Thursday, February 20, 2014

economics vs. the EPI letter on the minimum wage

The EPI letter:

July will mark five years since the federal minimum wage was last raised. We urge you to act now and enact a three-step raise of 95 cents a year for three years—which would mean a minimum wage of $10.10 by 2016—and then index it to protect against inflation. Senator Tom Harkin and Representative George Miller have introduced legislation to accomplish this. The increase to $10.10 would mean that minimum-wage workers who work full time, full year would see a raise from their current salary of roughly $15,000 to roughly $21,000.

So far, so good. Indexing would be a nice move forward, assuming that we're going to have a minimum wage (MW). They go "normative" in recommending a policy with an interesting array of benefits and costs, but ok. They ignore far better policy choices in the same realm, allowing politics and pragmatism to get in the way of an opportunity to educate.

These proposals also usefully raise the tipped minimum wage to 70% of the regular minimum.

70% is arbitrary; why not 100%? "Useful" is an odd choice of terms. Servers would find their compensation shifted from tips to income. It's useful that there would be less tax evasion among servers. Some would lose their jobs.

This policy would directly provide higher wages for close to 17 million workers by 2016. Furthermore, another 11 million workers whose wages are just above the new minimum would likely see a wage increase through “spillover” effects, as employers adjust their internal wage ladders.

The economists are correct to point to the spillover effects-- by the way, the most compelling reason why unions like this proposal. (See: South Africa and a connection between the MW and racism.) And the economists are assuming no job loss-- benefits only, so far. They could address/fix that below, but unfortunately, they won't.

The vast majority of employees who would benefit are adults in working families, disproportionately women, who work at least 20 hours a week and depend on these earnings to make ends meet. At a time when persistent high unemployment is putting enormous downward pressure on wages, such a minimum-wage increase would provide a much-needed boost to the earnings of low-wage workers.

Wrong. Yes, for those who keep their jobs, things would get better. But only a small percentage of MW workers are heads of household.

In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market.

Wrong/over-stated. There is some debate in the literature on the size of the employment effects and the more subtle negative effects-- in the private sector. But there is little evidence about increases in the MW of this magnitude-- and the evidences available are quite sobering. With the initial MW in the 1930s, Puerto Rico was quickly given a waiver after the MW devastated its labor market. And in more recent history, other U.S. territories were given exemptions from the "federal" MW law, anticipating the same problems.

Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front.

Wrong, wrong, wrong-- and aggravatingly stupid. How can an artificial (price or) wage increase in competitive markets make things better overall? If this is good for an economy, why not increase the MW to $20 or $50 per hour. You can argue for a higher MW, but keep obviously-stupid stuff like this out of your mouth.


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