hearing me out.

      • Debt, plain and simple. Our government has this false sense of security that they have the luxury of raising the debt ceiling without any concern of who is going to pay for it. Whether they believe this or not, this is how they budget. If I join those that feel they are entitled to have the government take care of them- I am part of the problem. Entitlements are not free, they never have been and never will be. Actually, the costs increase exponentially. Not only do we pay more financially (principle plus interest, pretty basic), but debt takes away our independence (something we as a country have fought for and enjoyed since 1776).

        • This may be out of ignorance, but someone please help me understand something. Right or wrong, I am seeing a strong trend. More and more, It appears that the groups who are demanding a higher minimum wage are aligning themselves with those groups who are demanding economic equality. Maybe this is only my delusion. I can’t imagine anyone believing that a wage increase will level the playing field between the “have” and “have not”.

          • Income inequality isn’t very simple, Steve. The average income in 2005 (most easily at hand here) for the four lowest quintiles was about $10,500, $25,000, $47,000 and $75,000 respectively. Boosting 16.5 million wage earners some $1.4 trillion would probably have meant some 10 million households averaging an extra $1400. With 22 million households in every quintile, that might have boosted 8 million into the next quintile. Not a princely sum, but if your family income has suddenly jumped 13%, it’s significant to you. Nevertheless, a practical example of resolving income inequality.

            Where income equality really gets tricky is in the top quintile, which in 2005 averaged $160,000. HOWEVER, that was the average. Seventy-five percent of the bottom of that had an average income barely above $150,000, which dragged the average way down. The average in the top 5% was $281,000; in the top 1%, $402,000; in the top 0.1%, $1.6 million, in the top 0.01%, $6 million and in the top 400 households, not too far south of $410 million. Of course, the disparity is even greater 8 years after these figures were published; in 2012, the top 400′s income average was $434.4 million.

            So you can see that “income inequality” is a pretty impossible target if you are talking about making incomes more equal. How in the world are you ever going to get George Soros or David Koch to voluntarily give up 99.9% of their income? Not going to happen, period!

            Where income inequality is a real problem is when we get into the present state of affairs, best summarized as, “One dollar, one vote.” In 2004, 85% of ALL federal election candidates were funded by only 5% of the population, and some 85% of that population were in the 95th income percentile. It doesn’t help that corporations, both domestic and foreign, may now legally contribute any amount without disclosure of source to any campaign.

            Clearly, in my opinion, “income equality” is needed in preventing distortions of the democratic process which exist due to inadequate protections. You might have noticed that the deficit reduction advisory board assembled by the president consisted of millionaires and billionaires who recommended– surprise!– that Social Security be cut, but not that taxes be raised on the households averaging $434 million. But in America, we have always believed, “If he’s rich, he must be smart!” And a deficit reduction panel needs to be staffed by smart people, right?

            Also, we have always believed that each of us stands a good chance to get filthy rich, which moved John Steinbeck to comment, ” Communism has failed to gain a foothold in America simply because everyone believes he is a temporarily embarrassed millionaire.” A myth to live by…

            As Gibbon pointed out in the Decline and Fall, “the peasantry had less to fear from barbarian incursions than from the predatory nature of the wealth class, who sought to extract from them the maximum wealth possible.” Or words to that effect.

  8. Wage subsidies are wealth redistribution, whereas minimum wage rules are price controls (on the price of labor).

    The first is socialism, i.e., virtual slavery; for the fruits of one’s labor are directly expropriated (taxed in a way that excludes choice, as opposed to user taxation) and those stolen earnings are given to others who did not earn them, but who will likely vote for the criminal syndicate (political party) that offers the spoils. This is the definition of systemic corruption, and it is the civil religion of socialists, world-wide.

    Price controls nullify free market choice, introducing gross inefficiencies to the market, typically resulting in shortages – in the case of wages, it means fewer jobs. Price controls are another feature of the socialist’s attempts to divide populations into clienteles (for their own good, they say), which they pit against each other in order to present themselves as just arbitrators over a zero-sum pie, now under their control (virtual ownership), thus assuring themselves of steady employment (and all the pie they want), of the sort that succors their messianic self-absorption.

    Because pure socialism is intrinsically dysfunctional and horribly conducive to political racketeering and other forms of corruption, third-way socialists have progressed (actually, regressed) to corporatism, which is growing in Europe, and promoted by increasingly intolerant statist-progressive Democrats and plutocratic Republicans in America. Fact is, America’s corporate law, regulations, and the tax code have been tailored (corrupted, in the sense of inequality before the law) to suit this not-so-new coddling of elitist self-interest.

    Want real growth and “full employment”? Try a flat-rate tax on personal income, including corporate persons (no exemptions) and no taxes on non-incorporated businesses (to level a playing field tilted by corrupt government to favor corporate entities, which are more easily bullied by elected racketeers and syndicalists), no capital gains tax (to offset the total loss of write-offs), no minimum wage (for, wages will rise with the growth of un-taxed small businesses and the subsequent reduction in the supply of labor). Add to this no inheritance tax (the inheritance tax is a boon to corporate America, which happily fills the voids left by fallen competitors – gaps left by family businesses that are driven out of business once the original owner(s) pass on, leaving their inheritors with a confiscatory tax).

    You might also try devolving the banking system, and increasing every bank’s share required in every investment (so as to incentivize wise investments in newly incentivized domestic markets). Then rescind the executive order that gave rise to public-sector unions (government is non-profit; therefore, there is no “surplus” to be redistributed); add, to this, national ‘right to work’ legislation. Also, devolve de-unionized public education and wax the Dept. of Ed. Once you’ve allowed these things to stabilize, devolve national entitlements to non-socialist, economically viable states, and reintroduce a metal-based currency (so as to put the real value of the economy back in the hands of the people, making it that much harder for war-mongers to fund their schemes, among other things). If done wisely – wisdom being found in decentralized planning (in other words, keep federal policy based on general principles, thus allowing for innovation, while reintroducing the idea that the federal guard dog belongs outside the henhouse) – we could see relatively stable prices, once again, and a level of health and stability in our civic culture, and growth in our economy, that we haven’t seen in more than a hundred years.

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