Thursday, June 02, 2005

Minimum Wage

The Republican leadership has lately been giving moderates a lot of reason to be disgruntled, but there are good reasons we're not Democrats, and the minimum wage is a good case in point. Unfortunately, as you can see by my sources, the research in the field is heavily politicized.

The Liberal argument asserts that corporations divert much of the fruits of workers' labor into CEO salaries and stock dividends, so government regulation to establish a minimum wage is a means to moderate incomes. An influential book published in the mid 90s Myth and Measurement often quoted on liberal blogs to this day purports to show empirical evidence that there was no economic downside to 4 specific minimum wage hikes.

However fiscal conservatives strenuously argue that increasing the minimum wage is a barrier to hiring low-wage workers. They further note that raising the wages of low-wage earners requires many employers to raise the wages of more skilled workers, further reducing their ability to hire (and train) more people. The Cato Institute specifically refutes the data in Myth and Measurement.

While it's tempting to segue with some platitude like 'the truth lies in the middle' I think the truth is actually askew both these arguments. If the government set no minimum wage, there would be a small number of people at the tail of the wage bell-curve who would be worse off, but it would be a small number and there would indeed be government programs to prevent utter destitution. If the minimum wage were suddenly exorbitantly high, say $20 per hour, one could imagine a period of high inflation and wage increases as the market adjusted, then there would still be a bell curve of wages with the minimum wage at about the same point on it once the market reached equilibrium. There is thus probably a certain range of minimum wages which do not significantly affect employment, while still benefiting low wage earners. (Mr Laffer is rolling over in his grave, assuming he's dead). However, there's no way to know if we're in that range, since we can only study the effect of changes in the minimum wage--we can't add the minimum wage to an economy that never had one and observe the effects. This uncertainty allows folks at either end of the political spectrum to make whatever unprovable yet indisputable claims they like.

Furthermore, there's not a single labor market, there are multiple markets--for doctors, engineers, salemen, designers, etc. who are not interchangable. Any minimum wage is really applied only to the unskilled labor market. Some evidence supports the notion that increasing the minimum wage will affect teens more than adults. Also, it's pretty clear that the effect the minimum wage rate has on a given worker's salary is determined by the worker's substitutability; the more easily substituted (usually this means the lower his skill level) the more his salary is affected by a minimum wage hike. As far as total employment, the effect of the minimum wage is to make those workers whose labor is valued below the minimum wage unemployable, while employers invest in some capital to make those whose labor is valued just above the minimum wage more efficient and hire more of them. The net effect cancels out: some loss of low skilled workers' job prospects, and increase in more skilled worker employment. If this provides a structural incentive for low-skilled workers to get an education, it may be a good arrangement. More detailed discussion along these lines can be found here.

The bottom line: a minimum wage is not a disaster, and is not a panacea. Its most effective use is as a policy to support for a politician to seem populist, without directly costing the government any money necessitating tax increases. Since a minimum wage may help a small minority of people a great deal, I would not abolish it altogether. I would favor its being kept low however, since it can do more harm than good as an obstacle to low-skilled workers participating in the labor force.

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