Cardiff Garcia has a good rundown on the minimum wage debate. He’s looking for someone to persuade him either way, and I’ll try to explain my qualified support for a minimum wage. For many, the debate is about the relative value of a minimum wage, which is theoretically inefficient, against wage subsidies which are not. However, as Paul Krugman pointed out earlier this year (though this is nothing new) the minimum wage and Earned Income Tax Credit (EITC) are really compliments, at least to the extent your goal is ensuring workers and not employers capture the benefits.
Here’s the pith in just a few sentences. As far as welfare goes, the government should not really be concerned about the wage paid by employers as much as the wage received by workers. If we decide that everyone needs $15 dollars an hour to live a comfortable life, then the government should not require that employers pay at this level, but promise to cover the differential between the market clearing rate (for unskilled laborers). The problem is labor supply is not perfectly inelastic, so this becomes subsidy for employers who can pay less.
There’s another problem with the EITC – it’s somewhat procyclical. There’s some econometric evidence to this effect, but it’s pretty easy to see that a program dependent on employment is not very countercyclical. This is not a problem per se but the marginal value of government spending – not just in increasing the welfare of the poor, but in moderating business cycles – is much higher in recession.
We should institute a procyclical minimum wage – relatively high when growth is good, and low when growth is bad. Actually, at least in the short run, this will address Tyler Cowen’s problem as well:
What about when the wage profile for low-skilled workers is sloping downward over time? One would expect the opposite result to hold, namely that employers are less likely to hold on to workers when confronted with a mandated wage increase.
For much of the 1990s, the labor market for less skilled workers was in decent shape. Since 1999 or so often it has been in bad or declining shape, excepting the “bubbly” years of 2004-2006. Therefore a minimum wage hike today would be more likely to boost unemployment than the minimum wage hikes of the past. And that unemployment is more likely to be long-term, corrosive unemployment than in previous decades.
I do understand that a minimum wage hike, in the eyes of some, is more “needed” today, perhaps for distributional reasons. But can we admit it is more likely than average to lead to additional unemployment?
There are many ways to make a minimum wage procyclical, but a simple heuristic might be keeping the portion of the workforce on minimum wage constant over time. That means when the labor market is tight the minimum needs to be raised to keep the level constant, and vice-versa in a loose market like today. There’s a pretty good argument that a minimum wage is like fiscal stimulus the government doesn’t have to pay for, advocated most vocally by billionaire Nick Hanauer. He thinks that’s a good thing, but huge cash piles or not, a recession is precisely the worst time to ask the private sector to pay more.
This would work in tandem with a wage subsidy guaranteeing some minimum income that is acyclical. In good times, the required employer pay rate increases, easing the government’s deficit. The disemployment effect during this time will be relatively negligible as per Cowen’s logic but also because inflation is higher during boom times allowing the employer to erode the real wage rate if the employee turns out to be bad.
When times are bad, the wage employees need to pay falls, which increases demand for labor, and the government picks up the tabs. Sure it’s partly a subsidy to employers, but one precisely when they need it.
This has the free benefit of making the EITC a lot more countercyclical. It also eases political constraints of efficient stimulus. The government can choose to make the minimum wage zero in slow times – something I’ve advocated before – which would in effect be providing free labor to employers. This sounds a lot better once you consider that at least today employers seem to think the long-term unemployed are approximately useless.
A procyclical minimum wage in tandem with a wage subsidy is in effect a countercyclical stimulus program. It also directly encourages hiring in a way the standard program does not. Here’s to the market determined minimum wage.