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The Good and Bad of the Minimum Wage: A Super-Short Analysis
This exchange between AEI economist Michael Strain (from a recent podcast Q&A) and me pretty well summarizes the pros and cons of the minimum wage:
STRAIN: If your goal is to put more money in the pockets of the bottom half, let’s say, of households by income, then the minimum wage is a reasonable policy. And you see people saying, look, you raise the minimum wage and it will put billions and billions and billions of dollars into the pockets of workers and it will help millions of households, and that’s a good thing. And, yes, there will be job loss but, say, for example, we take the minimum wage to $10 an hour [for] the federal minimum, several hundred thousand people will likely lose their jobs, but a whole lot of people will see an increase in their incomes and that’s a trade-off worth making. But, implicit in that argument is that the goal of raising the minimum wage is to help the bottom half of households by incomes.
If instead your goal is to help the working poor, then the minimum wage is a much less defensible policy, both because the costs to workers of raising the minimum wages will be borne disproportionately by lower skilled, lower income workers. And because there are such better tools to help the working poor than the minimum wage (such as the Earned Income Tax Credit or other wage subisdy).
PETHOKOUKIS: So why isn’t it a well-targeted policy fix for the working poor as opposed to a household which is just below the median household by income?
STRAIN: Well, it’s not well targeted because of the structure of the program. So the minimum wage applies to hourly wage workers regardless of the overall income of the household in which those workers live. So a single mom with two kids at home qualifies for the minimum wage. At the same time, the teenage daughter of parents who earn a six-figure income qualifies for the minimum wage. And so what you’re doing is you’re increasing the minimum price that firms can pay for an hour of labor. And it’s simply a matter of fact that those benefits are distributed throughout the income distribution.
Again, if you look at raising the federal minimum wage to about $10, the overwhelming majority of the benefits — say something like 80% of the extra income that people would receive from the minimum wage increase — goes to households above the poverty line, with incomes above the poverty line because the minimum wage goes to everybody and not just to people who live in poor households.
Published in Economics
Why do we always focus on this nonsense? The value is what the value is. The number we assign to that value is arbitrary. Changing the number doesn’t do anything at all except during the short term period where all the other numbers are adjusting.
Worse than that, raising the minimum could ratchet up a lot of already higher wages to maintain differentiation between skill levels. Unions think this is important. Heavily unionized companies used to link salaries to their union wage scale, also. Maybe they still do. If there were to be a ripple effect, it should be seen in a general increase in prices.
And it will still lead to layoffs at the lowest tier.
Why does the SEIU care about minimum wage (aside from being leftists)?
Some union contracts base pay scales on the minimum wage.
This assumes the income tax remains more or less as it is, and that it is a good idea to use it as a tool to transfer income, and that we know the correct amount to transfer and that there are no negative unintended consequences. It also makes it more difficult to abolish or seriously reform it. The minimum wage is a seriously harmful policy and should just be abolished. If states choose to make it more difficult for first time job seekers and increase dependency that is their choice. But the federal government can’t and shouldn’t.
Discussions of the adverse effects of the minimum wage always seem to focus on the employment loss, which is very real but which is not the only (or even the worst) adverse effect on the poor. The worst impact is the price inflation which disproportionately impacts the poor. Those “billions and billions” of dollars that are supposed to flow from an increase in the minimum wage all come out of the pockets of the customers of businesses with minimum wage workers. Every penny. And the people who shop at minimum wage businesses tend to be the poor.
If you double everyone’s wage, then the price of everything also doubles, and buying power remains exactly the same. When will the lefties learn that you cannot raise the level of the water in one side of the bathtub by scooping up water from the other side and pouring it into the first side?
Because lots of union jobs have their pay scales tied to minimum wage.
I think raising the minimum to $15 as CA and NY are doing will have negative effects on those it is intended to help.
After some period the net effect will be to further debase the US dollar, and decrease its value relative to the rest of the world, so everything even imported products will cost more. Over a few years, likely on the order of 5 or so, the economy will reprice the value of work, and incomes will again reflect market costs, but at a higher cost in total dollars, in effect inflating the currency, and removing all the short-term benefits the raise in the minimum was intended to accomplish. Government picking winners and losers, doesn’t work in the long run, or change economic “laws” it can only reduce the ability of the economy to react to shocks, reduce the incentive to innovate or grow, and reduce everyone to the same gray hopeless condition, where government power is maximized and individual freedom minimized, likely the real goal of those educated individuals who impose minimum wage raises in the first place
It’s happening anyway, but this will speed it along.
And a large percentage of job growth in the US in the recent past was in the service sector….
I do not understand economics; it has always been an intimidating topic for me. But I have a serious question for any one who is knowledgeable and can help me out. If I have limited skills and the only real thing I own and have to trade is my labor in an extremely competitive labor market, how is setting a minimum wage at $X.00 an hour not the same as prohibiting me from setting a competitive price for my only marketable asset ?
China or Robots.
Choose the form of the destructor!
Well you could bring in lots of illegals as a third option….