November 26, 2006
On Raising the Federal Minimum Wage
On Raising the Federal Minimum Wage--BECKER
An increase in the minimum wage has several distinctive negative effects on the economy. While the wages of some low skilled workers would improve, it would reduce employment opportunities for teenagers and other lower skilled workers. They are pushed either into unemployment or the underground economy. A bigger minimum also raises prices of fast foods and other goods produced with large inputs of unskilled labor. Workers who receive on the job training must accept lower wages in return. A higher floor on wages prevents the wages of lower skilled workers from being reduced much, and hence discourages firms from providing much training to these employees.
A rise in the minimum wage increases the demand for workers with greater skills because it reduces competition from low-skilled workers. This is an important reason why unions have always been strong supporters of high minimum wages because these reduce the competition faced by union members from the largely non-union workers who receive low wages.
Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate. Poorer workers who are lucky enough to retain their jobs at a higher wage obviously do better, but the poorer workers who are priced out of the above ground economy are made worse off. Moreover, many of those who receive higher wages are not poor, but are teenagers and other secondary workers in middle class and rather rich families. Poor families are also disproportionately hurt by the rise in the cost of fast foods and other goods produced with the higher priced low-skilled labor since these families spend a relatively large fraction of their incomes on such goods.
A recent petition by over 600 economists, including 5 Nobel Laureates in Economics, advocated a phased-in rise in the federal minimum wage to a much higher $7.25 per hour from the present $5.15 per hour. This petition received much attention, and the number of economists signing is impressive (and depressing). Still, the American Economic Association has over 20,000 members, and I suspect that a clear majority of these members would have refused to sign that petition if they had been asked. They believe, as I do, that the negative effects of a higher minimum wage would outweigh any positive effects. That is one reason I would surmise why only a fraction of the 35 living economists who received the Nobel Prize signed on to the petition--I believe all were asked to sign.
Controversy remains in the United States (and elsewhere) over the effects of the minimum wage mainly because past changes in the U.S. minimum wage have usually been too small to have large and easily detectable general effects on employment and unemployment. The effects of an increase to $7.25 per hour in the federal minimum wage that many Democrats in Congress are proposing would be large enough to be easily seen in the data. It would be a nice experiment from a strictly scientific point of view, for it would help resolve the controversy over whether the effects of large increases in the minimum wage would be clearly visible in data on employment, training, and some prices. Presumably, even the economists and others who are proposing this much higher minimum must believe that at some point a still higher minimum would cause too much harm. Otherwise, why not propose $10 or $15 per hour, or an even higher figure? I am confident that for this and other reasons, the actual immediate increase in the federal minimum wage is likely to be significantly lower than $2.10 per hour.
A number of countries, including France, have already initiated this experiment, for the ratio of the minimum wage to the average wage in these countries is much higher than in the United States. The effects of the French minimum have been carefully studied by two excellent economists, Guy Laroque and Bernard Salanie, in a series of articles, such as " Labor Market Institutions and Employment in France," Journal of Applied Econometrics, 2002. They find that the relatively high minimum in France explains a significant part of the low employment rate of married women in France. Salanie has also argued that the high French minimum wage is important in explaining the dismal employment prospects of young persons in France, and the huge unemployment rate of Muslim youths there, estimated to be about 40 per cent.
Should Congress Raise the Federal Minimum Wage?--Posner
Increasing the federal minimum wage, currently $5.15 an hour, is a priority of the new Democratic Congress. Democratic leaders want to raise it by 40 percent, to $7.25 an hour. From an economic standpoint, even from an egalitarian standpoint, raising the minimum wage, especially by such a large amount (roughly 10 percent of the American workforce makes less than $7.25 an hour, which is double the percentage of the workforce that is paid the current minimum wage), would be a grave mistake. As a matter of economic theory, increasing the price of an input into production, such as labor, has two effects: an increase in the price of the product, because the producer's costs have risen (provided the increased input cost affects his competitors as well) and a reduction in the demand for the input, both because the higher price of the product reduces demand for it and because substitute inputs will now be more attractive. Any such substitution will be inefficient because it is motivated not by an increase in the real cost of labor but by a government-mandated increase in the price of the input, which has the same misallocative effect as monopoly pricing.
If the input is labor, forcing employers to pay employees an above-market wage will result in (1) higher prices for the goods or services produced by the employers, which will have the same effect as a tax on the consumers of those goods or services, (2) higher wages for those minimum-wage employees whose employers decide to retain them and pay the mandated new wage, and (3) less employment of marginal workers, that is, of workers paid less than the imposed minimum. Any interference with the market-determined wage level is prima facie inefficient; and to the extent that marginal workers are poorer than workers unaffected by a minimum wage, and the consumers of goods and services produced by employers of marginal workers are also below average in income, a minimum-wage law is inegalitarian as well as inefficient. Its effect on income equality, however, depends not only on the relative incomes of the groups affected by the law but also on the balance between the effect on employment and the effect on the wages of those who are retained. The lower the percentage drop in employment relative to the size of the minimum wage, the less likely the net effect of the mininum-wage law will be to make marginal workers worse off. Some economists, notably David Card and Alan Krueger, deny that the minimum wage has any disemployment effect. See their book Myth and Measurement: The New Economics of the Minimum Wage(1995), but their work has been heavily criticized. See, e.g., David Neumark & William Wascher, "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania: Comment," 90 * Am. Econ. Rev*. 1362 (2000), and Richard V. Burkhauser, Kenneth A. Couch & David C. Wittenburg, "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," 18* J. Lab. Econ.* 653 (2000). It is unlikely that a 40 percent increase in the minimum wage would have no effect on employment.
Although working full time at $5.15 an hour yields an annual income (slightly more than $10,000) barely above the poverty line, most minimum-wage workers are part time, and for the majority of them their minimum-wage employment supplements an income derived from other sources. Examples of such workers are retirees living on social security or private pensions who want to get out of the house part of the day and earn some pin money, stay-at-home spouses who want to supplement their full-time spouse's earnings, teenagers working after school, and other students. An increase in the minimum wage--depending critically of course on how great the increase is--will provide a windfall to some minimum-wage workers, many of whom are not poor, and disemploy some others, also not poor. The effect on wage equality is likely to be slight, but consumer prices will be higher (which may reduce overall equality) and the efficiency with which goods and services are produced by low-wage workers will be reduced.
As a means of raising people from poverty or near poverty, the minimum wage is distinctly inferior to the Earned Income Tax Credit, which compensates for low wages without interfering with the labor market. EITC is of course not devoid of allocative effect, because like any other government spending it is defrayed out of taxes; but it is probably a less inefficient tax than the minimum wage. And it is a more efficient device for spreading the wealth, since many, perhaps most, minimum-wage workers are not poor.
So why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous? Three reasons can be conjectured. First, unions, which are an important part of the Democratic Party's coalition, favor the minimum wage because it reduces competition from low-wage workers and thus enhances the unions' bargaining power and so their appeal to workers. This would not be as serious a problem for unions if minimum-wage workers were organized. But the fact that most minimum-wage workers are part time makes them uninterested in joining unions. Second, increasing the EITC would mean an increase in government spending and hence in pressure to increase taxes, and the Democrats wish to avoid being labeled tax-and-spend liberals. And third, genuinely poor people vote little. The number of nonpoor who would be benefited by an increase in the minimum wage, when combined with the number of nonpoor workers whose incomes will rise as a result of reducing competition from minimum-wage workers, probably exceeds the number of nonpoor who will be laid off as a result of an increase in the minimum wage. Teenagers, moreover, will be among the groups hardest hit, and most of them do not vote.