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)?
Subsidize Workers Instead of Business?
Conservatives confuse me, mostly because I tend to think of them in black and white terms. The ability to think in a nuanced manner is directly correlated with one’s familiarity with a subject. The less you know, the more polarized your opinions become (of course, the opposite can be just as crippling).
A blog I regularly read posted a link to an article from the (rabidly) conservative American Enterprise Institute (AEI). The article confronted the issue of automation in manufacturing, how it is displacing the American worker and what to do about the problem of increasing economic inequality in the United States.
Noah Smith, an assistant professor of finance at The State University of New York at Stony Brook states:
“..a better proposal is actually wage subsidies, government wage matching, also called a negative income tax. We would be putting our thumb on the scales between humans and robots to keep humans in work that in a perfectly free market they wouldn’t be doing. When a company offers you wage, the government matching would have already done behind the scenes. Someone comes and offers to pay me $20 an hour, the government is paying $12 of that. I would be making $8 an hour, but I would feel like a person who making $20 an hour. Unlike the Earned Income Tax Credit where you get a check from the government based on how much income you earned, I think people would feel a lot better in term of the framing of it if the government matched their wages instead.”
I could get behind this. I’m not sure that Noah Smith is a conservative, but that AEI didn’t scrap this as re-distributive heresy is kind of startling.
An interview with economist Edmund Phelps, confirms that this idea doesn’t live in a bubble:
“The advantage of work subsidies is that they would bid up the wages of low-wage people, and that same bidding for more low-wage people in the labor market would pull up their employment too. With the minimum wage, of course, the suspicion is that raising it will cut back on the number of low-wage workers that companies feel they can afford.
So government subsidies of workers increases not brings up wages, but also might increase employment. A minimum wage, these guys argue, is a disincentive to employment. If I know I want to hire low wage workers, but know I have to pay $20.00 an hour, I’m less likely to hire from those with the least skills. I’ll want the most bang for my buck. Also, it is argued that a minimum wage distorts wages by giving businesses a floor (which they will inevitably fall to) depressing wages over all. I could speculate that this would be a regional phenomenon.
It turns out that the idea for wage subsidies (or a “negative income tax”) was originally floated by conservative economist Milton Friedman. His ideas inspired the earned income credit, also a wage subsidy for low income workers.
I always thought it interesting that welfare programs are fodder for right wing politicians looking for programs to malign, but that the EIC, a blatant example of wealth redistribution, is barely mentioned. I think I understand why now.
I could get behind worker subsidies like this. It’s far more advantageous to workers than subsidizing the companies themselves, who likely convert those transfers to stock dividends. Like food stamps, worker subsidies would inject money directly into the economies through increased spending by poor families at local establishments, creating jobs
Now I have no idea whether this is a good idea or not. I’m not an economist and don’t claim to be. From the armchair though, I ‘m thinking that rather than prop up oil companies, big agri-business and bottom of the barrel box retailers, we might look to expanding the EIC program to do the poor (and society) a favor. Someone explain to me why this wouldn’t be on the political table?