Category Archives: Minimum Wage

The DNC Platform and Inequality

As the Democratic National Committee convention wraps up in Philadelphia, I took some time to look over theparty platform’s planks on inequality. Iain Murray and I counsel a “People, Not Ratios” philosophy on inequality in our recent study; the Democratic platform mostly takes the opposite approach.

Iain and I argue that from an ethical standpoint, the mathematical difference between rich and poor is irrelevant. What matters is making sure that all people, especially at the economic bottom, have enough to live comfortably and securely. The DNC platform instead is about ratios, ratios, ratios: “most new income and wealth goes to the top one percent (p. 3),” “the top one-tenth of one percent of Americans now own almost as much wealth as the bottom 90 percent combined (p. 10),” and so on. Some of the policies it proposes to reduce inequality ratios include:

  • Tax hikes on the wealthy. This would have the unintended effect of leaving less capital for small businesses and startups. The wealthy tend not to hoard their wealth like Scrooge McDuck or Smaug the dragon from The Hobbit. They invest most of their wealth, and as it circulates throughout the economy, and small-scale entrepreneurs, innovators, and other value creators benefit—as do their consumers.
  • Tax breaks for favored corporations. Intentional or not, this would be very good for lobbyists, and hardly anyone else.
  • Tax hikes for disfavored corporations. Ditto, as unpopular industries descend on Washington to try to avoid punishment. If the federal government is going to have a corporate tax, it should be as simple and uniform as possible. Of course, the ideal corporate tax rate is zero—companies pass on their costs to consumers, so it’s really you and me who pay corporate taxes, not GE or Microsoft.
  • A $15 hourly minimum wage. Iain and I discuss this in our other recent paper, “The Rising Tide.” Higher minimum wages would help some workers, but with severe tradeoffs. Some workers will find themselves working fewer hours, or even fired. Other workers, especially younger workers, will never be hired in the first place, denying them the chance to gain skills and experience that can lift them up the economic ladder as they get older. This could potentially increase inequality ratios over the long run. Workers would also see fewer on-the-job perks, such as free parking and meals, flexible vacation policies, and so on. The minimum wage is not a free lunch.
  • Expanded collective bargaining. Again, some workers will get a raise, but at others’ expense. Fewer jobs, higher consumer prices, and more are all among the tradeoffs. And again, increased unionization could increase inequality by giving privileges to union members at non-members’ expense.

Progressives and classical liberals share the same goal when it comes to poverty—ending it. Achieving that goal requires people across the political spectrum to focus more on people, and less on ratios. In that respect, the DNC platform has a long way to go. The most effective policies involve eliminating barriers to entrepreneurship. These include reforming occupational licensing requirements that now affect a third of American workers, as President Obama has suggested. We also recommend clearing vast swathes of the 175,000-page Code of Federal Regulations. Other helpful policies include affordable energy, easy access to capital, and a commitment to an honest price system. For more policy ideas, see Iain’s and my recent papers.

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.

Minimum Wage Is No Panacea

I recently spoke to a reporter about the minimum wage’s tradeoffs: it helps some people, but at the cost of hurting other people. Here’s the writeup.

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.

Seattle’s $15 Minimum Wage

A short writeup of Seattle’s new $15 minimum wage quotes me.

Minimum Wage Tradeoffs: Are They Worth It?

Minimum wages help some workers, but only at other workers’ expense. Whether or not these tradeoffs are worth it is for each individual to decide. Unfortunately, many activists simply wish those tradeoffs away, which clouds decisionmaking. Over at RealClearPolicy, I praise an honest minimum wage advocate:

Finally, some minimum-wage advocates are acknowledging the policy’s tradeoffs. New School economics professor David Howell recently asked the Washington Post, “Why shouldn’t we in fact accept job loss?” He calls for a “living wage” mandate for some, even if it hurts others.

Is that a good trade? Lawmakers should carefully consider this question before following in the footsteps of California, which recently decided to raise its minimum wage to $15 by 2022, or New York State, which is also aiming for $15 (though its timetable is less certain).

Read the whole thing here.

Minimum Wages and Tradeoffs

An otherwise-excellent article by Connor Wolf in the Daily Caller on how the minimum wage affects young workers quotes me.