As you may be aware, the Federal minimum wage was scheduled to increase to $6.55 yesterday. Today I had a Facebox e-debate of sorts which I think has helped me refine my position on the issue of income support for poor workers. I am very interested in other people’s take on my position on the issue.
Standard neoclassical economic theory tells us that a legally mandated minimum wage, if it is above the market clearing wage, will reduce employment, especially for the most marginally employable workers. The microeconomic rationale for this is pretty straightforward; if you forbid employers to pay any wage under $X/hr., they will fire or not hire employees who are worth any amount less than $X/hr. So the guy who is worth only $7/hr. loses (or never gets) his job when the minimum wage is increased to $7.50/hr. As always, the standard economic theory is plausible. But, also as always, it must be empirically supported to form the basis of informed policy-making. The magical curves and lines don't always get it right.
When I took a labor economics class in college, this study was relatively new and represented kind of a coup d'etat. The Krueger and Card study compared the effect of an increase in the minimum wage on employment in the fast food industry in one state with the level of employment in the fast food industry in an adjacent state that did not increase its minimum wage. Surprisingly, the study found that employment had actually slightly increased (relatively) in the state that had increased its minimum wage. Naturally, this sparked a great gnashing of teeth and back-and-forth debate within the economics profession
So today, a right-wing Facebox-friend of mine posted something to the effect that any increase in the minimum wage is an "inane" policy. In response, I drew his attention to the Krueger and Card study. He, in turn, posted a link to this study, which provides a pretty comprehensive survey of the minimum wage literature. The study found that almost 2/3 of the studies it surveyed, and 85% of the studies it found "most credible," showed a negative, "but not always statistically significant" effect of minimum wage laws on the number of people employed and/or hours of employment. The majority of the studies appear to have found that a 10% increase in the minimum wage leads to a roughly 1% to 3% reduction in the employment of low-skill workers, with significantly stronger negative effects on teenagers and young adults and much weaker negative effects on adults 25 and older.
The study appears pretty thorough and I think I buy its conclusion – i.e., there’s generally a small, negative effect of a minimum wage increase on the employment of low-skill workers. But it's important to bear these results in perspective. A 1% to 3% reduction in low-income employment is not the end of the world, particularly if we had an adequate social welfare state to provide for the subsistence of the unlucky 1%-3% (which, unfortunately we don't, but many other countries do). But it is a significant downside effect that we should take into account when thinking about income support issues. Interestingly, left-leaning economist Paul Krugman appears to share this concern ("...the centrist view is probably that minimum wages 'do,' in fact, reduce employment, but that the effects are small and swamped by other forces.").
I have proposed a fairly radical solution to all of these employment and income support issues (see #'s 1 and 6). But it's probably safe to assume that that's not going to happen any time soon. In the meantime, I think it's helpful to look at the issue the way right-of-center Harvard economist Gregory Mankiw does: as a tax on employers of low skill workers which directly funds a subsidy to low skill workers. Looking at it this way raises the obvious question - why should the employers of low skill workers bear the whole burden of this subsidy? Surely, income support of poor workers is more of a general social responsibility than the exclusive responsibility of poor workers' private employers, just as medical insurance and care is a general public and social responsibility (even if, in this country, it is an abdicated one) and should not be regarded as the particular responsibility of workers’ employers. Therefore it would be fairer and more efficient to simply increase taxes (disproportionately on high earners and very disproportionately on very high earners, of course), and then to use the proceeds to significantly increase the Earned Income Tax Credit (the EITC, or "negative income tax") for poor workers.
With respect to the relative efficiency of using a negative income tax policy instead of a minimum wage policy, consider this CBO report which found that a hypothetical increase in the minimum wage in 2005 from $5.15 to $7.25/hr. would have given an additional $11 billion overall to workers making somewhere between $5.15 - $7.24/hr. (of which, startlingly, only 18% were actually members of poor families in 2005, at least according to the notoriously low Federal poverty guidelines), only $1.6 billion of which (or about 15%) would have gone to workers in poor families. On the other hand, an increase in the EITC with the same overall income effect as the minimum wage increase would have cost the Federal government a total of $2.4 billion, $1.4 billion of which would have gone to poor families. If these estimates are reliable, the minimum wage is a very blunt instrument for supporting the incomes of poor workers.
So it seems to me getting rid of the minimum wage and drastically increasing the EITC (along with providing payments at least on a bi-weekly basis and not in one lump sum at the end of the year so the whole thing doesn't end up going to H&R Block or payday lenders) is the way to go, at least before we can push for anything more ambitious. The effect of this would be to allow employers to hire whomever they want at whatever price the employee will agree to, but to use the additional public revenues raised by a big progressive tax increase to bring everyone up to (at least) the poverty level. This way we fund the income support subsidy through the proceeds of a broad based progressive tax system rather than specifically punishing employers who happen to operate in low-skill industries by forcing them to pay for the whole burden, and a much higher percentage of the proceeds will go to workers who are actually in low income families. And of course then we would avoid the whole negative employment effect of the minimum wage (especially since, as we know, increases in tax rates generally have negligible effects on labor supply).
The bottom line for me is that the income support of the poor (ideally to the point where they are no longer “poor”) is a fundamental social responsibility, but that this responsibility would be fulfilled in a much fairer and more effective manner if the government (relying on high, progressive tax revenues) were to provide direct subsidies to poor workers rather than forcing private employers to serve as surrogate welfare agencies.
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Ryan and I talked about this at lunch today, but I just thought of something. I don't know if this actually affects the analysis, but I think there is something in addition to society's moral imperative to prevent poverty. And direct subsidies seems to let companies off the hook to provide a living for their employees.
ReplyDeleteWe had talked about how the subsidy would be based on some sort of threshold, likely somewhere between maybe 3.00 and 6.00 dollars per hour. Even if the government makes up the difference and places people at the federal poverty line (or at a higher, re-evaluated poverty line) won't allowing employers to pay less still exert downward pressure on wages, and push more workers to the poverty line, even if they are not allowed to fall below the line?