The Minimum Wage Debate

A student calls to my attention a recent release from Senator Hillary Clinton's office, which says "Senator Clinton is a strong advocate of increasing the minimum wage." It also says "she will introduce legislation when Congress returns to link Congressional pay increases to increases in the federal minimum wage."

It looks like the minimum wage is shaping up to be an issue in the 2008 Presidential election.

To read conventional analyses of the economics of minimum wages, click here and here. For Steven Landsburg's always provocative take on things, click here.

Finally, I cannot resist offering an excerpt from my favorite textbook:

The minimum wage has its greatest impact on the market for teenage labor. The equilibrium wages of teenagers are low because teenagers are among the least skilled and least experienced members of the labor force. In addition, teenagers are often willing to accept a lower wage in exchange for on‑the‑job training. (Some teenagers are willing to work as "interns" for no pay at all. Because internships pay nothing, however, the minimum wage does not apply to them. If it did, these jobs might not exist.) As a result, the minimum wage is more often binding for teenagers than for other members of the labor force.

Many economists have studied how minimum-wage laws affect the teenage labor market. These researchers compare the changes in the minimum wage over time with the changes in teenage employment. Although there is some debate about how much the minimum wage affects employment, the typical study finds that a 10 percent increase in the minimum wage depresses teenage employment between 1 and 3 percent. In interpreting this estimate, note that a 10 percent increase in the minimum wage does not raise the average wage of teenagers by 10 percent. A change in the law does not directly affect those teenagers who are already paid well above the minimum, and enforcement of minimum-wage laws is not perfect. Thus, the estimated drop in employment of 1 to 3 percent is significant.

In addition to altering the quantity of labor demanded, the minimum wage also alters the quantity supplied. Because the minimum wage raises the wage that teenagers can earn, it increases the number of teenagers who choose to look for jobs. Studies have found that a higher minimum wage influences which teenagers are employed. When the minimum wage rises, some teenagers who are still attending school choose to drop out and take jobs. These new dropouts displace other teenagers who had already dropped out of school and who now become unemployed.

The minimum wage is a frequent topic of political debate. Advocates of the minimum wage view the policy as one way to raise the income of the working poor. They correctly point out that workers who earn the minimum wage can afford only a meager standard of living. In 2005, for instance, when the minimum wage was $5.15 per hour, two adults working 40 hours a week for every week of the year at minimum-wage jobs had a total annual income of only $21,424, which was less than half of the median family income. Many advocates of the minimum wage admit that it has some adverse effects, including unemployment, but they believe that these effects are small and that, all things considered, a higher minimum wage makes the poor better off.

Opponents of the minimum wage contend that it is not the best way to combat poverty. They note that a high minimum wage causes unemployment, encourages teenagers to drop out of school, and prevents some unskilled workers from getting the on-the-job training they need. Moreover, opponents of the minimum wage point out that the minimum wage is a poorly targeted policy. Not all minimum-wage workers are heads of households trying to help their families escape poverty. In fact, fewer than a third of minimum-wage earners are in families with incomes below the poverty line. Many are teenagers from middle‑class homes working at part-time jobs for extra spending money.

EITC is better than the Minimum Wage

From David Neumark:

Suggesting that federal policy addressing low-wage work and low-income families has somehow failed because the minimum wage has not kept pace with inflation ignores the fact that we have moved away from a focus on the minimum wage — a policy with many flaws — and toward the earned-income tax credit.  We shouldn’t be asking simply how much the real minimum wage has changed, but rather how much the combined income floor generated by the two policies has changed.

To provide an example, the blue line in the figure below shows the wages received by a single adult worker earning the minimum wage and working full time throughout the year. This can be interpreted as the income floor established by the minimum wage. The red line shows the level of family income when the earned-income tax credit for a family with two children is added (all in 2012 dollars). The lower line illustrates the income consequences of the real decline in the minimum wage. But the upper line shows that, because of the sharp increase in the generosity of the earned-income tax credit, the combined effect of the two policies is that the real income of this family is as high or higher than it was in past decades — when the real minimum wage was relatively high — and much higher than it was in most of the intervening years.

