As you may know there a proposal to increase the federal minimum wage from $5.15 to $7.00. And there’s a pretty interesting discussion going on in the blogosphere about it. As you might expect Brad DeLong is basically for it and Steve Verdon is basically against it.
Steve says:
Also, this issue that Prof. DeLong raises does not address the fact that the minimum wage is basically a hidden tax. Not many people are going to go to the store and notice the price increase and go, “Damn those politicians for raising the minimum wage. That resulted in this $0.30 price increase in this chocolate shake.”
Actually it seems to me that Prof. DeLong touts that as a feature:
The minimum wage, on the other hand, is nearly self-enforcing: its administrative costs are nearly nil, for workers (legal workers, at least) have a very strong incentive to drop a dime on bosses who violate it. From a government-administrative and error-rate perspective, it’s a very cost-effective program.
and
I–and almost everybody else I’ve talked to–think this is dead wrong: the incidence of the minimum wage “tax” falls almost entirely upon the customers of firms that employ minimum-wage workers, and that’s pretty much all of us. It’s not as though the owners and managers of firms that employ minimum-wage workers have no other options. So I believe Landsburg is wrong: the burden of the minimum wage is broadly distributed across all taxpayers.
For some perspective on employment, wages, and the minimum wage see here for 2002 minimum wage information, here for 2003 minimum wage information, and here for 2003 employment and wage information.
Steve correctly points out that the effects of a raise in the minimum wage depends on the slopes and elasticities of supply and demand in the effected industries:
The ability of firms to pass this “tax” on to consumers depends on the supply and demand elasticities in those specific markets.
I have a number of problems with the discussion of a national minimum wage. First, anyone who’s pushing an increase in the minimum wage from $5.15 to $7.00 and implying that it will result in a living wage is making a strawman argument. $3,700 per year ($1.85/hour X 2000 hours) is not the difference between a poverty wage and a living wage. Anyone who want to raise the minimum wage to the level of a living wage will have to raise the minimum wage significantly more. And the effects of the slopes and elasticities that Steve talks about really begin to kick in.
Second, it’s a regional problem. Nearly 20% of all of the full-time minimum wage workers in the country are in just two states: California and Texas. Now in fairness nearly 20% of all full-time workers are in those states as well but there is a slightly higher proportion of minimum wage workers in those states than in the country as a whole so it would appear that there’s something in the structure of the economy of those two states that favors paying the minimum wage.
And $5.15/hour is a lot different in Mississippi than in Manhattan. W is right on this one. Flexibility by state and locality would seem to make sense.
Third, it’s pretty apparent to me that neither Professor DeLong nor Steve Verdon has ever stood in a room of Fortune 1000 executives pitching technology solutions and had it explained to him that they’d rather do it the low-tech way and hire more minimum wage employees. Paying the minimum wage is a business strategy. But is it a strategy that we want to support?
So I favor a sharp increase in the minimum wage but not to help the poor. I want to
- Increase the minimum wage.
- Provide greater incentives for turning in violators.
- Toughen the penalities for hiring illegal workers.
- Enforce the laws on wages and workers more strenuously.
And, yes, it will reduce employment of minimum wage employees. As Brad DeLong says—a lot of these jobs are lousy jobs anyway. And a lot are held by illegal immigrants. We need to move the country in the direction of higher skills and higher wages and strategically the way to do this is reduce the incentives for businesses to create business models around low wage employees.
And, for the record, I am not anti-immigrant but I am anti-unskilled immigrant. I don’t look forward to a country consisting of a few high-skilled and protected professionals, a lot of low-skilll low wage helots, and an embattled middle class which is where I think the strategy we’re using now will take us.
