Friday, February 02, 2007

Minimum wage increase: how to make the poor poorer

Rather than increase the Earned Income Tax Credit or reduce payroll taxes, Congress is moving forward with an increase in the minimum wage. Gary Becker and Richard Posner have written a Wall Street Journal op-ed titled "How To Make the Poor Poorer" which describes the likely consequences of this feel-good legislation:
Although some workers benefit -- those who were paid the old minimum wage but are worth the new one to the employers -- others are pushed into unemployment, the underground economy or crime:
  • The losers are therefore likely to lose more than the gainers gain; they are also likely to be poorer people.
  • And poor families are disproportionately hurt by the rise in the price of fast foods and other goods produced with low-skilled labor because these families spend a relatively large fraction of their incomes on such goods.
Because most increases in the minimum wage have been slight, their effects are difficult to disentangle from other factors that affect employment:
  • But a 40 percent increase would be too large to have no employment effect; about a tenth of the work force makes less than $7.25 an hour.
  • Even defenders of minimum-wage laws must believe that beyond some point a higher minimum would cause unemployment, otherwise why don't they propose $10, or $15, or an even higher figure?
Good intentions don't make for good legislation.

UPDATE (February 9, 2007): Glen Whitman writes about how the minimum wage debate is largely symbolic on both sides, though this time it could be different.

UPDATE (September 6, 2007): I just came across this interesting post at the Coyote Blog about how minimum wage changes affect his specific business.

UPDATE (October 10, 2007): Here's a nice summary of U.S. minimum wage worker statistics, including:

According to the U.S. Department of Labor, the median annual income of a U.S. worker is $32,140. Federal minimum wage is currently $5.85 an hour, or about $11,500 per year — just above the poverty line. Of the 76.5 million people paid by the hour in the United States in 2006, 2.2% make minimum wage or less. Here are some generalizations we can make about minimum wage workers:
  • Most minimum wage earners are young. While 2.2% of all hourly workers earn minimum wage or less, just 1.4% of workers over the age of 25 are paid at or below the Federal minimum wage. More than half (51.2%) of minimum wage workers are between 16 and 24 years old. Another 21.2% are between 25 and 34.
  • Most minimum wage earners work in food service. Nearly two-thirds of those paid minimum wage (or less) are food service workers. Many of these people receive supplemental income in the form of tips, which the government does not track.
  • Most minimum wage earners never attended college. Just 1.2% of college graduates are paid the minimum wage. If you only have a high school degree, you’re more likely (1.9%) to be paid minimum wage. Those without a high school degree are nearly three times as likely (3.7%) to earn minimum wage. 59.8% of all minimum wage workers have no advanced education.
  • Finally, as you might expect, part-time workers are five times more likely to be paid the minimum wage than full-time workers.
UPDATE (November 25, 2012): There has been an accumulation of evidence that a moderate minimum wage is a net benefit, improving both wages and employment in some cases (reference to The Economist, Nov. 24, 2012, p. 82, "Free exchange: The argument in the floor").


Einzige said...

Economics Professor Russel Roberts, over at Cafe Hayek, recently posted a brief survey of the empirical evidence on the effects of the minimum wage.

Like the story of the broken window, it's a lot easier to point to the benefits of a minimum wage than to the costs, but that doesn't make the costs any less real.

As Heinlein was fond of saying, TANSTAAFL

Ktisophilos said...

But what's the excuse? Economists for decades have pointed out the obvious: price ceilings lead to shortages as surely as night follows day, and price floors lead to gluts — and a glut in labour is usually called unemployment. But politicians care about being elected, so they push what feels good not what is good.

More people should take note of the economist Dr Thomas Sowell:

Q: If you could knock a little something into the heads of young liberals, what would it be?

A: I'd like to get them to think in terms of incentives and empirical evidence, and not in terms of goals and hopes. Over the years, I've reached the point where I can hardly bear to read the preamble of proposed legislation. I don't care what you think this thing is going to do. What I care about is: What are you rewarding, and what are you punishing? Because you're going to get more of what you're rewarding and less of what you're punishing.

BTW Einzige, Frédéric's Bastist entire essay whence the broken window parable comes is available, What Is Seen and What Is Not Seen. It's tragic that politicians are pushing "economic stimulus spending" and protectionism that Bastiat demolished 160 years ago.