Thursday, November 09, 2006

The Minimum Wage: I Am Probably an Idiot

There's been a lot of blogging about this:

A group of people, some of them economists, and a handful of them Nobel Prize winners, have come out in favor of a minimum wage increase. I don't think I can add too much that hasn't already been said, and I may be an idiot, but I can't see how thse guys can possibly reach their conclusion. I have a lot of respect for those guys, especially Arrow and Stiglitz. But I can't imagine what they could be thinking. In the surveys I've seen, a majority of economists agree or partially agree that the minimum wage has a negative affect on employment. I do not think the opinions of economists reflect the opinions of the discipline as a whole.

The most thorough survey of the literature that I've seen recently is this one from David Neumark:

The results are pretty strong. Most studies find a statistically significant unemployment effect of raising the minimum wage, although it is small. So a minimum wage increase may only create a small inefficiency, but it is still inefficient. It is still harming some of those low-skilled workers whom it purports to help. The effects aren't always immediate; sometimes companies simply refrain from hiring new workers, rather than firing current workers. The effect is still there, however. I have heard a new theory which might explain why some studies of a single area find no unemployment effect. The theory is that those areas in which nearly all workers are all earning above minimum wage can raise the minimum wage with no opposition from employers (since it has no affect on them). I don't think it's been tested yet in a published paper, but it's an interesting idea.

Furthermore, the minimum wage doesn't really affect much of the workforce. How many workers are earning minimum wage, do you think? Most people guess between 25% to 40%, in my experience.

Check out these figures from the census bureau (Thanks to Art Carden for pointing it out to me):

Roughly 2.7% of hourly employees older than 16 earn the minimum wage or lower (there are a few exceptions to the minimum wage; non-profit educational institutions can pay some student workers less, for example). The vast majority of workers are already paid more than minimum wage. The median hourly wage is $11.00/hr. And look at the breakdown by age! Among those hourly employees 16 to 19, 9.1% are on minimum wage or lower. Among hour employees 16 to 24, 6.3% are on minimum wage or lower. And among hourly employees 25 or older, only 1.7% are on minimum wage or lower.

Or look at it in absolute numbers instead of percents. About 2 million hourly workers 16 and older are on minimum wage or lower. About 982,000 of those 25 and older are on minimum wage. These are not a lot of people, relative to the number of people classified as below the poverty line. A minimum wage increase is going to cause some of these people to lose their jobs. It won't affect those who are working jobs that are exempt from the minimum wage. And it won't help the working poor who earn above minimum wage. What the hell kind of policy is this?Something like the Earned Income Tax Credit is a far better way to help the poor. Also, as I've mentioned before, I really like Al Gore's idea of replacing payroll taxes with taxes on CO2. I think it should be extended to other pollutants. We could take advantage of the "double dividend", eliminating taxes that discourage work and hiring, and shifting to taxes that discourage pollution. It's win/win. The minimum wage--like most price controls--is just a bad idea.