 

Nonetheless, there are important differences between the earned-income tax credit and the minimum wage. The fundamental difference is that the earned-income tax credit aims benefits at low-income families with children, rather than simply low-wage workers. This is in large part its virtue, and it makes a lot more sense than the minimum wage’s focus on low-wage workers. Do we really care if a low-wage teenager in a middle-class family makes an extra dollar an hour?  Economists of all persuasions in the minimum-wage debate agree that mandated wage floors do a bad job of directing benefits to low-income families.  This is confirmed in recent research by my graduate student Sam Lundstrom, calculating who would be affected by increasing the current federal minimum to $8.25 from $7.25.  He finds that only 21.3 percent of the affected workers would be in poor families, while 30.9 percent would be in families with incomes more than three times the poverty line.

Mayor Daley on the Living Wage

Here is a good decision, but politically a tough one for any elected official, as reported in USA Today:

Mayor vetoes Chicago's 'living wage' ordinance aimed at big retailers

Mayor Richard Daley vetoed an ordinance Monday that would have required mega-retailers to pay their workers more than other employers after some of the nation's largest stores including Wal-Mart Stores warned that the measure would keep them from opening their doors within the city's limits.

Supporters said the measure would guarantee employees a "living wage," but in a letter to City Council members released Monday, Daley said the ordinance would drive businesses from Chicago.

"I understand and share a desire to ensure that everyone who works in the city of Chicago earns a decent wage," Daley wrote. "But I do not believe that this ordinance, well intentioned as it may be, would achieve that end." The veto was Daley's first in 17 years in office, and will likely set up a showdown during Wednesday's council meeting.

Here is an old piece I wrote on the topic, when Harvard students were protesting for a living wage at the university.

The Cost of a "Living Wage"

By N. Gregory Mankiw
Boston Globe, 6/24/2001

If student movements are a leading indicator of social trends, and they often are, then the recent student takeover of the administration building at Harvard University is a troubling sign.

The students wanted a ''living wage'' ($10.25 a hour, plus benefits) for all Harvard workers. Like the broader living wage campaign, which could culminate in a much higher national minimum wage, the students were laudable in their intentions but deficient in their analysis.

The appeal of the living wage is obvious. Life is hard for workers trying to support families on $7 or $8 an hour. If we could wave a magic wand and help those at the bottom of the economic ladder move up a rung or two, we should do it.

But enacting a social reform is not like waving a magic wand. It is more like prescribing a drug with a long list of side effects. Sometimes the side effects are worse than the disease.

Like most other prices, wages are set by the market forces of supply and demand. The major difference between high-wage workers and low-wage workers is not that the former are better organized or better liked by their employers -- it's that their higher productivity enhances the demand for their services. Workers earning only $7 or $8 a hour are typically those with the fewest years of education and the least experience, which depresses the demand for their labor.

The living wage campaign wants to repeal the law of supply and demand and raise wages by fiat. The goal is to help low-wage workers. Unfortunately, it wouldn't work out that way. One effect of a higher wage is a reduction in the amount of labor that employers demand.

Take Harvard, for instance. How often does it need its janitorial staff to vacuum the classrooms and wash the blackboards? It's a judgment call. An increase in the wage from $8 to $10 a hour raises the cost of labor by 25 percent. It is wishful thinking to suggest that this won't affect the number of workers hired.

Living wage proponents say that Harvard, with its huge endowment, can afford to pay higher wages. Yes, that's true, but that's not the point. Like all employers, Harvard is always making cost-benefit calculations, weighing the benefits of one project (hiring more janitors to clean blackboards more often) against others (hiring more professors to reduce class sizes). By raising the relative price of unskilled workers, the passage of a living wage shifts the tradeoffs in a way that means fewer of those workers will be hired.

Living wage advocates often point to a study by economists David Card and Alan Krueger, which claims that raising the minimum wage does not reduce employment. This research became prominent during the Clinton years, in part because Krueger was once chief economist in Clinton's Labor Department.

