via Brad DeLong by J. Bradford DeLong on 2/27/13
I would point out that the EITC and the minimum wage have different weak points--too high a minimum wage will have a substantial disemployment effect, and too high an EITC does create incentives to pad your hours. A mixed strategy helps attenuate both these flaws.
Leading Economists Vote on Raising the Minimum Wage: I'm delighted to see the U Chicago IGM Forum ask a really useful, non-softball question.Disappointing to see Caroline Hoxby believing that our unemployment right now is structural:
The panelists are evenly split on whether an increase to $9 would make it "noticeably harder for low-skilled workers to find employment."I note how many who commented bring up the EITC, suggesting that an increase in that support might be better than a minimum-wage increase. I note further that they apparently haven't read the very good reasoning and research suggesting that the two together very effectively address the problems of each. But Paul Krugman has. And his surprise helps explain why the others haven't thought about this:
A 4:1 majority thinks that weighing the costs and benefits, "this would be a desirable policy."
Second — and this is news to me — the usual notion that minimum wages and the Earned Income Tax Credit are competing ways to help low-wage workers is wrong. On the contrary, raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers. This actually is Econ 101, but done right.
Question A: Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment.Richard Schmalensee puts my view concisely:
Unemployment among low-skilled workers is already high by historic standards, indicating that wages are already too high for market-clearing.
Question A: Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment.As does Richard Thaler:
There would surely be some [disemployment] effect, but "noticeably" seems a reach.
Question A: Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment.Paul Krugman:
Yes, I know the Econ 101 answer but the evidence suggests the effect on employment is between small and 0.Question B: The distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy.
All methods of helping the poor cause distortions. This one not bad.
Minimum Wage Economics: what should you know? First, as John Schmitt (pdf) documents at length, there just isn't any evidence that raising the minimum wage near current levels would reduce employment. And this is a really solid result, because there have been a lot of studies. We can argue about exactly why the simple Econ 101 story doesn't seem to work, but it clearly doesn't — which means that the supposed cost in terms of employment from seeking to raise low-wage workers' earnings is a myth.And Mike Konczal:
Second — and this is news to me — the usual notion that minimum wages and the Earned Income Tax Credit are competing ways to help low-wage workers is wrong. On the contrary, raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers. This actually is Econ 101, but done right: given a second-best world in which you use imperfect tools to help deserving workers, two tools together can produce a better outcome than either one on its own.
So a minimum wage increase isn't some kind of counsel-of-despair way to help workers a bit in a dysfunctional political scene (although there's that too); it's actually good policy.
Interview with Dube; EITC and Minimum Wage as Complements: I still notice many people arguing that we should just raise the earned income tax credit (EITC) for the working poor rather than raising the minimum wage…. The EITC partially subsidizes employers, and as such the minimum wage is an excellent way to combat this. So it complements, rather than substitutes, for an EITC. Economists love to tell people that who pays a tax is independent of who Congress wants to pay it. The "Tax These Evil Corporations Act" might fall entirely on people buying stuff from those firms instead of their shareholders…. Jesse Rothstein did an estimate finding that for every dollar of EITC, a worker's wage only goes up 73 cents. That's a big capture by employers…. David Lee and Emmanuel Saez have a paper arguing that when this is the case (and if the EITC works primarily by bringing people into working, via an extensive margin, which it does), the minimum wage is an excellent complement to low-wage government transfers tied to work. Or as Dube says:
We have different polices designed for different distributional goals. We need to think not in terms of a single policy, but instead think in terms of what is the right portfolio of policies given the range of objectives you have.The minimum wage is an excellent tool to boost the efficacy of government transfers, and it should be raised and tied to a cost of living raise. There's no magic bullet - there's just a variety of tools that reinforce each other.