Thursday, July 23, 2009

Maximum Folly

One hundred thousand lemmings can't be wrong. Anon
The recent debate in the media about the minimum wage (or is it a debate by the media, as suggested by Karl Whelan?), seems to be a case of A or B. Option A: leave the minimum wage alone; Option B: reduce the minimum wage. But like the beer ad goes, it’s not always A or B, it’s probably C. And Option C in my book is to get rid of the minimum wage.

The minimum wage has been described as a maximum folly by its critics, for good reason. The noble intention is to lift the working poor out of poverty. Who could be against that? The problem is, most of the people on the minimum wage are not 'poor' in a household or family income sense. Bear in mind that only a tiny minority of employees are on the minimum wage in the first place (1.6% of industry workers, for example - see table 10 pdf), and that there are several derogations for young people and apprentices.

In truth the minimum wage has become one of those totemic issues - support for which is a badge signifying you really care - that has no bearing on the reality of poverty as it is experienced by those actually in poverty. That's not to say that raising the real value of the minimum wage (achieved by keeping it constant against a background of deflation) might not contribute to poverty in the future. As one assessment of the economics of the minimum wage points out:
The central goal of raising the minimum wage is to raise incomes of low-income families and reduce poverty. There are three reasons why raising the minimum may not help to achieve this goal. First, a higher minimum wage may discourage employers from using the very low-wage, low-skill workers that minimum wages are intended to help. Second, a higher minimum wage may hurt poor and low-income families rather than help them, if the disemployment effects are concentrated among workers in low-income families. And third, a higher minimum wage may reduce training, schooling, and work experience—all of which are important sources of higher wages—and hence make it harder for workers to attain the higher-wage jobs that may be the best means to an acceptable level of family income.
The unspoken, cynical truth about the minimum wage, as noted by Stephen Landsburg, is that it is more politically expedient to impose a minimum wage on a minority of employers than to impose taxes on the majority of taxpayers:

By contrast, the minimum wage places the entire burden on one small group: the employers of low-wage workers and, to some extent, their customers. Suppose you're a small entrepreneur with, say, 10 full-time minimum-wage workers. Then a 50 cent increase in the minimum wage is going to cost you about $10,000 a year. That's no different from a $10,000 tax increase. But the politicians who imposed the burden get to claim they never raised anybody's taxes.

If you want to transfer income to the working poor, there are fairer and more honest ways to do it. The Earned Income 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.

It seems clear: neither A nor B but C.


  1. This comment has been removed by the author.

  2. At the time the National Minimum Wage was introduced I was one of the very few people to publicly point out the obvious problems. The whole debate was very depressing & convinced me of the futility of getting involved in these matters. When it was introduced the government was smart enough to introduce it at a level (about €5 ph) which was pretty much the market clearing level or a bit below. So no jobs were lost, no one really gained and people could feel that something had been done. So it was that rare thing , a victimless crime.
    My guess is that now the current level is above the market clearing rate so it does matter. Minister Lenihan has talked about the possibility of reducing it if it is an obstacle to job creation. Smart boy Brian, but how would he know? Meanwhile a Fine Gael TD, Varadkar, has looked into his heart, De Valera-like, and decided that it is not costing jobs. Well thats alright then. Let us pray that government policy on swine flu (for example) is not decided on the same ad hoc, amateurish basis.
    All of this brings to the fore the importance of joined up thinking: the effect of minimum wages interacts with the effect of the benefit system. It is essential to coordinate these policies.

  3. You know the whole lemming thing was made up right?

  4. Very interesting remark from Landsburg there! Just some thoughts on the measures being suggested in the media, and I'd be interested to see what people think..


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