Although Card and Krueger are reputable economists, equally reputable economists have attacked their data, methods, and results. Meanwhile, most research on the minimum wage finds that it reduces employment. Emphasizing the Card-Krueger evidence is like a doctor prescribing a drug relying on a single controversial study that finds no adverse side effects, while ignoring the many reports of debilitating results.

Moreover, the adverse effects of a high minimum wage go beyond its impact on total employment. In addition to reducing the amount of labor demanded, a high minimum wage compounds the problem by increasing the amount of labor supplied. In other words, not only are there fewer jobs available for unskilled workers, but more people apply for those jobs. Studies have found that increases in the minimum wage encourage some teenagers to drop out of school earlier than they otherwise would. These teenagers take jobs that would go to unskilled adults, making it harder for those adults to make the transition from welfare to work.

The case against a high minimum wage is even more compelling once one realizes that it is not the only way to address the hardship of the working poor. A better weapon to fight poverty is the Earned Income Tax Credit, a provision of the income tax system that supplements the income of low-wage workers. Like any spending program, this policy has the cost of higher taxes on everyone else. But those costs are smaller than the unemployment that results from high minimum wages.

Throughout history, students have been drawn to utopian social reforms. But history teaches that such social reforms often fail to yield what the reformers promised. The living wage campaign is the most recent example.

Can 600 economists all be wrong?

An ec 10 student recently asked me why some economists, including some prominent ones, favor an increase in the minimum wage, in light of the standard economic analysis of price floors. To avoid putting words in other people's mouths, I asked one of the leading economists who signed the open letter supporting a minimum-wage increase exactly that question.

My friend told me that he viewed the minimum wage as a second-best policy. He would prefer increased cash payments to the poor, such as a much-expanded earned income tax credit (EITC) or a more general negative income tax. But if his first-best policy was politically impossible, a minimum-wage increase was, in his view, an improvement over the status quo. He admitted that the minimum wage had adverse effects on employment, but he judged those to be modest in size. All things considered, he concluded that a higher minimum wage was better than nothing.

There is, of course, another side of this coin. Some economists, such as David Neumark, view the adverse employment effects as larger than my friend does. But, even if my friend is correct that the disemployment effects are modest, one should look at the magnitude of the anti-poverty effects. The minimum wage is not well targeted to poor families. Many minimum-wage earners are like I was in the summer of 1976: teenagers from middle-class homes with minimal skill and experience, getting their first taste of working.

Economists Richard Burkhauser (Cornell University) and Joseph Sabia (University of Georgia) report:

a beneficiary from a proposed federal minimum wage hike to $7.25 an hour is far more likely to be in a family earning more than three times the poverty line than in a poor family. In total, only 12.7 percent of the benefits from a federal minimum wage increase to $7.25 an hour would go to poor families. In contrast, 63 percent of benefits would go to families earning more than twice the poverty line and 42 percent would go to families earning more than three times the poverty line.

So even if my friend is right that the disemployment effects are modest, it seems that any benefits from the standpoint of poverty reduction are likely to be modest as well. When I asked him about this, he agreed.

As I noted in a previous post, professional economists are divided about whether the minimum wage should now be increased or eliminated. But I believe that relatively few economists would include the minimum wage as part of their first-best package of policies.

Neumark on the Minimum Wage

A prominent critic of the minimum wage as an anti-poverty tool is David Neumark, an economics professor at UC Irvine and a graduate of the Harvard econ PhD program. Here is an excerpt from Neumark's latest summary (brief version) of the relevant research:

The central goal of raising the minimum wage is to raise incomes of low-income families and reduce poverty. There are three reasons why raising the minimum may not help to achieve this goal. First, a higher minimum wage may discourage employers from using the very low-wage, low-skill workers that minimum wages are intended to help. Second, a higher minimum wage may hurt poor and low-income families rather than help them, if the disemployment effects are concentrated among workers in low-income families. And third, a higher minimum wage may reduce training, schooling, and work experience—all of which are important sources of higher wages—and hence make it harder for workers to attain the higher-wage jobs that may be the best means to an acceptable level of family income.

