Sunday, September 14, 2014

Measured views of minimum wages

Eli Lehrer September 13, 2014

Highly relevant in NZ – none of the parties have a measured view – the polar positions are BOTH WRONG…. but it still doesn't help the poor.

The ground has been shifting in the battle over the minimum wage. With President Obama's proposal to hike the national minimum from $7.25 to $9 an hour stalled in Congress, local labor activists have been aiming even higher, getting behind a vastly higher minimum wage of $15 an hour.

The proposals are gaining steam. The small city of SeaTac, Wash., which includes Seattle-Tacoma International Airport, already has a $15 minimum in force, while Seattle plans to implement one over time. Similar "super-minimum" proposals also are under consideration in cities like San Francisco and Chicago. Recent state-level legislation will phase in a minimum wage of greater than $10 in California, Connecticut, Maryland, Hawaii and Vermont. Massachusetts' minimum will rise to $11 by January 2017, while the District of Columbia's is set to rise to $11.50 by July 2016.

Predictably, market advocates and business interests warn that such laws portend disaster: layoffs, benefit cuts, huge surges in consumer prices, mass unemployment and business closures.

Just as predictably, labor unions and their allies on the left paint the subject in terms of "fairness," arguing the higher wages will be paid out of what one SEIU lawyer called "billions and billions" in “extra” profits earned by fast food restaurants and others.

In truth, while the proposals are deeply flawed, the projections of economic catastrophe are at least somewhat overblown. The best reason to oppose a $15 minimum wage is that it's a bad way to help the very people it is intended to help.

Though the economic literature on the subject is mixed, a comprehensive review done in 2013 by the National Bureau of Economic Research found most studies do find a small but measurable increase in unemployment in response to minimum wage hikes.

The effects tend to be concentrated in a few industries that employ lots of low-wage workers, often teens and seasonal employees.

That a rising minimum wage would have only a small impact on unemployment shouldn't be terribly surprising, because government regulation doesn't have that large an immediate effect on jobs anywhere.

The Bureau of Labor Statistics regularly asks employers the reason behind layoffs. Those attributed to "government regulations/intervention" are routinely less than 0.5 percent of the total.

Both because they want to take care of their employees and because they would lose customers if service levels get cut sharply, business owners will avoid layoffs if they can. Nor are the costs of higher minimum wages simply passed on to customers. While a portion of almost any cost increase will almost certainly be passed on to consumers in the form of higher prices, price competition alone means that consumers will rarely have to pay all of it.

Instead, businesses may look to cut the cost of non-labor inputs, or to slow cost-of-living adjustments, cut raises for employees earning more than the minimum wage, or increase employees' share of health-care costs.  And yes, some will accept lower profits.

Of course, none of this makes a vastly higher minimum wage a good idea.  Higher labor costs will encourage businesses to automate more tasks and, over time, look for creative ways to avoid filling vacancies.

This will encourage elimination of many of the easiest-to-replace jobs.  And while mass insolvencies and rampant unemployment may be unlikely, there will certainly be some effect. Some already teetering businesses will almost certainly be pushed over the edge and some jobs that could have been taken by teenagers, the disabled and those lacking familiarity with work itself will never be created in the first place.

What's more, raising the minimum wage is simply a terrible way to help the poor. Only about 7 percent of those below the federal poverty line work a full-time job of any sort. Meanwhile, many of those who earn the minimum wage aren't poor at all. Roughly 42 percent live with a parent or relative, while another 18 percent are married second income earners, which helps explain why the average family income of a minimum wage earner is $53,000 per year.

Expanding the Earned Income Tax Credit, a direct subsidy for those who work for modest wages, is a much better and much more direct way to help the working poor.

Changes to healthcare, nutrition and education programs could do still more to help those in poverty. By comparison, a $15 minimum wage, even if not as disastrous as some market advocates claim, is likely to do more harm than good.

Eli Lehrer is president of the R Street Institute.

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