Inequality: Policies That Work, and Policies That Don’t

CEI recently released a pair of papers by Iain Murray and me about economic inequality. The first encourages activists to ask the right questions: think about flesh-and-blood people, not ratios. The second paper seeks to answer the right questions. Our main focus is on effective poverty reduction policies. But it is also important to know which policies don’t reduce poverty, so policy makers can avoid them. We mention two in our paper: minimum wage hikes and increased collective bargaining.

The arguments against both are similar: they have tradeoffs. Some workers benefit from a higher minimum wage, and many union members benefit from higher union wages. But their benefits come at a cost.

Workers pay for minimum wage increases in the form of reduced hours, firings, some workers never being hired in the first place, higher youth unemployment, and reduced on-the-job perks ranging from paid vacation to free parking and meals. These costs to people must be weighed against the benefits other people receive. Whether they are worth it or not is a decision every individual must make for himself, and is open for debate. That these tradeoffs exist is not debatable.

Collective bargaining’s costs include higher consumer prices, along with lower wages and reduced purchasing power for other workers. Public sector unions impose massive costs on taxpayers through their pension obligations. They are major contributors to potential government bankruptcies in coming years from California to New Jersey. Again, some workers do benefit from collective bargaining. And it is every individual’s own decision if the tradeoffs worth it or not. But the tradeoffs exist.

There are many policies that instead can make the poor better off, from affordable energy to occupational licensing reform, to easy access to capital, to regulatory reform, a CEI specialty. But some policies do not help the poor—or if they do help some of the poor, the tradeoffs eliminate net gains in human well-being. Minimum wages and collective bargaining are two such policies. Well-meaning activists should approach them with caution.

For more, see Iain’s my new paper, The Rising Tide: Answering the Right Questions in the Inequality Debate, as well its companion paper, People, Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions.

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