Thursday, August 03, 2006

Minimum Wage Thoughts: Transition Away From the Welfare State

I just thought I would chime in on the minimum wage debate that is currently not raging in d.c. because congress is in recess (which is the best thing for democracy). My disclaimer: I believe the minimum wage should be $0. Helping the working poor is a compelling end but ultimately I question how effectively minimum wage achieves this end. I think from both a politicial and policy standpoint we could much more effectively help the working poor through expanding the Earned Income Tax Credit (EITC) or through a negative income tax.

We value work as a society. There is a certain dignity achieved through working that manifests itself in a number of areas. People respect those that work, and those that work have an elevated self-worth. I would also argue that employment has positive implications for the family structure which itself has ramifications but that is an argument for another time. As a country we are much more supportive of public assistance that is conditioned on work. A minimum wage that really provides ample subsistence will have significant negative employment effects while diluting the benefits by dispersing them over a broader population than intended. I think a more effective means of finessing this tension lies with either increasing the Earned Income Tax Credit (EITC) or instituting a negative income tax.

XTRA's "Facts":

I think there are certain elements that we can all agree on in terms of discussing a minimum wage hike (or maybe not and thus we'll call these Xtra's "facts"):

1. The proposed minimum wage hike (about $1.50 per hour), which is modest, is unlikely to have a significant impact on the employment of those currently earning the minimum wage.

2. That said, it is clear that minimum wage does have a negative employment effect as the imposed marginal cost on the employer may exceed the value of a given employee's labor. We call this the law of demand, for evidence of this phenomena look at Europe. Points 1 and 2 appear to be in competition but in fact this tension speaks to the economic concept of elasticity.

3. The minimum wage is intended to help the working poor and does so (though, in my view not without adverse effects, see point five).

4. A significant portion of those earning minimum wage are either retirees supplementing their retirement income, spouses supplementing a household income, or students (high school and above) that are not part of impoverished families (looking at a DHHS study during the Clinton administration I would say this non-working poor population approaches half, that 75% of minimum wage workers work under 20 hours per week is a particularly telling statistic). I expect this point will be subject to quibbles, thus my "Xtra's Facts" qualifier.

5. Over the long term, the less one works the fewer skills/experience one will acquire thus reducing their lifetime earnings. This is acutely problematic for those with less education as a job is their only avenue to attain marketable skills.

Xtra's "facts", should you choose to entertain them at least, present several problems with the minimum wage and its effectiveness. A vast pool of people, who we don't necessarily define as the working poor are affected by minimum wage. So it is not an effective transfer as far as precision is concerned. The minimum wage imposes greater costs than intended as it benefits others than the working poor. We are effectively asking consumer and employer alike to subsidize the wages of a population that doesn't necessarily need or warrant this form of assistance.

And it is a transfer. When we advocate a minimum wage hike what we are doing is forcing employers to pay more for an employees labor than the employer would have otherwise. The essential difference between this and any other transfer is that the benefit is transfered from the employer as opposed to the general taxpayer. Proponents would argue that cost of the minimum wage is borne by the employer. I think proponents of the minimum wage are hard-headed to a fault on this point. A large part of support for minimum wage emanates from romantic notions of the social contract or corporate social responsibility or plainly to stick it to big business. I think sticking it to employers for the sake of itself is idiotic. Regardless of the motivation, the employer will do everything possible to avoid absorbing the costs of a minimum wage hike. Employers will either try to pass the cost on to consumers or do without the employee. How this is progressive escapes me unless progressivism is measured in proportion to its antagonism towards businesses. On a broader level, this is reflective of a tendency amongst "progressives" to conflate in their own minds how things ought to work and how they do work.

The earned income tax credit or a negative income tax is essentially the opposite of taxes. If your paycheck is below a certain level, your pay is supplemented by the taxpayer. It's like getting your tax refund without having to pay taxes in the first place (though, you do have to work, thus the earned part). The EITC enjoys bipartisan political support, does not have the negative employment effects, and could be precisely targeted to those that most need assistance. At a broader social policy level, we have been moving away from the notion of the welfare state to something along the lines of a "Work Ethic" state (I am stealing this phrase from Mickey Kaus) and I think such a step would accelerate this movement.

Helping the working poor is a compelling end. The minimum wage simply isn't an effective means towards that end. Our transition from a welfare state to a "work ethic" state (which may be merely a figment of my imagination), is a positive trend and should be continued. It impacts not only the level of poverty but the pathologies associated with poverty. Removing the minimum wage and offsetting the difference with the Earned Income Tax Credit would be a good first step to that end.

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