The evidence from a large body of existing research suggests that minimum wage increases do more harm than good. Minimum wages reduce employment of young and less-skilled workers. Minimum wages deliver no net benefits to poor or low-income families, and if anything make them worse off, increasing poverty. Finally, there is some evidence that minimum wages have longer-run adverse effects, lowering the acquisition of skills and therefore lowering wages and earnings even beyond the age when individuals are most directly affected by a higher minimum....

Those interested in using economic policy levers to redistribute income to lower-income families should instead push for policy options that encourage work, that better target poor and low-income families, and that have a proven record of reducing poverty. The Earned Income Tax Credit, which is implemented at the federal level and supplemented by many states, appears to satisfy all of these criteria and thus is a better redistributive policy.

If you click on the link, you can also read Neumark's assessment of the famous Card-Krueger study, which is often cited by minimum-wage advocates.

Republicans and the Minimum Wage

Some Republicans in Congress are apparently worried about the midterm elections. They are so worried, they are starting to vote like Democrats.

According to today's Wall Street Journal,

Breaking with its Republican leadership, the House Appropriations Committee approved a $2.10-an-hour increase in the minimum wage as part of a budget bill that adds $4 billion to President Bush's requests for domestic programs.

The 32-27 vote is certain to be challenged when the $596.5 billion measure comes to the House floor. But the seven Republican defections underscored the growing prominence of the wage issue going into the November elections.

The minimum wage is, I admit, controversial among economists. But many economists, and surely most allied with the Republican party, take the view that Linda Gorman expressed so succinctly:

Unfortunately, neither laudable intentions nor widespread support can alter one simple fact: although minimum wage laws can set wages, they cannot guarantee jobs. In reality, minimum wage laws place additional obstacles in the path of the most unskilled workers who are struggling to reach the lowest rungs of the economic ladder.

Consistent with this assessment, here the abstract of a NBER study by David Neumark and Olena Nizalovaof on the long-run effects of the minimum wage:

Exposure to minimum wages at young ages may lead to longer-run effects. Among the possible adverse longer-run effects are decreased labor market experience and accumulation of tenure, lower current labor supply because of lower wages, and diminished training and skill acquisition. Beneficial longer-run effects could arise if minimum wages increase skill acquisition, or if short-term wage increases are long-lasting.

We estimate the longer-run effects of minimum wages by using information on the minimum wage history that workers have faced since potentially entering the labor market. The evidence indicates that even as individuals reach their late 20's, they work less and earn less the longer they were exposed to a higher minimum wage, especially as a teenager. The adverse longer-run effects of facing high minimum wages as a teenager are stronger for blacks. From a policy perspective, these longer-run effects of minimum wages are likely more significant than the contemporaneous effects of minimum wages on youths that are the focus of most research and policy debate.

Who earns the minimum wage?

The minimum wage is heating up as a political issue, so some readers might want to learn more about the characteristics of minimum-wage workers. The Labor Department has a good fact sheet on the topic.

One fact missing from this sheet, however, is the percentage of minimum-wage workers who are in families below the poverty line. Although the minimum wage is often considered an anti-poverty program, in fact many minimum-wage workers are teenagers from middle-class homes. For example, my first full-time job (exactly 30 years ago) was a minimum-wage job; although my family wasn't rich, we also weren't poor.

An old study from the CBO reports:

Four-fifths of all minimum wage workers are not poor.... Part of the explanation for why so many minimum wage workers are not poor is that over two-thirds of them are in families in which at least one other member has a job.

I am sure someone has updated this fact, but I don't know a source. I checked with one of my empirical labor economist friends, and he said this CBO number still seemed about right to him.

Sperling on the Minimum Wage

Gene Sperling, former economic adviser to Bill Clinton, tries to get President Bush to endorse a minimum-wage increase. Gene dismisses worries about adverse effects on employment. He writes:

No one has yet rebutted convincingly David Card and Alan Krueger's study that compared fast-food jobs on the border of New Jersey and Pennsylvania, and found no decrease in lower-wage jobs after New Jersey raised its state minimum wage.

The key word here is "convincingly." Gene is, apparently, not convinced by the Neumark-Wascher study that reevaluated the Card-Krueger work:

estimates of the employment effect of the New Jersey minimum wage increase from the payroll data lead to the opposite conclusion from that reached by CK.

