I was reading over one of Professor Landsburg’s articles on the minimum wage today. Surprisingly, and I’m embarassed I haven’t come across this information before, he argues that the minimum wage does not in fact hurt low-level unskilled employment. Instead, the real case against it rests on ethical grounds:
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.
Upon further reflection, Professor Landsburg makes a lot of sense. When we make social justice claims, we are saying that as a society, we have an obligation to help x disadvantaged group. In fact, most proponents of the minimum wage believe that the policy acts as a symbolic statement about our society’s moral progress. But if we share this obligation to elevate our societal standing, then we can’t scapegoat a small group of individuals - usually small business owners - and unload all the financial burden on them for carrying out this moral task. We cannot ask businesses to compensate for our shared sense of guilt - we must atone for it together.
And even if we believed that some businesses should atone for their astronomical profits and excessive greed, which is a questionable assumption in itself, they are not the ones being targeted by the minimum wage. Instead, large corporations are more likely to welcome the minimum wage so they can see labor costs rise for their smaller, weaker competitors. While they take a pay cut, they increase their market share. In the end, it’s a win for them.
So this is all very enlightening and good. But then I read over the comments, and I am reminded of a conversation I once had with a friend of mine who strongly supports the wage policy. At the time, I was very much flustered by what he was trying to (I think) convey: that raising the minimum wage helps workers, inducing them to spend more and thus stimulate the economy. Win-win. I knew there was something fishy about the argument, but I couldn’t put my finger on it. The conversation did not end well. Now, I’ve realized what was wrong with that line of thought, and it is voiced here:
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
Except this is all voodoo economics. No, not that voodoo economics, though it’s about as ridiculous as believing that we are always above the optimum level of taxation on the Laeffer Curve, all the time. It’s voodoo because it assumes that we can magically do some macroeconomic accounting and everything will be all right. First, LannonMac forgets that a minimum wage hike is nothing but a transfer payment. It is essentially a tax on employers and a payment transferred to workers. The federal government taketh away and it giveth. This is not the same as a tax cut, which is a reduction of the amount the federal government takes away. Put it this way: assuming growth is C+I+G+NX, basic economics tells us that a tax cut is an increase in C. This is obvious, and it will result in a GDP/AD increase. On the other hand, the wage hike is an increase in G (through government spending) but an equivalent decrease in C. Why the decrease in C? Because it acts as a tax hike on employers, which is internalized into higher prices if firing employees is too costly. Thus, consumption decreases with the higher prices. No GDP growth ensues.