Thursday, November 29, 2007

Minimum Wage Increase

For a good primer on minimum wage facts, visit the Employment Policies Institute.

Like the majority of economists, I am against raising the minimum wage. I certainly don't hate poor people nor do I want to keep them down for some personal benefit. Here is how I see the minimum wage issue... Assume that the labor market is segmented into low-, medium-, and high-skill workers. Assume further that the low-skill labor market is currently in equilibrium at price Peq and quantity Qeq. Now, raise the price of labor (wage) creating an artificial price floor (aka minimum wage) in the low-skill market. Raising the minimum wage will not affect medium- and high-skill workers who currently earn above the new proposed minimum wage.
At a price P1, the amount of workers actually hired falls from the current equilibrium rate Qeq to Qd, the amount that firms are willing to hire at price P1 (people/households "supply" the labor, unlike most other graphs you're used to seeing where firms supply televisions and people demand them).

Here's the tradeoff: people who keep their jobs earn more money, but some people lose their jobs entirely. All workers whose marginal revenue product is between P1 and Peq will be fired. However, people who do keep their jobs are likely to have any benefits reduced so that the employer can help offset the cash outflow of raising the wage. Now you're saying that minimum wage earners don't get 2 weeks paid vacation. While that's true, they could be forced to work more hours off the books after the wage increase or they could be given fewer hours per week.

It is a misconception that most people who earn minimum wage are heads of poor households. This misconception inclines people to think of anti-minimum-wage-hikers as cold hearted bastards. The fact is that around 15% of minimum wage earners are actually heads of poor households. Most minimum wage earners are earning a second (or higher order) income for the family. Many are teenagers or working mothers. Over the course of a few months, most minimum wage earners can earn a raise based on their own merit/performance. This may not be true in menial jobs or ones where you pretty much do nothing productive (e.g. Night Owls *which I heard is now discontinued thanks to Ed Fulton*). HOWEVER, if the minimum wage is raised from Peq to P1, then all of a sudden, there is an excess supply of workers, meaning that minimum wage employees are now expendable. One can be hired and another is more than happy to fill the vacancy.

More effective ways to get more money into the pockets of the working poor is through programs such as the Earned Income Tax Credit that allows workers to make more money tax free or through HUD voucher programs that effectively augment family income by giving money toward paying rent. Raising the minimum wage won't be beneficial. Not now, not ever.
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