Deinonychus antirrhopus

The Further Economic (Mis)Adventures of Kevin

Kevin has decided that raising the minimum wage is a great way to help the working poor. What does he base this on? The fact that large increases in the past have not had "ill-effects" what ever the Hell an ill effect is. Did the economy tank? No, probably not. Was there a plague of locust? Not that I've heard. Did cats start lying with dogs? Again, not that I've heard. But lets forget about this silly problem with a vague and completely subjective and undefined notion of what "ill effects" are.

Lets turn now to the Bureau of Labor Statistics, and look at some of their research. Here is the abstract (with emphasis added):

Disemployment effects and weak links among low wages, low income, and poverty have been at the center of the debate about the poverty-reducing effect of a higher minimum wage. Recent studies do not settle the debate. Charles Brown, Andrew Kohen, and Curtis L. Gilroy concluded that disemployment effects are small.¹ But Edward M. Gramlich and Terrence Kelly showed that most low-wage workers are not poor.² Several recent studies, using a variety of methods and data sources, confirm this result.³ Most economists analyzing the subject conclude from this evidence that a higher minimum wage is a poor tool for fighting poverty. But economists who specialize in studies of the poor concentrate on changes that have occurred while the minimum wage remained at its 1981 level. For example, between 1981 and 1986, the poverty line for a family of three increased from $7,250 to $8,737 (20.5 percent) and the number of poor workers increased from 8.6 to 8.9 million (2.7 percent).⁴ Anxious for ways to reduce working poverty that do not affect the Federal budget, poverty specialists still favor a higher minimum wage.⁵

Analysts on both sides of this debate neglect important barriers to reducing poverty through raising the minimum wage. These barriers are related to (1) the provisions of the minimum wage law, (2) the characteristics of low-wage workers, and (3) the characteristics of poor families with low-wage workers. (Here is a link to the full study.)

Now reading the paper initally leads one to believe that the data indicates that a higher minimum wage can reduce poverty amongst the working poor. However, the author offers a note of caution, the results are dependent on the covereage,

In particular, economists can only guess about the size of the disemployment effect for low-wage adult workers, who make the largest contribution to family income. If disemployment effects for low-wage adults is the same as for teenagers, complete coverage or a much higher minimum would have small poverty-reducing effects.

Okay so that is an old paper. 1990 sheesh! There has to be something earlier? Yes, there is. Does the Minimum Wage Affect Welfare Caseloads? The answer appears to be yes, and in a positive direction (i.e., an increase in the minimum wage increases the number of welfare cases).

Our empirical results indicate that, once state trends and a variety of other factors are accounted for, the elasticity of the welfare caseload with respect to the minimum wage is between 0.1 and 0.2. In other words, a 35 percent increase in the minimum wage (like the increase recently implemented in California) could lead to a 3 to 7 percent increase in the size of the welfare caseload, holding all else equal.

Whoops. Is that an "ill effect"? I suppose if you're not one of the 3-7% the 35% pay increase is a great thing. The article further states,

These results suggest that minimum wages are not an efficient means of improving the financial independence of low-skilled single mothers, since the wage gains experienced by those who keep their jobs are counteracted by an increase in the welfare rolls. Policies like the Earned Income Tax Credit (EITC), which increases wages through the tax code without depressing the demand for low-skill labor, are likely to be more effective in facilitating the transition from welfare to work.

Well, that isn't good now is it? But wait, that isn't all there is.

Do Minimum Wage Increases Lower the Probability that Low-Skilled Workers Will Receive Fringe Benefits? Well the answer appears to be yes, and not in a good way. Increases in the minimum wage tend to reduce the probability that workers will get fringe benefits such as health insurance, sick leave, retirement benefits, etc. How big is the effect? Well here are some of the findings from the paper,

For example, a $0.50 increase in the minimum wage from its 1999 level is estimated to decrease pension eligibility of less educated workers by 6.8 points and their health insurance eligibility by 3.9 points.

Is that a net benefit or an "ill effect"? Guess depends on which type of minimum wage worker you are, the one who doesn't get a pension or health insurance or not.

Of course, this paper that looks at the same issue finds no relationship. Unfortunately it is an NBER paper so it'll cost money to get a copy. This paper (also from NBER) suggests the better policy tool here is the Earned Income Tax Credit. And this NBER paper doesn't speak well of the minimum wage as a policy tool to help reduce poverty, I'll reproduce the entire abstract here,

The primary goal of a national minimum wage floor is to raise the incomes of poor or near-poor families with members in the work force. However, estimates of employment effects of minimum wages tell us little about whether minimum wages are can achieve this goal; even if the disemployment effects of minimum wages are modest, minimum wage increases could result in net income losses for poor families. We present evidence on the effects of minimum wages on family incomes from matched March CPS surveys, focusing on the effectiveness of minimum wages in reducing poverty. The results show that over a one-to-two year period, minimum wages increase both the probability that poor families escape poverty and the probability that previously non-poor families fall into poverty. The estimated increase in the number of non-poor families that fall into poverty is larger than the estimated increase in the number of poor families that escape poverty, though this difference is not statistically significant. We also find that minimum wages tend to boost the incomes of poor families that remain below the poverty line. The evidence indicates that in the wake of minimum wage increases, some families gain and others lose. On net, the various tradeoffs created by minimum wage increases more closely resemble income redistribution among low-income families than income redistribution from high- to low-income families. Given these findings it is difficult to make a distributional or equity argument for minimum wages.

Income redistribution among low-income families. Gee, is that and "ill effect" and is it "toxic"?

I wonder what the next adventure in economics will be about.

Update: VodkaPundit raises a good point. Since we don't know what constitutes an "ill-effect", why not just raise the damn minimum wage to $100/hour? Why not indeed?

Update II: In the comments to Kevin's post one of his readers raises the same objection and Kevin's response was,

Doc Memory: Don't be ridiculous. Suggesting that the minimum wage should be increased to $7 does not mean that it should be increased to $100. Try again.

But Doc Memory's response is perfect. Sure $100 is absurd, but it brings to light in much starker terms the problem. That is the problems with a $100/hour minimum wage are the same problems with a $7 minimum wage; it is just that the problems are smaller with the $7/hour minimum wage, or as Doc Memory put it,

Kevin: $100/hr is admittedly argumentum ad absurdem, but the absurdity is the point: a $7 minimum wage is a bad idea for the exact same reasons as a $100 minimum wage; we just don't see it as easily because the smaller number "seems" less absurd. But the inflationary and ethical fallout is exactly the same.

I think this highlights the problem I noted with the wage subsidy (link). That is, even though the Earned Income Tax Credit looks to be the better policy for lifting people out of poverty there is still strong opposition to eliminating the minimum wage and going with the most effective policy alone. Thus, when a new policy is spun as an "alternative" that can "replace" and existing program, don't believe it. Its bullshit. Oh, the people saying it is a replacement may believe it and be sincere, but in the end the political process wont provide that outcome. Junk the less effective program first then I'll be willing to consider the replacement, until that time forget it.

Posted by Steve at December 30, 2003 03:52 PM