The Logical Floor
Moderate minimum wages do more good than harm. They should be set by technocrats not politicians
(From The Economist)
ON BOTH sides of the Atlantic politicians are warming to the idea that the lowest-paid can be helped by mandating higher wages. Barack Obama wants to raise America’s federal minimum wage by 40% from $7.25 to $10.10 an hour, and more than three-quarters of Americans support the idea (see
article). In Germany, one of the few big rich-world countries still without a national wage floor, the incoming coalition government has just agreed on an across-the-board hourly minimum of €8.50 ($11.50) from 2015. In Britain, which has had a minimum wage since 1999, the opposition Labour Party is keen to cajole firms into “voluntarily” paying higher “living wages”.
For free-market types, including
The Economist, fiddling with wages by fiat sets off alarm bells. In a competitive market anything that artificially raises the price of labour will curb demand for it, and the first to lose their jobs will be the least skilled—the people intervention is supposed to help. That is why Milton Friedman called minimum wages a form of discrimination against the low-skilled; and it is why he saw topping up the incomes of the working poor with public subsidies as a far more sensible means of alleviating poverty.
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(From NY Times, Laura D'Andrea Tyson)
The last several decades have been especially hard on American workers in jobs that pay the minimum wage. Adjusted for inflation, the federal minimum wage of $7.25 an hour today is 23 percent lower than it was in 1968. If it had kept up with inflation and with the growth of average labor productivity, it would be
$25 an hour.
Congressional Democrats have proposed legislation to raise the minimum wage to $10.10 an hour and index it to inflation, and President Obama signaled support in
a recent speech highlighting the economic and political dangers of growing income inequality. Predictably, opponents of an increase in the minimum wage are once again invoking the hackneyed warning that it will lead to higher unemployment, especially among low-skilled, low-wage workers who are the intended beneficiaries.
I heard the same refrain in 1996 when I served as chairwoman of President Bill Clinton’s National Economic Council, and he worked with congressional Democrats to raise the minimum wage to $5.15 an hour at a time when it had fallen in real terms to a 40-year low. To hear Republican opponents and lobbyists for retailers and fast-food companies, we were about to inflict a cold-hearted fate on young people and minority workers. The same chorus is voicing the same dire predictions today....
...
Contrary to the warnings of its opponents, a higher minimum wage would, under current economic circumstances, mean more employment, not less.
An increase in the minimum wage would also increase the effectiveness of the earned-income tax credit to reduce poverty and increase demand among low-income households with high propensities to consume. As David Neumark asserts in
his recent Economix post, since the mid-1990s, when President Clinton championed a sizable increase in the earned-income tax credit, it has provided much greater income support to low-income families than the minimum wage. But as Professor Neumark acknowledges, the earned-income tax credit and the minimum wage are not substitutes for each another. They work together and can lead to better outcomes than either policy alone.
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