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July 29, 2006
Minimum Wage Buzz
It seems to be a theme of the week, motivated by two, very visible, developments: A new Chicago ordinance requiring that "big-box retailers pay higher wages and benefits to workers", and the gambit by Congressional Republicans "to allow the first minimum wage increase in a decade but only if it's coupled with a cut in inheritance taxes". Maybe predictably, the reaction among the econ-types was less than positive. Captain Capitalism had this to say:
Again, it seems the parasite has killed off its host and not realized it and in doing so has condemned itself. For while it may be grand that wages are now higher, unfortunately, this will deter companies and potential employers from conducting business in Chicago, and thus THERE WILL BE NO FREAKING JOBS, let alone ones that pay $10/hr. Furthermore, this will contribute to the divide between rich and poor in Chicago as now the only businesses that will set up shop are those that need specialized labor and would have to pay about $10/hr anyway, and thereby denied unskilled and presumably poor labor any employment prospects.
Similar sentiments are expressed by Phil Miller, by Tim Swanson, and by Ryan McMaken. Russell Roberts notes that this seems to be a unique character trait among economists, a fact that Russell's blogging partner Don Boudreaux explores in some detail:
Do we know with certainty what effect raising the minimum wage will have? Maybe not. But even if we don't, that doesn't mean we can't take a position on the matter...
The evidence is indeed imprecise. Some empirical studies -- most famously one published in 1994 in the prestigious American Economic Review by David Card and Alan Krueger -- find that on at least some occasions raising the minimum wage might actually increase employment of low-skilled workers. Other studies -- for example, this 2004 one by David Neumark and Olena Nizalova -- find that the higher the real minimum wage, the worse are the employment prospects of low-skilled workers...
Basic economics tells us that the higher the cost of choosing X the less likely is X to be chosen. Economists call this relationship between cost and choice "the law of demand." Non-economists call it common sense. Does anyone really doubt that the law of demand is both true and robust? I think not -- even though persons who insist that a higher minimum wage is good for low-skilled workers carve out employer decisions on hiring workers as an inexplicable exception to this rule...
We don't know exactly how, or exactly by how much, employers as a group respond to higher minimum wages -- but the theoretical case that they do respond in ways unfavorable to low-skilled employees is too powerful to dismiss.
Greg Mankiw is skeptical that this argument will carry the day, but thinks the evidence is nonetheless on side of the minimum-wage's critics:
In the end, there is no good substitute for an appeal to facts. What the facts show is that the minimum wage is poorly targeted as an anti-poverty program. Moreover, while the evidence is controversial, some studies find significant long-term adverse effects. As a result, most economists prefer more efficient and better targeted anti-poverty tools, such as the EITC, which has grown significantly over the past few decades.
Andrew Samwick makes a similar appeal in discussing the minimum-wage/estate-tax package offered up the Republican Congressional leadership (an offer that is reviewed, without much enthusiasm, by pgl, by Mark Thoma, by Dean Baker, and by Daniel Gross.) Says Andrew:
If you want to make sure that household heads are above poverty, then make a program directly for them and them alone. That's the EITC. Compared to the minimum wage, the EITC allows us to condition on total hours worked and family status in redistributing income. By all means, argue for its expansion if you want to help low-income heads of household...
Basically, I won't support an increase in the minimum wage until I hear the explanation of why we need a minimum wage if we have an EITC.
On the superiority of the EITC, I'm with Andrew and Greg -- and Chairman Bernanke.
P.S. Alexander Villacampa at Mises Economic Blog also highlights a proposal out of the Chicago City Council that would ban the use by restaurants of oils containing trans-fats. (A related item from Raymond Sokolov appears on the opinion page of Thursday's Wall Street Journal.) First smoking and foie gras, and now KFC (and other things much beloved by yours truly)? Time to check the stuff they are using to dye that river.
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Listed below are links to blogs that reference Minimum Wage Buzz :
Minimum Wage Disaster
Macroblog sums-up the reactions of various econ. bloggers to the 2 recents events related to minimum wage laws in the US: the setting of the minimum wage for Chicago to 10 USD/hour and the proposal of US Republicans of mixing... [Read More]
Tracked on Jul 29, 2006 1:06:30 PM
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