Minimum Wage Increases Inequality, Decreases Labor Force Participation

The minimum wage actually increases inequality. It helps some workers, but only at others’ expense. The reasoning is simple: people can’t make money if you put them out of work. When the minimum wage goes up, some people get a raise, but only because other people get their hours cut, are fired, or never hired in the first place. Some people get more, just as many other people get less. The minimum wage’s results are exactly the opposite of its intentions.

That’s why a recent Council of Economic Advisors report, “The Long-Term Decline in Prime-Age Male Labor Force Participation,” misses the mark. On page 42, the report says: “To fight the long-run trend of increasing inequality, the President has proposed raising the minimum wage, giving greater support to collective bargaining, and helping ensure that workers have a strong voice in the labor market.”

There are two problems with this approach. The big one is the implicit assumption that inequality is automatically a bad thing. This is precisely the approach Iain Murray and I warn against in our recent paper, “People, Not Ratios.” The mathematical difference between rich and poor is ethically irrelevant, as Princeton University philosopher Harry G. Frankfurt also argues.

What is ethically relevant is how people at the economic bottom are doing. Do they have enough to live with comfort, dignity, and security? Are they becoming better off over time? What policies will help the poor become better off over time? These are the questions anti-poverty activists should be asking.

That’s a pretty big problem. The second problem is with a study quoted on the same page by David H. Autor, Alan Manning, and Christopher L. Smith, “The Contribution of the Minimum Wage to US Wage Inequality over Three Decades: A Reassessment.”

Economists are famously divided on many issues, leading to President Harry Truman’s wish for a one-armed economist, who would be unable to say “on one hand… on the other hand…” The minimum wage is not a two-handed issue. A survey of professional economists finds overwhelming support for the statement “A minimum wage increases unemployment among young and unskilled workers.”

So not only did the CEA report have to cherry-pick a study that supported its ideological priors, that study’s support is tepid at best. This may be why the CEA report does not bother to quote it directly, which I do here:

We find that the minimum wage reduces inequality in the lower tail of the wage distribution, though by substantially less than previous estimates… These wage effects extend to percentiles where the minimum is nominally nonbinding, implying spillovers.

For more on how the minimum wage affects inequality, see Iain Murray’s and my recent paper, “The Rising Tide.” A future post will make similar arguments about the CEA report’s arguments on collective bargaining.

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