diet coke for breakfast

Friday, July 09, 2004

Posted by Jake
The Sin of Wages -- The Real Reason to Oppose the Minimum Wage -- Steven Landsburg at Slate

The president is trying to cast doubt on Kerry's proposal by alluding to the old canard that minimum wages cause unemployment and therefore hurt the very people they're supposed to help. Obviously that's occasionally true. If you contribute $6 an hour to your employer's bottom line, and if he's forced to pay you $7 an hour, you'll soon find yourself out on the street.

But so what? Sure, you've lost your job. But don't forget, this was a minimum-wage job in the first place. Losing a lousy job might not be a whole lot worse than keeping it. Meanwhile, lots of minimum-wage workers keep their jobs and are presumably grateful to the politicians who raised their wages.

If you want to transfer income to the working poor, there are fairer and more honest ways to do it. The Earned Icome Tax Credit, for example, accomplishes pretty much the same goals as the minimum wage but without concentrating the burden on a tiny minority. For that matter, the EITC also does a better job of helping the people you'd really want to help, as opposed to, say, middle-class teenagers working summer jobs. It's pretty hard to argue that a minimum-wage increase beats an EITC increase by any criterion.

I can think of a couple reasons why the minimum wage is better than the EITC. First, if you need more money because you say have more children, you can work more with a minimum wage but not get a greater EITC (I think that the CTC doesn't change after a certain number of children too but I am not sure about that.). This gives you control over your income that you wouldn't have had without. Second, the EITC costs money to distribute -- you know that whole government thing. You lose some and in some cases a lot of the money you would like to distribute. Minimum wage puts it in the hands of people directly.

If indeed the evidence shows that the effects of the wage increase are minimal -- and I don't know if that is true -- then why not stick with letting the market sort things out.

James the Economist might be interested in weighing in.

James- The problem is that a minimum wage is a price control, and price controls distort markets. Labor is an input like any other, if it becomes too costly, purchasers will find a substitute. At large companies, that's likely to be automation, which will mean job loss. At small businesses, they are likely to do without, and that will mean job loss. A minimum wage risks artificially inflating the cost of labor instead of allowing supply and demand of manhours to determine it.

But, to your specific concerns... I don't have numbers, but I doubt the EITC costs that much to administer. It's a tax credit, which means that either the government takes less through withholding, or mails a bigger refund check. You might be able to fire some IRS employees and save tax-payers money that way, but I doubt that would happen, they'd just allocate those employees to other tasks, so it's not a cost savings.

Second, the EITC adjusts upwards with the # of hours worked as reflected by the amount you earn (that's why its called an EARNED income tax credit) up to a certain point, . Beyond that point, the person is considered "out of poverty" and the EITC diminishes. And remember, that person can still control their income, by working more hours, at whatever wage they're earning.

To give a more complete answer, I'd have to go back to some Labor Econ text books, which I just don't have the time to do, but in general, if my memory serves, there are some perverse incentive points on the EITC curve, but in general it's less distortive than the minimum wage.

Of course the entire discussion rests on the assumption that redistribution of income is good. I'm guessing that anyone reading this blog is probably ok with some redistribution, the question is whether the goal of that redistribution is to assure mere subsistance, then the EITC probably works fine. If you want more redistribution than that, then you'll probably need to look for a more drastic policy.

Brian- Another point on the EITC costing more than the minimum wage hike: bear in mind that there are still certain costs involved in the increase as well. Think of all the employers paying the current minimum wage who aren't too keen on paying more. There is, of course, an apparatus to enforce the minimum wage as it stands now, but that would certainly grow, at least temporarily, if the wage was increased.

And regarding the initial article. This: "Losing a lousy job might not be a whole lot worse than keeping it" is one of the worst, most insensitive things I've ever heard anyone say. This is clearly a man who has never had to live on a minimum wage job. It may be terrible, but it must certainly be better than nothing. After all, there are even a lot of immigrants in this country who subsist on less than the legal minimum wage, and they'd certainly be worse off if they lost their jobs.


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