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Politics Trumps Policy: The Minimum Wage Crusade

February 15, 2016.

To be clear, I favor an upgrade of minimum wage policy, but NOT the Democrats' one-size-fits-all approach.

Preventing full-time working families from slipping into poverty was a major refrain of the Obama White House. In this era of rising inequality, what could be more progressive than raising the income of the working poor? But instead of enlisting the most effective program for achieving that goal, Democrats have championed a populist crusade to raise the Federal minimum wage.

The progressive program they chose to bypass is the Earned Income Tax Credit (EITC). This venerable program provides an income subsidy (tax credit) to workers who don't earn enough to adequately support their families. An upgrade of EITC benefits would be no more difficult to get through Congress than a minimum wage hike. Economists leave no doubt that the EITC is enormously more effective and less costly than the minimum wage as a vehicle for helping poor families. Here are the reasons they give.

  • The EITC specifically targets poor working families, so funds are not dissipated on those who don't really need it. On the other hand, only 20% of minimum wage workers qualify as poor. In fact, 40% of minimum wage workers come from households in the top half of the income spectrum, and 14% come from six-figure households and above.

  • Since the EITC is the lowest rung on the ladder of the progressive income tax, the credits received by the poor are paid for mostly by the rich. But in the case of a minimum wage increase, the transfer of income is only slightly progressive, and only in the short run. That's because a wage hike results in slightly lower profits for businesses, but higher prices for consumers who, for the most part, are not rich.

  • Unlike the EITC, a higher minimum wage makes it more costly for companies to employ people. Democrats are quick to claim that the impact on jobs will be miniscule or even positive, a claim that is supported by some empirical research. But the Congressional Budget Office (CBO), which refuses to cherry-pick research, expects that raising the minimum wage from $7.25 to $10.10 will cost 500,000 jobs. If my arithmetic is correct, this means for every 33 beneficiaries of a $2.85 raise, one person's earnings will be slashed to zero through job-loss. Furthermore, the Democrats' optimistic research on job-losses are not likely to apply to poor states, where the median hourly pay is barely above the current minimum wage. In those states, a minimum wage hike will impact more workers and result in larger job losses. Hardest hit will be first-time entry level workers. A higher minimum wage induces employers to recruit and retain workers with known skills instead of hiring (and training) snot-nose kids. In other words, the policy extolled by Democrats would throw black teenagers under the bus. How progressive is that?

  • Poor families gain the least from a hike in the minimum wage. That's because many of them are receiving public assistance such as EITC, CHIP, or food stamps; so any increase in wage-income could jeopardize or reduce those benefits. For this and other reasons, experts like Isabel Sawhill argue that the Federal minimum wage should be changed only in coordination with a generous redesign of EITC.

  • Finally, if the near term benefits of a minimum wage hike seem anemic, the long run prospects are worse. Gradually, but relentlessly, the private sector will adjust to a "higher bill for lower skill" by adopting labor-saving technology, to the detriment of first-time entry level workers. And the CBO hints that economic growth may suffer as well.

However, an expansion of EITC benefits would depress the wages employers offer to entry-level and low-skill workers. To offset this problem some sort of wage floor is needed. More progressive redesigns of minimum wage policy are suggested by Sawhill and Dube.

Of course, the foregoing analysis cannot possibly compete with the profound wisdom of Harry Reid, Hillary Clinton and the Queen of Progressive Democrats, Elizabeth Warren. Of course not, because theirs is the wisdom of politics not policy. So if you ask, why would self-proclaimed progressives ditch the EITC to bloviate about a "living wage", the answer is simple: the potential political payoffs are just too good to pass up. Those political payoffs are the subject of the next post.



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