Tuesday, January 30, 2007

EITC v. Minimum Wage

1. Demand is downward sloping. There are almost no examples of any good (including labor) that you can charge more for it and not get less. The higher the price, the lower the quantity purchased. This happens in many ways, but in recent times it is most often seen in the move toward automation. For one example, see self check-out at grocery stores. If the government forces employers to pay their 20 workers more, some will fire 10 and install automated systems.

2. The real question is how elastic demand is? Will a increase in cost of 40% create a drop in employment in the minimum wage labor force by 10%, 40%, or 60%. My educated guess is in the 10-25% range. Since the other 85% of workers are unaffected, the affect on overall unemployment will be small. For example, if 10% of minimum wage worker lose their job within two years then the affect on overall unemployment would be 1.5%. (10% of 15% is 1.5%).

3. There is no such thing as a free lunch. It would behoove those who support the minimum wage for political reasons to at least acknowlege that there is a cost to the program. The most apparent cost is the increased unemployment among low wage workers. That unemployment may be worth the increased wage for the 75%-90% who do not lose their job, but the increased wage is not costless.

4. Does it matter who benefits? To many people, I don't think it matters to them who actually benefits from an increase in the minimum wage.* As an anti-poverty tool, it is rather poor one. Less than 20% of minimum wage earners have a family income below the poverty level. The average family income of people working for the minimum wage is $49,885. This is because most people working for minimum wage are not breadwinners.

5. The unseen losses. The most unfortunate part of the debate over the minimum wage from my perspective is that most of those who lose when the price floor is raised go unnoticed. Minimum wage earners are usually new entrants into the labor force. After establishing the ability to work on time and efficiently, most get a raise, promotion or leave to go to a better paid job quickly. Specifically, more than 2/3rds of minimum wage earners make more than the minimum wage within a year.* It is the first rung on the ladder of success for many workers. If you take away the first rung, some (although not all or most) of those workers will not get to the second rung. And most unfortunately, no one will really notice that those people are unemployed because of a feel good piece of legislation.

6. Why France sucks. As the Nobel Laureates point out, France has a miserable problem with youth unemployment. The rate is in the 20% range for the youth and higher in poor segments of the country. This unemployment causes a myriad of other social ills. On the flip side, the U.S. minimum wage is at its lowest point in real terms in 50 years. And our unemployment rate is incredibly low by historical standards at 4.5%. Possibly more important to some, the unemployment rate for blacks is lower than all but a couple years at any time over the past 40 years at 8.4%. I am happy to place a nice bet on the fact that the black unemployment rate will be higher than 8.4% in two years if the minimum wage is increased to $7.00 or higher.

So all in all, I just hope you do take the time to read both sides of the issue. The real costs of any policy change need to at least be recognized. Then one can debate whether the benefits are worth the costs. And when there are a number of notable Noble Laureates bringing up the topic, it seems especially wise to not brush them off based on political reasoning rather than even-handed discussion of the implications of a policy. And as someone who has researched the topic a bit, I'm happy to talk with anyone who has questions about the economics of the minimum wage.

Monday, January 29, 2007

Earned Income Tax Credit versus Minimum Wage

In this post I am responding to a Wall Street Journal article entitled "How to Make the Poor Poorer" the gist of which was that by enacting a raise in the federal minimum wage, the new congress would not only make the poor poorer but also missed the opportunity to pass a raise in the Earned Income Tax Credit.

Becker and Posner state that raising the minimum wage will raise the price of consumer goods and hurt the poor by increasing unemployment. First of all, I don't think raising the minimum wage has substantial effects on the costs of consumer goods. Why? For one, the chump change that minimum wage employers are paying their employees likely do not constitute their most significant expenses. As a corollary to that, the consumer most markets seek to target is not the minimum wage consumer, but the above minimum wage and middle class consumers that have the money to buy not only want they need but also what they want - (see overeating as a perfect example).

