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.