Friday, July 28, 2006

Minimum Wage Hikes

Congress is considering a hike in the minimum wage from $5.15 to $7.25 over three years, but only if it is tied to other legislation that reduces taxes:

WASHINGTON (AP) -- Republican leaders are willing to allow the first minimum wage increase in a decade but only if it's coupled with a cut in inheritance taxes on multimillion-dollar estates, congressional aides said Friday.

A package GOP leaders planned to bring to a vote Friday or Saturday in the House also would renew several popular tax breaks, including a research and development credit for businesses, and deductions for college tuition and state sales taxes, said a spokesman for House Majority Leader John Boehner, R-Ohio.


Greg Mankiw, Angry Bear, and Dean Baker all have worthwhile posts on the issue. I'll take them in reverse order.

Dean argues that when the minimum wage is reported at two different points in time, it should be adjusted for inflation.
This means that when an article tells readers that a bill in Congress will raise the minimum wage to $7.15 an hour in 2007, from 5.15 an hour at present, it would be helpful to tell readers that this is equal to approximately $5.32 in 1997 dollars, the year the last minimum wage hike took full effect. This means that minimum wage workers would get about a 3.0 percent increase in real wages from 1997 to 2007, if this bill was approved.

I'll agree and go one step further: if someone can convince me that we should have a minimum wage law, then the further argument that it should be indexed to inflation would be an easy one for me to accept. That's a big if, though, to which I'll return in a moment.

PGL of Angry Bear is upset about the coupling of tax breaks for higher income households with the vote on the minimum wage:
Secondly, these “tax cuts’ are nothing more than tax shifts. Someone at some point will have to pay down all these deferred tax liabilities.

The Democratic response is to call for “an up or down vote” (as much as I hate to quote Bill Frist) on the minimum wage proposal. There is absolutely no excuse for the continued fiscal irresponsibility of this Republican led Federal government – regardless of one’s view on the minimum wage controversy.

I'll agree with him in spirit but not entirely. I am repeatedly disappointed with the failure to balance the on-budget account over the business cycle. Spending (in my view) needs to be cut dramatically, and if there is no political will to do so, then revenues certainly should not be cut.

But there is another element here that's worth considering. Greg Mankiw notes, and I fully agree, that even if the minimum wage doesn't substantially reduce low-wage employment, it is a poorly targeted policy to alleviate poverty:
What the facts show is that the minimum wage is poorly targeted as an anti-poverty program. Moreover, while the evidence is controversial, some studies find significant long-term adverse effects. As a result, most economists prefer more efficient and better targeted anti-poverty tools, such as the EITC, which has grown significantly over the past few decades.

If you want to make sure that household heads are above poverty, then make a program directly for them and them alone. That's the EITC. Compared to the minimum wage, the EITC allows us to condition on total hours worked and family status in redistributing income. By all means, argue for its expansion if you want to help low-income heads of household. (And, if you are Dean Baker, include its impact in your comparisons of after-tax income over time.)

Basically, I won't support an increase in the minimum wage until I hear the explanation of why we need a minimum wage if we have an EITC.

One interesting note that I heard while in Washington a few years ago was that Congress used to prefer the minimum wage hike to the EITC because the minimum wage didn't specifically cost the government any revenue in its budget forecasts but the EITC did. The story continues that one change that was implemented in the way the minimum wage legislation was discussed is that it would likely be coupled with tax reductions that softened its impact on small businesses. At the time, I thought this was enlightened policy making--there was now no budgetary reason to favor the minimum wage hike over something like the EITC.

It's disappointing here to see that the tax reductions being proposed here really don't have anything to do with small business per se, so the word "enlightened" certainly doesn't apply. If this minimum wage hike goes through, it should be coupled with tax reductions for small businesses, and those tax reductions should be "paid for" in the budget by reductions in spending elsewhere in the budget.

14 comments:

PGL said...

Indexing the minimum wage - like it, a lot! Now at what level? Which price index?

Lord said...

