Raising minimum wage is a bad way to help people

Enthusiasm for a big increase in the federal minimum wage is building in the U.S. It’s a shame to see so much energy devoted to a policy that’s not only dubious but also sidelines better ideas.

In his State of the Union address in February, President Barack Obama called for an increase in the federal minimum wage to $9 an hour from $7.25. Recently he said he supports a measure that would raise it in stages to a little more than $10. State and local governments across the country have been going ahead on their own. The president says there’s “no solid evidence” that raising the minimum wage would cost jobs.

That’s true in a way. The effect of minimum wages on employment has been studied and quarreled about for years, and the findings are still disputed. But “no solid evidence” doesn’t mean that increasing the minimum wage to $10 won’t increase unemployment; it means we don’t know.

One thing that isn’t disputed is that increasing the minimum wage to, say, $20 an hour really would increase unemployment. The question isn’t whether raising the price of unskilled labor would at some point reduce the demand; it’s how far you can push that price before bad results become apparent. Governments generally understand this trade-off, even if they don’t always acknowledge it, and they’ve mostly been cautious. They’ve kept minimum wages low, and they’ve often made exceptions for young people or for certain low-wage occupations or both. This helps explain why even after all those studies the question isn’t settled.

It’s sometimes argued that the U.S. minimum wage is so low that it could safely be raised a lot. At $7.25, it’s lower in real terms than in the 1960s and 1970s, but it’s higher than during most of the subsequent 30 years. Expressed as a proportion of average wages, it’s low by international standards because the U.S. is a rich country and its average wage is high. Measured by what it can buy, the U.S. minimum wage isn’t out of line ― $7.25 put the U.S. 10th out of 26 economies in 2012, between Canada and Austria. In purchasing-power terms, $10 would move the U.S. close to the top of the minimum-wage table.

Obama’s support for $10 is at the high end of cautious. A minimum wage at that rate ― equivalent to full-time pay of less than half the median wage ― isn’t outlandish and might not cost many jobs. But bearing in mind that a main cause of poverty in the U.S. is unemployment, why risk it if a more reliable policy is available?

A better approach is to cut labor taxes on low incomes and support low-wage workers with programs such as the Earned Income Tax Credit. I’m for both. I’d expand eligibility for the tax credit and make it more generous. If it were used to deliver some fiscal stimulus as well, so much the better. In any event, it would cut employers’ costs for unskilled labor (unlike raising the minimum wage, which would increase it) and add to the demand for workers.

A reasonable objection to this is that it’s fine in theory but politically impossible. An increase in the minimum wage is more feasible, you could argue, because voters think they won’t be affected and employers will be the main or only victims. The idea is popular. Even 50 percent of Republicans are for it. I question the logic but I see the point.

What I find harder to understand, especially coming from liberals, is the idea that subsidizing low-wage labor is wrong in principle. The idea here seems to be that offering “poverty wages” is morally bad and that the real purpose of the minimum wage is to forbid it ― a question of ethics more than economics.

There’s a lot wrong with this. For one thing, many minimum-wage earners aren’t poor; they’re members of households with one or more additional incomes. In other words, what constitutes a “poverty wage” isn’t clear-cut. It makes no sense, ethically speaking, to say that every full-time worker should be capable of supporting a two-, three- or four-person family above the poverty line. Why deny a young person without dependents, maybe still living at home or sharing expenses with friends, permission to work for less?

Granted, if you support low-income families with the Earned Income Tax Credit, a negative income tax (as proposed by Milton Friedman) or in some other way, employers will capture part of the benefit, and some liberals find this odious. But that’s how you increase the demand for unskilled labor ― which is a good thing to do, if you’ve got a lot of it.

What if you think employers are shrewdly paying unskilled workers less than their labor is worth? What if such transactions are fundamentally exploitative, and the very idea of a market for labor is ethically wrong? In that case, I can see why you’d hesitate to have taxpayers pay subsidies that help fatten the robber-bosses. In a world like that, though, you’d probably want the government to fix wages up and down the entire income scale. (Gouging by employers presumably isn’t confined to the unskilled.) Maybe have the government fix prices of every kind while you’re at it.

I’d say there’s no solid evidence that markets are evil and employers the enemy of all that’s decent. A better assumption is that unskilled workers are offered what their labor is worth to a business. On that view, the remedies for poverty in work are education and training to raise productivity (don’t oppose these just because, like wage subsidies, they also help employers), plus transfers from taxpayers at large to workers whose productivity is too low to support a decent standard of living.

In Washington right now, a cautious increase in the minimum wage might be the best progressives can do for the working poor. I see that. But why undermine the case for more effective anti-poverty policies? More generous taxpayer support for the unskilled should come first. Attacking that idea can safely be left to people who don’t care about poverty.

By Clive Crook

Clive Crook is a Bloomberg View columnist. ― Ed.

(Bloomberg)