Nor is he convinced by another Neumark-Wascher study that found

"no compelling evidence" that minimum wages help in the fight against poverty. A higher minimum wage...generates tradeoffs with respect to the incomes of poor and low-income families. Some families gain and others lose.

Nor is he convinced by the Neumark-Nizalova study that found adverse long-run effects of the minimum wage:

The evidence indicates that even as individuals reach their late 20's, they work less and earn less the longer they were exposed to a higher minimum wage, especially as a teenager.

Nor is he convinced by the Abowd-Kramarz-Margolis study that reported

movements in both French and American real minimum wages are associated with mild employment effects in general and very strong effects on workers employed at the minimum wage.

To me, Gene looks like a doctor prescribing a drug relying on a single controversial study that finds no adverse side effects, while ignoring the many reports of debilitating results.

Unintended Consequences

A surprising effect of the minimum wage:

Growing consumption of increasingly less expensive food, and especially “fast food”, has been cited as a potential cause of increasing rate of obesity in the United States over the past several decades. Because the real minimum wage in the United States has declined by as much as half over 1968-2007 and because minimum wage labor is a major contributor to the cost of food away from home we hypothesized that changes in the minimum wage would be associated with changes in bodyweight over this period. To examine this, we use data from the Behavioral Risk Factor Surveillance System from 1984-2006 to test whether variation in the real minimum wage was associated with changes in body mass index (BMI).... We find that a $1 decrease in the real minimum wage was associated with a 0.06 increase in BMI.... Real minimum wage decreases can explain 10% of the change in BMI since 1970. We conclude that the declining real minimum wage rates has contributed to the increasing rate of overweight and obesity in the United States.

From David Meltzer and Zhuo Chen.

The Increased Role of the Minimum Wage

I am in the process of revising my intermediate macro book.  As I was updating the section on the minimum wage, I was struck by how much the data has changed over three years.  The minimum wage has a much larger role now than it did three years ago, in large part because of the legislated increase in the minimum wage from $5.15 to $7.25 an hour.  For example, comparing the 2010 data with the 2007 data, one finds the following:

• The percentage of all hourly-paid workers paid at or below the minimum wage rose from 2.3 to 6.0 percent.
• The percentage of part-time workers paid at or below the minimum wage rose from 5 to 14 percent.
• The percentage of teenage workers paid at or below the minimum wage rose from 7 to 25 percent.

Question for class discussion:  In light of what is occurring with the overall economy during this period, how would you evaluate the policy change regarding the minimum wage?

Some Observations on Minimum Wages

John Cochrane has a nice post on minimum wages.

I was recently discussing the topic of minimum wages with a friend who favors them.  (He is a prominent economist, whose name you would surely recognize, but conversations with friends are off the record).  As justification for his view, he pointed me to this paper by Lee and Saez, called "Optimal minimum wage policy in competitive labor market."

What was notable to me about this paper is the incredibly strong assumptions they need to make their case.  In particular,

Assumption 1. Efficient rationing: Workers who involuntarily lose their low-skilled jobs due to the minimum wage are those with the least surplus from working in the low-skilled sector.

 Later they point out:

Finally, the desirability of the minimum wage hinges again crucially on the “efficient rationing” assumption. Under “uniform rationing”, where unemployment strikes independently of surplus, the minimum wage cannot improve upon the optimal tax allocation, a point formally proven in Lee and Saez (2008). Indeed, with efficient rationing, a minimum wage effectively reveals the marginal workers to the government. Since costs of work are unobservable, this is valuable because it allows the government to sort workers into a more socially (albeit not privately) efficient set of occupations, making the minimum wage desirable. In contrast, with uniform rationing, as unemployment strikes randomly, a minimum wage does not reveal anything about costs of work. As a result, it only creates (privately) inefficient sorting across occupations without revealing anything of value to the government. It is not surprising that minimum wages would not be desirable in this context.

