Redistribution and Raising the Minimum Wage

Economists have busy this week covering Obama’s proposal to raise the national minimum wage from $7.25 to $9.00 an hour.  There two main reasons some economists say this is a bad idea.

 The first is, as McCardle argues, that it “risks raising the unemployment rate.”  Lacking any immediate growth in demand, employers will attempt to consolidate labor by cutting the hours of existing employees and opting to not take on new ones.
 The other is that it is less cost-effective to help the poor by raising the minimum wage rather than through tax credits.
 Adam Ozimek writes:

This report from the CBO shows that showed the 2007 increase in the minimum wage cost employers $11 billion, of which $1.6 billion benefited poor families. In contrast, an expansion of the earned income tax credit (EITC) would have cost $2.4 billion, $1.4 billion of which would have gone to poor families. The EITC is cheaper and more targeted. Note that this is only the marginal cost of the most recent increase in the federal minimum wage, not the total cost of federal and state minimum wages, which would be much higher.  What the minimum wage does is effectively push the costs of a multi-billion dollar, illusory, anti-poverty program onto employers. It’s an inefficient way to help poor people, and a hidden tax on businesses that forces them to spend $4 so that the government doesn’t have to spend $1.”

II think all of that makes good sense, but something’s got to give for this economy to make any positive strides.  The curious thing is that economists are unable to be budget hawks in this discussion.  If you insist that it is cheaper for everyone that the poor stay on the dole, rather than business marginally raise their wages, you can’t gripe about big government or knock the poor for sucking at the government teat.  Republicans are right that everyone is too reliant upon government; what they don’t point out is that that includes business.  People and business alike make and take from the government and both rightly have a safety net.  But the convergence of public demand for greater benefits, and the systematic shifting of the burden of providing those benefits from business to government is what yielded our high national deficit and the highest corporate profits in recent memory (that and two unfunded wars).  


When did our personal, fiscal decisions become more important than our national aspirations? The ‘invisible hand of the market’ is feedback–not a social imprimatur, and it’s our prerogative to use our own hands to mold a Republic we value.  Bankers are only worth millions if we decide they are, and the same goes for burger flippers.

While it is unclear what effect a higher minimum wage will have on the poor and the economy at large, and even less clear what the fate of such a proposal will be in Washington, the gesture is what matters.  The message being: the rich aren’t paying their fair share and you’ve got to start somewhere.

 Ezra Klein gives props to Obama’s strategy to press Republicans on this issue:
“When they kill the Obama administration’s more technocratic proposals but don’t propose an alternative way to solve the underlying problem, they end up getting backed into a corner by his more populist proposals.”
 The solution for the poor may or may not be raising the minimum wage, but the one point of agreement across parties and economists is that more money in the pockets of people that are going to spend it creates economic growth.  And given that thosewho have a high school degree or less make up about 44% of the nation’s unemployed, who better to give that money to?  The poor don’t have the luxury of waiting on legislative action, and their inability to be prudent spenders could be the jump-start our economy needs.

Source: Bureau of Labor and Statistics

 You can follow Russell’s posts on his blog, on Twitter @NeoKubrick, and on Facebook under Russell Winfrey or 22 of the Day



Author: The Blue Route

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