Next, businesses such as McDonalds, Blockbuster and their franchisees are in no danger of going out of business. Therefore, they will continue to maintain the same size skeleton screw of workers without firing any, even if they have to spend a little bit more on their employees. Small businesses, the supposed hero of the libertarian, are already more likely to be paying the workers they know personally and care for more than the minimum wage and thus should be effected less.

Here's an article opposing the minimum wage that cites empirical evidence supporting my proposition that in fact raising the minimum wage has very little effect on unemployment: http://www.slate.com/id/2103486/

The authors fundamental argument is that a minimum wage increase is unfair in that it distributes the burden onto a very small percentage of people - onto employers. But like I argued before, let's look at who those employers are. The second half of the article refers to an ordinance that would have raised the minimum wage in the city of Chicago only. I totally agree that this is really stupid idea, but only because differential economic rules cause business to flee - especially when they can move ten miles down the road. However, these problems are removed with a national minimum wage increase and the results would still be on those that pay minimum wage.

Third, EITC? This is a benefit that you have to claim on your tax form: Are you kidding me? These guys clearly don't know anyone who earns minimum wage. People earning minimum wage are doing so because they have not had better opportunities in life, because they don't have the education to know to successful navigate the bureaucracy to get the benefits of things that they claim on their taxes. (This is not to insult those on minimum wage, I barely know how to navigate the bureaucracy involved with the tax system.) Give people the money up front, an EITC is like a rebate that no one mails in. This is not to say that their isn't a role for the EITC. Let's have both the EITC and the minimum wage increase. Hopefully another blogger will better explain the EITC.

Fourth, Posner and Becker may claims implying that increasing the EITC will harm teenagers: I say when it comes to important policy decisions affecting the poor, forget teenagers. I don't care about the job summer job prospects of this guys highschool aged son. Clearly, if his son doesn't get employed over the summer, his son's going to be ok.

As a corollary to this, Posner and Becker make claims that similar systems of entitlements for the poor in France are responsible for the upset of Muslim youth there. On the contrary, references to French muslim youth are illegitimate. France has a highly nationalist/racist entitlement system; it's generosity is not the problem, its racism is. But never mind that, for so many other reasons, France is France and the US is the US. Here our racist entitlement system takes the name of the above mentioned EITC and company. France seems to be a favorite referent of libertarians; they even rent soft porno movies entitled: Welfare Gone Wild, France Shows its Feel Good Tits but Welfare Gone Wrong, We See France's Unshaven Armpits. I refer these people to the many other successful welfare states in Europe.

Finally, I have come to strongly suspect that the motivations of those seeking tax breaks and spending at every turn. The only logical conclusion is that they aim to destroy the government through bankruptcy or they hope to strong arm our debtors at some future date. Neither of these is very promising.

A line of thought I intend to develop here is the idea that some of those who have profited most from capitalism are dissatisfied with the egalitarian effects capitalism has and are trying to send us back to the medieval Europe where class lines, determined by wealth in this case, are distinct enough that the upper class could truly revel in their wealth.

Free markets have been the greatest friend of the egalitarian in the history of humanity; but not in a vacuum. The collapse of the necessary social and political institutions supporting and surrounding otherwise mostly free markets would undo all of this. What really are people thinking the government is going to do over the long run by spending hand over fist while taking in almost no money? I may be wrong, but I would guess that Becker and Posner are not in support of new taxes despite his disingenuous suggestion otherwise.

Now don't get me wrong, an increased minimum wage is not a panacea, it may not even be the best solution, but it is a step in the right direction if we're going to simultaneously dismantle government based social support networks and support a broader meaning of corporate governance than Adam Smith or the Founders of this nation ever intended. And I certainly do agree with Mr. Becker's implied argument that our current politicians are spineless worms who do little more than stick their moist fingers in the air in the hope of purposeless and futile reelection.

As this is my first post, let me introduce my concerns. In the following statement the term that concerns me the most is the word all: I believe in freedom for all. The perspective I am attempting to develop is a Daoist politics (only somewhat of a contradiction) that essentially focuses on compassion and minimal regulation of behavior, but has a conservative humility about what politics and humanity can do.

Su Dongpo

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