To Raise the Minimum Wage or….

In my morning reads, I found this article from Ezra Klein. Apparently, economists widely agree that raising the minimum wage will reduce poverty.

Klein’s article mostly centers around a paper from Arindrajit Dube. Using models, he found that raising the federal minimum wage from the current $7.235 to $10.10 would reduce the number of people in poverty by 2.4%, largely agreeing with studies from other economists.

To me, this in encouraging but wholly unsatisfying. If we assume that approximately 50 million Americans live in poverty, this would mean that 1.2 million Americans would no longer be classified as poor. Certainly, this would be touted as a success.

However, noting that nearly 48 million Americans would still be impoverished, I can’t help but feel that the effort would have been wasted. Worse yet, I wonder how prices and employment might be impacted by a nearly 33% increase in wage costs. Here, there seems to be little consensus among economists.

The more I think about it, the more I like the idea of a redistributive “negative income tax” which provides direct cash payments to households based on income earned. Before my conservative friends get upset, I would point out that (depending on who you ask) the idea was originally proposed by conservative, free-market, University of Chicago school economist Milton Friedman. The present Earned Income Credit is based on his model.

So here are my (non-economist) points, all of which are completely up for debate:

1. Cash payments from government proportional to income earned would benefit far more people than those on the bottom income rung. The goal would not be to merely “alleviate poverty” but to also bring up the economic profile of all households below the current income median. I find the current discussions of raising the minimum wage to be incredibly myopic. I don’t know who raising the federal minimum wage will alleviate the greater problem of economic inequality in the United States.
2. It would have the effect of pro-actively alleviating poverty while still insuring employment and a health economy. Businesses would be motivated to maximize employment and would have little reason to insure that workers stay on the bottom. Small businesses would also have more leeway with which to figure out how to provide health or retirement benefits to workers.
3. Cash transfers would presumably reward increases in income within the bottom 25% of wage earners and gradually begin to taper off as incomes become healthy and sustainable. Tapering would be important. Welfare payments are often too regressive. They punish households for escaping poverty by cutting off benefits. Not only does this send an odd message to American workers, it also encourages hidden sources of income complicating taxation and the payment of wages below the federal minimum wage. Work in the shadows is not a pretty thing.
4. It would feed money directly into the economy and possible into communities. Households which have trouble saving would now (as with the EIC) receive lump sum payments with which they can purchase big ticket items, put a down payment on a new place to live, or even save the money so as to invest or start a business later. The biggest hurdle that entrepreneurs face is a lack of access to start up capital.
5. It would be equitable. Minimum wage increases risk regional efforts to circumvent them. As noted in 3) direct payments to households would help avoid the problem of “under the table work” which often preys on the weakness of workers.

Of course, this begs the problem of how to finance such a system. Barring the details (and potentially another post), I would suggest that federal sales (consumption) tax or a value added tax such as those in Scandinavia. This tax would exclude housing, food and education, but be applied to consumer goods and services. More on that later.

So that’s my take. I think that raising the minimum wage is a good step, but merely a Band-Aid on a greater problem. What do you think (all 10 of you)?