The blogger Max Sawicky has highlighted a letter being sent to economists. The letter asks them to sign and affirm the desirability of raising the minimum wage. Sad to see such an obviously bright gentleman pushing such profoundly silly economic nostrums. Raising the minimum wage is precisely and exactly what should not be done -- due both to predictable ill-effects and to the questionable morality of such an action.
As far as the effect is concerned, the letter is correct that a modest increase would only have a modest effect on unemployment. But then that's never really been the objection. While a small increase is obviously both unwelcome and painful for those who suffer it, the actual amount is swamped by the general turnover of employment in the country. Much more important is the effect on the number of hours both offered and demanded. Higher wages will lead to more people being willing to work for them and, at least if the very basis of the economic arts -- the supply and demand curves -- are valid, a drop in the number of hours offered. That this turns up as a reduction in the hours of work available, rather than jobs themselves, doesn't make this mismatch any more enjoyable for those caught in it.
As George Mason's Alex Tabarrok points out it's also an extremely inefficient way of doing what its proponents claim, reducing poverty.
"The letter says, for example, that 'The minimum wage is also an important tool in fighting poverty.' Rubbish. But don't take my word for it.
'The minimum wage is a blunt instrument for reducing overall poverty, however, because many minimum-wage earners are not in poverty and because many of those in poverty are not connected to the labor market. We calculate that the 90-cent increase in the minimum wage between 1989 and 1991 transferred roughly $5.5 billion to low-wage workers.... an amount that is smaller than most other federal antipoverty programs, and that can have only limited effects on the overall income distribution.'
"The source? Card and Krueger in Myth and Measurement (p.3)."
Harvard's Greg Mankiw is also less than impressed with the arguments involved in trying to buck the laws of supply and demand and notes that a far more cost effective measure to increase the incomes of the working poor is to increase the Earned Income Tax Credit (EITC). He also urges us to look at who actually earns the minimum wage. Well, quite, as many point out, there's a lot of teenagers in there, a lot of people who are part of families not in poverty, despite their earning said minimum wage. It's also worth noting how few of those earning the minimum wage actually depend upon it for all of their income:
"The industry with the highest proportion of workers with reported hourly wages at or below $5.15 was leisure and hospitality (about 14 percent). About three-fifths of all workers paid at or below the Federal minimum wage were employed in this industry, primarily in the food services and drinking places component. For many of these workers, tips and commissions supplement the hourly wages received."
Now it's a few years since I finished my eight-year stint in that industry (everything from the graveyard shift at Denny's to waiting table at Pierre Cardin's Maxim's) but the entire reason to do the job was the tip income, even when serving pancakes to drunks at four in the morning.
It could even be worth pointing out that poverty amongst those working full time is a very small part of any of the problems being faced. Here are the detailed statistics on who is in poverty, by race, by age, by alternative measures of poverty and, perhaps most importantly, by the number of hours worked and whether they are all year round or not.
This, to me at least, is an extremely important part of the argument. On the one side, we're told that there is something unnatural, wrong, about someone being in poverty if they work full time all year. I might even agree. But I don't see that this vanishingly small part of the problem (the vast majority of the poor are working part time or not at all) justifies raising the minimum wage for all. Rather, it might, if we accept the basic premise, justify helping those who are indeed working full time out of poverty in some other manner.
So far we seem to have evidence that raising the minimum wage is an extremely expensive way of helping a very few people out of poverty, those very few working full time yet still stuck below the poverty line. To raise the minimum wage means raising it also for a far larger group of people who are not in poverty (those earning tips perhaps?) and those not working full time. We also have those aforementioned ill-effects on the quantity of work desired and on offer, leading to, while the change in undesired unemployment might be low, an inevitable increase in undesired underemployment.
However, there is one much larger problem, as Paul Krugman pointed out:
"Consider, for example, the effects of 'Plan Y' (never mind) on the hypothetical head of a household, currently making $5.43 an hour. According to their estimates, as long as he or she remained fully employed, the living-wage law would raise earned income from $10,860 to $14,500 -- and also mandate $2,500 in health coverage. (This is, incidentally, a 57 percent increase in the cost to employers; you have to have a lot of faith in Card-Krueger not to worry that some jobs might be lost.) According to their numbers, that family would currently pay less than $900 in taxes while receiving some $9,700 in benefits such as food stamps, Earned Income Tax Credit, and health care. Their calculations also show that most of the gains from the living wage proposal would be offset by reductions in these other redistributive programs. Indeed, only about one-fifth of the mandated increase in wages and benefits actually gets manifested in disposable income; the rest is taken away as benefits decline."
You see, those in work and still in poverty, we already help them. If their wages rise then that help is withdrawn: so our rise in the minimum wage becomes even more expensive as a poverty alleviation method, we have to raise it even further to have anything more than a marginal effect upon actual disposable income.
As Krugman goes on to point out, at this point it all becomes political: there are those who despair of, say, raising the EITC and so will admit that while the minimum wage route is expensive, doesn't do very much and has a number of effects that we don't really want very much, it is the only thing that could be done. This might even be true, but if it is, I'd rather welcome economists signing a letter stating so rather than glossing over those bad effects.
There is, to my mind at least, something really rather unethical about this route though. Given that rises in the minimum wage -- at least the vast majority of them -- get taken back in lower benefits, what is really happening is that the cost of raising the working poor out of poverty is being transferred from the taxpayers to some other group. Dependent upon the incidence, it might be the investors in companies that use minimum wage labor, it might be customers of such businesses or it might be the workers themselves, suffering from either un- or under-employment. Opinions will differ here, of course, but my bet would be some combination of groups two and three -- not actually the people we would like to bear such a burden.
Think of it this way: there you are in a bar; there's a group in the corner you want to buy a drink for. Do you say "Get em' in barkeep, and put it on that guy's tab"? Or "put it on my (or our) tab"?
What's being proposed in this letter urging a raise in the minimum wage is the former. That while we as a society might indeed want to raise out of poverty those working hard, we're going to make someone else (as noted, precisely the people we don't want to bear such a burden) pay for it. The moral response, if we do indeed want to raise the hard working poor out of their poverty is the latter, to state that we, as a society, should be willing to pay for it ourselves. That means through the EITC and, yes, through the tax system.
Whether or not you agree that such action should be taken about the incomes of the poor is an entirely different question. But having said that, collective action must be taken. So deliberately to offer a solution, that doesn't not become paid for collectively? Well, pardon me, but I call that immoral. But then that's politics, isn't it?
Tim Worstall is a TCS Daily contributing writer.