The Minimum Wage STILL Isn't a Good Idea

February 14th, 2013 by 

"Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour." - President Barack Obama, State of the Union Address, February 13, 2013

No matter how big the stage you're standing on when you make arguments for it, the minimum wage still isn't a good idea.  Ostensibly, the minimum wage is a policy which is supposed to help the lowest wage earners by protecting them from earning less than a living wage from an employer.  In practice, the minimum wage does nothing more than set a minimum on what a worker can sell their talents for - well, short of an unpaid internship (or running a blog!).

So, our goal is to stamp out the poor and ensure that all households earn a living wage, right?  Just like the CAFE standards are a suboptimal way of reducing vehicle emissions, the minimum wage takes a backseat to another policy which is much better at eliminating poverty while spreading the burden equitably - negative income taxes.  We'll touch on that later, briefly.

Pay Attention to Effects - Not Titles

Lisa: His name doesn't matter, a rose by any other name would smell as sweet.
Bart: Not if you called him Stench Blossom.
Homer: Or Crap Weed.

-The Simpsons Episode 4F23, The Principle and the Pauper

The Simpsons had it backwards - if you took Stench Blossoms and called them Roses, that wouldn't make them smell any better.  They would still smell like (and be) Stench Blossoms.  Back in Washington, D.C. or any of the 50 state capitols, coming up with palatable names for things is like a second career for the political subset:  "PATRIOT Act",  "Pro-Life",  "Pro-Choice", "Gun Control",  "Climate Change",  "Marriage Equality".

Putting politically favored labels on movements is big business.

What's really going on once you strip off all the labels?  Simple - you're raising the cost of labor.  We go into the whole argument against minimum wages in the archives - but Economics 101 tells you what happens when you raise the cost of something, artificially or otherwise.  In this case there is a subset of employees who would work for less than the price floor but cannot due to the policy.

Labor Supply and Demand Meet the Price Floor

Labor Supply and Demand Meet the Price Floor

Incidence of the Minimum Wage

Incidence, in economics, refers to the group that the effects of some policy would fall upon.  Generally, 'Tax Incidence' is the topic - but today we're going to talk about 'Minimum Wage Incidence'.

It's impossible to argue that a minimum wage doesn't increase the cost of labor.  In the case of the mimum wage, there is the immediate rise in minimum wage costs to $9 an hour in addition to compliance costs, payroll taxes, and other costs (including health insurance - an additional service that all employers will now have to offer or pay a fine).

For the sake of argument, let's say that the $9 an hour employee now costs $15 to employ, up from $12 previously.  At the most basic level, that means that the employee must be in a role that is worth more than $15 an hour to the company.  If the job was worth $13 and an employer could previously justify the employee?  Well, let's just say that companies aren't in the business of losing $2 an hour to keep people employed.

So, in the immediate term, the employer can either lay off employees or raise prices.  This is where it gets interesting... I assume that some of the cost will fall on employers in the form of shrinking margins (say, a $17 / hour role, previously a $12 / hour employee, now a $15.)  The rest?  Passed on to customers through higher prices.

And who tends to bear the increased costs of goods and services from employers that employ minimum wage employees?

Well, let's just toss up the demographics of two well known chains which have employees who might be affected by an increase in the minimum wage.  One: McDonald's, where a majority of customers make under $60,000 a year and best fit the category "lower-income households living in city neighborhoods in the South."  (Inferred from website demographics).  Two: Walmart, with average customer household incomes between $30,000 and $60,000.

So, best guess is the incidence would fall partway between the employers and their customer bases - generally of similar demographics to their employees.  Logically, this makes sense, but also anecdotally - remember the threatened Walmart strike on Black Friday?  Since the people that were in favor of the strike didn't tend to shop at Walmart, it was more of a hiccup than a major disruption.

Logically, anecdotally, how about academically?  One very famous paper by David Neumark and William Wascher does show that the effect of the minimum wage might be redistribution among poor and almost poor families, just like in our simplified model.  Not the desired effect, I'm afraid.

Where Should the Burden Fall?

I'd argue that the responsibility to ensure a living wage falls on, well, all of us.  It's one thing to observe an ecosystem in which you don't participate and be in favor of it changing - it's another to help change things yourself.  If you never shop at stores with minimum wage employees you might not care if there is inflation among necessities on the low end, however, it's much better to spread the burden of providing for the lower earners among a larger population - like, say, a whole country.

Think of a puddle, perhaps one foot wide by one foot wide.  That's the universe of people who work and shop at minimum wage employing stores and business.  Imagine the costs of the minimum wage increase is represented by a small bottle of food coloring.  If you dump the whole bottle into a puddle, what happens?

Now, same analogy, except think of a swimming pool.  The swimming pool is the tax base of the United States - all of us, including the expensive store only shoppers (Whole Foods, Costco and Ikea, at a minimum, here in the Bay Area).  Now if you dump the whole bottle of food coloring into the pool... it doesn't affect it as much, does it?

Dumping the food coloring into the pool is the negative income tax, a refundable tax credit which can be used to set a living wage.  We're way too deep into this article (I sort of talk about it here) to discuss a good structure, but the only program we've got today which fits most of the requirements is the Earned Income Tax Credit.

Expand the Earned Income Tax

I think it's unfortunate that the Negative Income Tax is so out of vogue in Washington today.  A well designed NIT set up to properly reward increasing incomes could replace all of the non-health related welfare transfer payments we make today (that's right - including Social Security).

Of course, even though the EITC was a Republican policy (thank the late Milton Friedman for that), it's been all but abandoned.  The Democratic alternative, the minimum wage, isn't good at fixing the problem it attempts to fix, and is likely making things worse.

Anyone think there is a good chance the EITC gets a new look in this environment?

Don't Quit Your Day Job...

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