TCS Daily

Wage Against the Machine

By Tim Worstall - January 18, 2006 12:00 AM

Over the weekend, you may have seen the New York Times Magazine article called "What is a Living Wage?". Apart from not quite managing to spot that a "living wage" is an extraordinarily bad idea economically, one that actually works to the detriment of low-paid workers, the author, Jon Gertner, gives us an interesting read. Especially as he manages to get some worthwhile quotes from a variety of people.

In Florida, a ballot initiative to raise the state's minimum wage by a dollar, to $6.15, won 71 percent of the vote in 2004, a blowout that surprised even people like Kern, who spent several weeks in Miami working on the measure. "We would like it to become a fact of political life," Kern says, "where every year the other side has to contend with a minimum-wage law in some state." Though victories like the one in Florida may have done little to help the Kerry-Edwards ticket - George Bush won 52 percent of the state's vote - Kern and some in the Democratic establishment have come to believe that the left, after years of electoral frustration, has finally found its ultimate moral-values issue. "This is what moves people to the polls now," Kern insists. "This is our gay marriage."

Note that one of the main proponents, someone who has been working on this for a decade, sees raising the minimum wage as an electoral and moral issue. Not, as one would hope, an economic one. For the all-important question is: do raises in the minimum wage actually help the working poor?

In the mid-1990's, the last time Congress raised the minimum wage, the Clinton White House was reluctant to start a war over the federal rate, according to Robert Reich, the former labor secretary. For an administration bent on policy innovation, that would have seemed "old" Democrat. "Then we did some polling and discovered that the public is overwhelmingly in favor," Reich told me recently. "At which point the White House gave the green light to Democrats in Congress." Reich, now a professor at the University of California, Berkeley, happens to view the minimum wage as a somewhat inefficient tool for alleviating poverty (compared with earned income tax credits, say). But he acknowledges that it has a powerful moral and political impact, in states red as well as blue, and especially now, in an era when workers see the social contract with their employers vanishing.

Certainly some who know (e.g. Reich) say that while it's a very inefficient way of helping the working poor (if that's what the populace, in their delusion, want to happen) then politicians will go along with it in return for votes. It might also be worth noting that the EITC -- that more efficient method of providing aid -- is, in fact, a form of Milton Friedman's idea of a negative income tax. Really, who would have thought it? An economist often demonized by the left campaigns for 40 years for a policy that actually helps the poor?

If we go a little further into this question of whether minimum wage rises do help the working poor, we will inevitably come across the research of Card and Krueger.

Card and Krueger agreed that the hypothesis that a rise in wages would destroy jobs was "one of the clearest and most widely appreciated in the field of economics." Both told me they believed, at the start, that their work would reinforce that hypothesis. But in 1995, and again in 2000, the two academics effectively shredded the conventional wisdom. Their data demonstrated that a modest increase in wages did not appear to cause any significant harm to employment; in some cases, a rise in the minimum wage even resulted in a slight increase in employment.

For the basic hypothesis is -- if you raise the price of something then people will buy less of it. The key word in that paragraph is "modest". All are agreed that a raise to $50 an hour would lead to massive unemployment (of everyone whose labor is worth less than $50 an hour, actually) but these papers looking at small changes are used to bolster the case for large changes.

The more conventional view is upheld by the recent UK experience. Indeed, some of the supporters of a much higher minimum wage look specifically to the UK experience to support their case:

In fact, the most apt comparison would be Great Britain, which now has a minimum wage equivalent to about $8.80 an hour.

And what was the effect of that in the UK? From the Low Pay Commission (a part of the government and one that lobbies for an ever higher minimum wage):

It contains a survey of employers who were affected by the rise in the minimum wage in 2003. It shows that: 37 per cent of them cut staffing levels, whilst only 4 per cent raised them; 31 per cent cut basic hours worked whilst 3 per cent raised them; 28 per cent cut overtime hours; 81 per cent said their profits fell; and 63 per cent said they raised prices.

Why did we not see this effect in the unemployment figures?

Another reason is that advocates of the minimum wage focus on its macroeconomic effects, where any impact of the minimum wage would be too small to be detected. For example, the Low Pay Commission estimates that 2004's uprating added just 0.08 per cent to the aggregate wage bill. Assuming a price elasticity of demand for labour of 0.6, and that all the adjustment came in job losses rather than shorter hours, this would have cost just 13,000 jobs. That's equivalent to less than two days inflows into the unemployment figures.

In the context of the overall economy the effects on the total unemployment figures are simply too small to be seen. But the effects on the specific individuals, those who have their hours cut, lose their jobs, are of course substantial.

Now all of this is actually pretty conventional politics as it is practiced. We have a worthy goal, improving the incomes of the poor (and yes, I do think it's a worthy goal). There are a number of ways we could do this, the above rises in minimum wage and expansion in the EITC being just two of them. The latter would be more efficient, produce greater gain for less pain. The former would, at the level being argued for, cause real and sustained pain to those very low income groups that we intend to help.

Which policy is being promoted? As this Daily Kos piece shows, the inefficient one that causes more pain -- with John Edwards and others in the Democratic Party pushing it across the nation. Yes, really, a group of politicians will push a known-to-be-worse-than-the-alternative policy simply because it will get them votes.

The moral thing to do, of course, would be to explain to activists and voters that yes, helping the working poor is a good idea. However, here is a better way to do it. That better alternatives fail -- that the living wage campaign is based upon pandering to the ignorance of the electorate (which amounts to following rather than leading) -- is what leads me to believe that Jessica Cutler is not nearly one of the most immoral people in politics. At least she was the passive participant in the screwing rather than the active.

The author is a TCS contributing writer. He is editor of 2005 Blogged.


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