Minimum Wage

Peter Salins points out that raising the minimum wage can be expected to increase unemployment of those whose work is not worth the new minimum, or whose work can be done more cheaply than the minimum wage by a machine, which has no minimum wage, no overtime, no sick leave, no vacation, no unemployment tax, no health insurance, no maternity leave, no social security tax, no income tax. Nor is there any risk of the machine being lured away by a competitor, or joining a union, going on strike, or not showing up on time. Of course despite all these advantages, the machine is not perfect. Like a human employee, the machine might die, but even here it has the advantage of being more predictable and easier to replace, with far less effort — no need to advertise the position, to interview candidates — and far less chance of employing one that turns out to be somehow defective. Of course as a rule, fixing a defective machine is easier than using HR-approved methods to fix an employee problem, let alone to replace an unproductive employee. The essential point is simply that if in addition to all these advantages, the machine is also less expensive per hour than the minimum wage, then any business so careless about profit maximization that it opts for less cost-effective human workers is apt to be driven out of the market by more serious competitors.

The objective can be much better achieved, Salins explains, by improving the earned-income tax credit. Though the argument is clear, it is predictable that the debate about raising the minimum wage will mostly ignore this fairly obvious fundamental point, with a good chance of implementing a decision that despite good intentions will cause serious harm.

By my own estimation, based on a model of the national labor market developed by Jonathan Meer of Texas A&M University and Jeremy West of M.I.T., raising the minimum wage to $15 could reduce the total number of jobs nationally by three million to five million.

Regardless of the magnitude of job cuts caused by a minimum-wage increase, all the workers who lost jobs as a result would be ineligible for the earned-income tax credit. In most states they would receive unemployment insurance for up 26 weeks at a level well below their former earnings; after that, their income would fall to zero. And if the local minimum wage was now too high to justify hiring of low or marginally skilled workers, their chances for re-employment would be slimmer.

To the extent that advocates of outsize minimum-wage increases succeed — as they already have in some states and localities — they are likely to visit grievous harm on some of the very individuals and families they claim to be helping. By blithely discounting the economic realities of the labor market in many parts of the country, the proponents of such increases risk putting millions of Americans in low-skill jobs out of work, thus making them ineligible for the tax credit and possibly in danger of destitution.

Rather than playing a kind of economic Russian roulette with the least secure workers, these advocates should try to make the tax credit more effective.
- Peter Salins, A Better Way to Raise Incomes, NYT, July 6, 2016

"Some job displacement is possible" if the minimum wage is increased, according to Jared Bernstein. But he thinks raising it gradually will take care of that by "giving employers time to adjust." He fails to note that the adjustment, likely to take the form of substituting cheaper foreign labor for domestic, or replacing workers with automation, will leave too costly workers displaced despite its gradualness:

A higher minimum wage is yet another idea drawing broad liberal support.

Remarkably, the federal minimum wage is still $7.25, though most states and many localities have their own higher version of it. Still, 21 states remain on the federal level, and the “fight for $15” has been an important and successful movement by and on behalf of low-wage workers. One new estimate finds that 41 million workers would get a boost from this policy. More of them have college degrees than are teenagers. In other words, the devolution of low-wage work in America means that families often depend on a minimum-wage earner.

Some job displacement is possible given an ambitious increase like this, but a new proposal from congressional Democrats doesn’t get to $15 until 2024, giving employers time to adjust.
- JARED BERNSTEIN, Is There an Emerging Democratic Agenda?, NYT, JUNE 5, 2017

American Samoa, one of the smallest territories, lost one of the biggest engines of its economy in December when a big tuna cannery closed after being required to pay the federal minimum wage.
- MARY WILLIAMS WALSH, After Puerto Rico’s Debt Crisis, Worries Shift to Virgin Islands, NYT, JUNE 25, 2017

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