If your only consideration is poverty, than the EITC may make sense, but if you want to improve the level of jobs in this country and encourage investment, the minimum wage is the way to go. The EITC merely subsidizes jobs that probably shouldn't be done in this country, while the minimum wage encourages investment and together with support for increasing the education and training of the workforce, improves not only the lives of those subject to it, but the rest of the economy and nation as well.

Arun Khanna said...

Minimum wage increase under a Republican administration is a clear message. Such a step cannot be distorted by politicians who want to argue that U.S. two party system has a party of rich versus a party of poor.

"Hunter" said...

I know the intentions can be good, but this will have a major effect on the weakening economy in the form of slowing growth and fanning the flames of inflation even further. Legislation like this are what can be the straw that breaks the camel's back. I think the timing for this is very troublesome. Plus states like California already have increased their minimum wages and plans to further increase it.

Bibamus said...

Imagine a world in which there were no chance to meaningfully increase the EITC, because the Republicans who control congress hate the EITC with the white-hot intensity of a thousand suns.

Surprise! We live in that world.

In such a world, responding to calls to increase the minimum wage with 'raise the EITC instead' are a cheap way to distract attention, and nothing more. You may as well write:

"Basically, I won't support an increase in the minimum wage until I hear the explanation of why we can't relocate all the working poor to mars."

I agree that, as an income support policy, the minimum wage has its flaws. But the 'raise the EITC instead' line of argument is the product of either naivete so potent as to be dangerous, or politics so crude as to border on dishonest.

Andrew Samwick said...

Lord:

I don't see how a rise in the minimum wage leads to higher investment. Investment is driven by the expected productivity of the capital put in place. Since the most likely effect of a forced increase in the wage rate is lower employment, the raising the minimum wage should discourage, not encourage, investment.

Bibamus:

Maybe you haven't noticed, but this group of Republicans loves to change the tax code, and in particular, loves to change the tax code so that someone pays less in taxes. There have been ample opportunities for those now calling for an increase in the minimum wage to have called for an increase in the EITC as part of tax legislation, without having to initiate the legislation themselves.

I can't see any reason why they wouldn't have gotten it then, nor is there any reason why they couldn't get it now if they changed their tune.

Bibamus said...

I had noticed that. I'd also noticed that many in this group of Republicans, and most of the leadership, make a distinction between changing the tax code so that someone pays less in taxes, and changing the tax code so that someone who pays no or little taxes gets a tax return in excess of what they pay, a distinction your reply casually elides. It is possible to love cutting taxes and still hate the EITC. And many in this group do.

If I had to guess, I would say that the fundamental reason that the left is focusing on the minimum wage rather than the EITC is because they, realistically, realize that there is little chance of getting meaningful increases in either under this Congress/Administration. That leaves the issue (the working poor) to be fought and campaigned on, though, and the minimum wage works better for this because it is easier to campaign on and voters understand it better than the EITC.

robert brown said...

Bibamus: “I would say that the fundamental reason that the left is focusing on the minimum wage rather than the EITC is because they, realistically, realize that there is little chance of getting meaningful increases in either under this Congress/Administration.”

I think the main reason is one of their major benefactors, the labor unions, prefers the minimum wage since it tends to put upward pressure on union workers wages that are well above minimum wage whereas the EITC does union workers little or no good.

In case you haven’t noticed, the left, despite all their rhetoric, really doesn’t care all that much about poor people.

BarbaryCoast said...

I'm truly surprised that no one here has mentioned the Krueger quasi-experimental study of the New Jersey minimum wage hike, which argued pretty convincingly that raising the minimum wage did not necessarily lead to significant surges in unemployment and in some circumstances even led to slight increases in employment when compared with a nearby counterfactual. To be fair, in nominal terms the NJ increase was less than the $2.10 we're talking about here, though I'm not sure how it compares in real dollars. I'd wager it was more than $.17 in 1997 dollars, so my hypothesis if I were studying the effects of a 2006 hike would be benign, insignificant changes.

