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Negative-Sum Politics: The Minimum Wage Crusade

March 4, 2016.

In the last post I explained why a progressive policy-wonk would never choose the Federal minimum wage over the Earned Income Tax Credit (EITC) as a way to assist the working poor. Yet Democratic leaders deliberately embraced the minimum wage option. So in this post I will explain why that bad choice of policy is diabolically good politics.

First, the net political payoff from doing the right thing is probably negative. To expand the EITC, Democrats would have to take the heat for increasing taxes or deficit spending, solely for the benefit of the poorest 10-15% of households. In short, a very high political cost for a small, marginalized and unreliable constituency.

Even worse, expansion of EITC would reward Republican (red) states for being much poorer than Democratic (blue*) states, on average. Since the EITC is financed by progressive tax rates, its expansion would transfer income from wealthier blue states to red states. Hard-ball politics dictates that progressive policy should stop at the enemy's gates.

In contrast, the minimum wage has a broad constituency and requires no government funding. Instead, the cost of raising workers' pay is shifted onto the private sector, where consumers pay higher prices, business owners make less profit, and teenagers are less employable. Democrats love unfunded Federal mandates because they obscure the fact that the aforementioned costs are taxes by a different name. And in this case, most of the costs will be inflicted on red states - their punishment for being poorer.

Indeed, the big payoff for Democrats stems from the fact that a hike in the Federal minimum will have a much bigger impact on red states than on their own blue states. After all, 92% of blue states have already chosen to raise their wage minimums above the Fed's $7.25. In 2015, the average minimum wage in the 15 bluest states was $8.56; but only $7.47 in the 15 reddest states. (The gap is even greater if you include state mandated increases scheduled for the next two years). So, the Democrats' interest in raising the Federal minimum is NOT to benefit blue state workers, but to force a costly change upon the enemy's strongholds.

Of course, Democrats would claim that their motive is to rescue red state workers from excessive wage-inequality**. But this is disputed by the data on the median/minimum ratio, a standard measure of wage inequality: in 2015 the median wage in the average blue state was 2.5 times its minimum wage, compared to 2.4 times for the average red state. In other words, the divide between median and minimum wages is actually smaller in red states. So, if inequality is the Democrats' concern, it is their own blue states that need higher minimum wages.

The truth is, the minimum wage crusade is an example of negative-sum politics. It's an attempt to cripple the beneficiaries of an historic economic trend: the demise of the Democratic rust belt and the corresponding ascendance of the Republican sun belt. Since the 1960's, stagnant productivity in the monopoly-infected economy of the rust belt resulted in a loss of jobs, business investment, and population to more competitive red states. The essence of red states' competitive advantage was, and still is, low cost. Businesses are attracted by lower taxes of about $1300 per capita, not mention the advantage of non-union labor. And citizens flock to red states, not so much for the sunshine, but because housing is 31% cheaper, and they get a 16% discount on the overall cost of living.

What better way to erode that cost advantage than to increase the Federal minimum wage? Labor costs would rise disproportionately in red states because a Federal hike would shrink the gap between minimum and median wages a lot more than in blues states. In fact a $2.00 hike will narrow the gap by 25% in red states, but only 13% in blue states.

As the minimum wage moves closer to the median level, it has a bigger impact on average labor costs. That's because a higher minimum tends to bump-up the pay of workers on the next rungs of the wage ladder. In red states the 'next rungs' are closer to the median wage, so a much larger percentage of workers are bumped up to a higher wage. Hence, red states would experience a disproportionate increase in average labor costs, and because of that, a disproportionate loss of jobs.

The Parable of Puerto Rico

Of course, Democrats deny that employment will be hurt. Before you swallow that, consider Puerto Rico. Beginning in 1983, the U.S. Federal minimum wage of $3.35 was fully applied to that very poor island. In Puerto Rico $3.35 is so high that it equals 77% of the Island's median wage, compared to just 41% in the states. The result has been a drastic decline in employment opportunities and rapid migration to the U.S. mainland.

Now, let's apply this lesson to a hypothetical increase in the Federal minimum to $10.10. The result in Mississippi would be a minimum wage that equals 61% of the state's median wage, a rise of 17 points; but in New York the minimum would equal just 48% of the median, a rise of only 6 points.

The Democrats' rosy jobs outlook might work in New York but not in Mississippi. Like Puerto Rico, employment in Mississippi is likely to take a big hit. Furthermore, Mississippi's labor costs are a bigger proportion of total business costs simply because land rent is so much cheaper than in New York - another reason to expect layoffs from a minimum wage hike.

Many other states fit Mississippi's profile such as Alabama, Georgia, South Carolina, Arkansas, and Texas. And which of their residents are most likely to be "dis-employed" by a $10.10 minimum? That's right, poor African Americans and Latinos, the very people Democrats claim to represent. How progressive is that?

If it's any consolation, negative sum politics is the depraved calling of both parties.


* Blue states are states where Obama won more than 50% of the popular vote in 2008.

** This refers to lower-tail inequality. The minimum wage affects inequality in the bottom 50% of the wage distribution, but has little impact on upper-tail inequality which, by the way, is higher in red states on average.



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