The Sin of WagesThe real reason to oppose the minimum wage.
Posted Friday, July 9, 2004, at 9:19 AM ET
John Kerry wants to raise the minimum wage, and President Bush, at least in principle, is on board—provided, says the president's spokesman, that it can be done without placing unreasonable costs on "job creators."
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StumbleUponThe 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.
In fact, the power of the minimum wage to kill jobs has been greatly overestimated. Nowadays, most labor economists will tell you that that minimum wages have at most a tiny impact on employment.
Twenty years ago, they'd have told you otherwise. Back then, dozens of published studies concluded that minimum wages had put a lot of people (especially teenagers, blacks, and women) out of work. As the studies continued to pile up, you might think we'd have grown more confident about their common conclusion. Instead, the opposite happened. Even though the studies were all in agreement, they managed to undercut each other.
Here's how: Ordinarily, studies with large sample sizes should be more convincing than studies with small sample sizes. Following the fates of 10,000 workers should tell you more than following the fates of 1,000 workers. But with the minimum-wage studies, that wasn't happening. According to the standard tests of statistical significance, the results of the large-scale studies were, by and large, neither more nor less significant than the results of the small-scale studies. That's screwy. Screwy enough to suggest that the studies being published couldn't possibly be a representative sample of the studies being conducted.
Here's why that matters: Even if minimum wages don't affect employment at all, about five out of every 100 studies will, for unavoidable statistical reasons, appear to show a significant effect. If you could read all 100 studies, that wouldn't be a problem—95 conclude the minimum wage is pretty harmless as far as employment goes, five conclude it's a big job-killer, you realize the latter five are spurious, and you draw the appropriate conclusion. But if the 95 studies that found no effect were deemed uninteresting and never got published, then all you'd see were the spurious five. And then the next year, another five, and the next year another five.
Even when the bulk of all research says one thing, the bulk of all published research can tell a very different and very misleading story.
How do we know what was in all the unpublished research about the minimum wage? Of course we don't know for sure, but here's what we do know: First, the big published studies were no more statistically significant than the small ones. Second, this shouldn't happen if the published results fairly represent all the results. Third, that means there must be some important difference between the published and the unpublished work. And fourth, that means we should be very skeptical of what we see in the published papers.
Now that we've re-evaluated the evidence with all this in mind, here's what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers.
In fact, the minimum wage is very good for unskilled workers. It transfers income to them. And therein lies the right argument against the minimum wage.
Ordinarily, when we decide to transfer income to some group or another—whether it be the working poor, the unemployed, the victims of a flood, or the stockholders of American Airlines—we pay for the transfer out of general tax revenue. That has two advantages: It spreads the burden across all taxpayers, and it makes politicians accountable for their actions. It's easy to look up exactly how much the government gave American, and it's easy to look up exactly which senators voted for it.
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.
The minimum wage is nothing but a huge off-the-books tax paid by a small group of people, with all the proceeds paid out as the equivalent of welfare to a different small group of people. If a tax-and-spend program that arbitrary were spelled out explicitly, voters would recoil. How unfortunate that when it is disguised as a minimum wage, not even our Republican president can manage to muster a principled objection.
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Remarks from the Fray:
…The social benefits of the minimum wage are to improve the lives of low-wage workers, reduce the number of hours they need to work to make a living, and reduce the demand for social services such as food stamps. If the minimum wage is increased when low-wage jobs are scarce, it could slightly increase unemployment and drain the tax coffers of unemployment benefits. However, since crummy jobs are not in short supply in America (in fact we crassly import 3rd world laborers to meet demand) this shouldn't be a problem. Without a minimum wage, destitute citizens would have a working life indistinguishable from illegal immigrants.
The minimum wage guarantees benefits to the working poor without requiring government employees to process claims at taxpayer expense. The EITC, on the other hand, is a government program originally designed to supplement income in order to make work more attractive than welfare. Relying on it exclusively to keep the working poor off the streets would increase administration costs for the program and strain the already-strained federal budget.
The minimum wage appears to be very different from the EITC, because it is, in fact, very different from the EITC. Both serve a useful purpose. Neither is dispensable.
--ShriekingViolet
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..on…the issue of minimum wages as charity for incompetents, I agree with Landsburg. If we want to give to the poor, we should be explicit about what we are giving, and why we are giving it. Propping up minimum wages as a backdoor path to social justice is disingenuous, and not notably effective judging by America's economic history. The notion of a "living wage" to me qualifies as rhetoric rather than reasoned argument. I would far rather pay the appropriate amount for a job, supplement quality of life with subsidized health care, food, shelter, and education--and come up with arguments in favor of social welfare states predicated on more than empty populist slogans.
--post_hoc_prior
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Interesting point, but the statistical analysis is misstated. If the universe of data shows that no jobs are created or lost by minimum wage increases (hypothetically speaking, as I have no idea what the numbers are), and the sample a study takes results in a significance of 95%, then the author rightly concludes that a study will find a significant but false result 5% of the time. However, the result will show job loss only 2.5% of the time, and job gain the other 2.5%.
I'm not sure how this changes the thesis. On one hand, it indicates that given the (presumably hidden) studies, it is just as possible that job creation has resulted from minimum wage increases. On the other hand, it means that the people doing the studies would have to do twice as many to get the same number of "lying" studies - making it less plausible that they are doing hundreds of studies per year and only releasing the ones with results that they want.
His theoretical argument about taxes and transparency carries the real weight of the piece. Perhaps he should have stuck to that and not tried to argue that 95% (or 97.5%, using a proper understanding of statistics) of studies on the subject are being hidden away.
--Jester2459
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The economic logic of a livable minimum wage seems be very similar to the economic logic of a tax cut and rests on the assumption that the more money available to consumers (through higher wages or tax refund checks) the more consumers will spend. Therefore, a logical conclusion is that an increase in the minimum wage will stimulate the economy, increase consumer spending, create new jobs and generally be good for the economy.
Under this paradigm, all Republicans should support a livable minimum wage.... I wonder why most Republicans don't?
--LannonMac
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…Landsburg brings up another important factor of the minimum wage-- there's people that NEED a living wage(people who live alone), and people that don't(teenagers). If we're serious about improving the economic conditions of poor people without impacting small businesses, we need to create a minimum teen wage, and a minimum living wage.
--Madai
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