One problem with the minimum wage is its catholicon premise: the same rate for everyone in the US. But this is more than a little absurd, since $7.25 in Prestonsburg, KY represents something very different from $7.25 in San Francisco, CA. In fact, some states have found a haphazard solution: pass their own minimum wages higher than the federal mandate. It seems to me, though, that there's a more elegant solution: have Congress set the minimum wage for the poorest state and then adjust it from there for each of the other 49 states based on cost-of-living. That creates a uniform PPP minimum wage. The nominal wage differential also creates an incentive for economic development: large corporations, for example, that wanted to save on labor costs could move their operations to the areas with the lowest wages, incidentally the poorest areas anyway.

Finally, there's one huge political advantage to indexing the minimum wage. A rudimentary political science model would probably show that political support for a minimum wage hike is inversely proportional to the minimum's real value: as a static wage loses its worth in inflation-adjusted terms over time, advocacy for an increase builds until it reaches a tipping point, usually in an election year. But if you maintain the real value of the minimum wage through indexing, you cut off a vital source of political willpower. Congress would likely never revisit the issue ever again. Isn't that alone worth the potential economic costs?

Lord said...

Raising the minimum wage tells the employer to raise the productivity of his workforce through training, raise his prices, if he can, or reduce his demand for labor by capital investment, or by shrinking. Businessmen are creative and much prefer the former solutions to the latter, all of which I find desireable as well. A rising minumum wage in this case is little different from the technological changes any business must face. The minimum wage is not an anti-jobs measure but an anti-poorjobs measure and is exquisitely targeted at underperforming industries.

If government paid all the wages of low income workers, I am sure businesses would have no trouble finding a use for them. It is just that those uses would not generally be the most productive. As it is, the EITC pays a portion of them which leads to somewhat less productive uses. It is more likely therefore to lead to poor people being locked in poor deadend jobs with little training or advancement. I am not surprised EITC has been growing as a result. I would rather we spent our taxes on education and training to raise the quality of the workforce so they could get wellpaying jobs. The EITC is lacking even as an anti-poverty program since it doesn't address those that are unemployable or even unemployed.

France may not be the most desireable objective to strive for, but even it is more desireable than Mexico.

Robert Brown said...

Lord: “The minimum wage is not an anti-jobs measure but an anti-poorjobs measure and is exquisitely targeted at underperforming industries.”

I thing you are engaged in wishful thinking if you believe that a government decree that an employee be paid above the market value for his labor will cause employers to find a way to increase the market value of that employee.

Prior to the decree, employees had a positive incentive to improve their value to their employer with the expectation that they would be rewarded with a higher wage. If the government mandates that they get the higher wage regardless of their efforts to improve themselves, that positive incentive is gone, likely to be replaced by the negative incentive of a threat by the employer of loss of his job if he doesn’t improve.

Is it really a good policy to eliminate all “poor” jobs? Should there not be some jobs available that do not pay enough to support a family, but are readily available to those in society who for some reason are marginally employable as a vehicle to help them become more employable in the future?

Anonymous said...

To briefly respond to your question of why we need a minimum wage when we have the EITC, the answer is that you are incorrectly viewing them as substitutes, in the area of anti-poverty policies, when in fact they are complements. One of the commentors on the duplicate of this post over at Angry Bear gave a link to a Levy Institute study which goes into this issue in some detail.

And while it may be true that "policy analysts" are unanimous in favoring the EITC, Republican politicians definitely are not--I can well recall, and I hope you do as well, the attempts by Congressional Republicans to gut the EITC in the 1990's. That is why I am suspicious of the sudden enthusiasm for the EITC on the far right now that increasing the minimum wage is on the table.

Lord said...

I thing you are engaged in wishful thinking if you believe that a government decree that an employee be paid above the market value for his labor will cause employers to find a way to increase the market value of that employee.

I think you are deceiving yourself if you think employers are spoiled brats that will take their chips and go home if they can't play according to their rules. The choice is not between poor jobs and no jobs; it is between more poor jobs and fewer better jobs. This is not a tradeoff to be taken lightly, but it one worth taking in extremus. I don't see adopting the Mexican model as a desirable goal for the country. I don't see telling those that lose their jobs they can find two new ones that pay half as much as charitable.

Nicolai Brown said...

Food for thought on the minimum wage:

http://www.ameswire.com/iowa/iowa-minimum-wage.html