Rather than providing a justification for minimum wages, the paper seems to do just the opposite. It shows that you need implausibly strong assumptions, such as efficient rationing, to make the case.  I cannot see any compelling reason to believe that in the presence of excess supply of workers, the market will somehow manage to efficiently ration the scarce jobs.

Minimum Wage as a Symbol

Gary Becker and Richard Posner have good posts on the minimum wage at their blog.

In watching this debate unfold, I am moving toward the view that the issue is more symbolic than substantive. Posner asks, "why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous?" Here is my answer: Many voters don't know what the EITC is, whereas the minimum wage is easy to understand. As Becker points out, "Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate." True, but few voters are so knowledgeable. As a result, the minimum wage is an easily explained issue that says, "We Democrats care about poor people, unlike those Republicans."

Here is a question that I would ask any politician: If you could set your ideal policy to help the poor, wouldn't you prefer to expand the EITC and abolish the minimum wage? Any politician that fails to answer "yes" is either misinformed or engaging in demagoguery.

Two Ways to Tell the Story

 From Paul Krugman today:

The most famous example is the research that Card conducted along with the late Alan Krueger on the effects of minimum wage. Most economists used to believe that raising the minimum wage reduces employment. But is this true? In 1992 the state of New Jersey increased its minimum wage while neighboring Pennsylvania didn’t. Card and Krueger realized that they could assess the effect of this policy change by comparing employment growth in the two states after the wage hike, essentially using Pennsylvania as the control for New Jersey’s experiment.

What they found was that the increased minimum wage had very little if any negative effect on the number of jobs....

So the empirical revolution in economics undermines the right-leaning conventional wisdom that had dominated discourse.

From David Henderson today:

Messrs. Card and Krueger conducted a famous natural experiment by studying employment at fast-food restaurants in New Jersey and Pennsylvania before and after New Jersey raised the minimum wage while Pennsylvania didn’t. Contrary to what one might expect, employment in New Jersey’s fast-food restaurants rose slightly relative to employment in Pennsylvania’s. On this basis, they challenged standard supply-and-demand models of the effects of minimum wages. Unfortunately, Messrs. Card and Krueger’s data weren’t so great—they gathered it by phoning restaurants.

University of California Irvine economist David Neumark and Federal Reserve economist William L. Wascher, using the restaurants’ payroll data, found what most economists would have expected: The minimum wage increase in New Jersey caused employment to fall in the New Jersey restaurants relative to Pennsylvania restaurants’ employment.

Greenspan on the Minimum Wage

Larry Mishel, President of the Economic Policy Institute, sent me an email today, asking me to sign a letter of economists endorsing an increase in the minimum wage. Apparently, he already has some high-profile signers, including my undergraduate thesis adviser Alan Blinder and my current Harvard colleague Larry Katz. Despite my fondness and respect for Alan and Larry, I declined.

Alan Greenspan will, I predict, decline as well--a forecast I make based on this old article from the files.

Greenspan warns higher minimum wage could raise unemployment
The Associated Press, February 24, 1999

Raising the minimum wage could deny some teenagers their chance at entry-level jobs, Federal Reserve Chairman Alan Greenspan said Wednesday.

Responding to questions from House Banking Committee members while delivering the Fed's semiannual report to Congress, Greenspan said increasing the wage probably would push inflation higher. But he said his main concern was "individuals who become unemployed because of the minimum wage."

"Being unemployed when you're a teenager... is very detrimental to... learning by training and becoming a productive member of the work force," he said.

Greenspan's view is consistent with recent research by David Neumark. Obviously, not all economists are convinced.

I wonder if Ben Bernanke will be as forthright on this topic as Greenspan was. My guess is that Ben's views on the minimum wage are not very different from Greenspan's, but that Ben will decide that he hasn't accumulated enough political capital to stick his neck out on such a politically charged issue.

New Research on the Minimum Wage

From UCSD economist Jeffrey Clemens:

The Minimum Wage and the Great Recession: Evidence from the Current Population Survey

I analyze recent federal minimum wage increases using the Current Population Survey. The relevant minimum wage increases were differentially binding across states, generating natural comparison groups. I first estimate a standard difference-in-differences model on samples restricted to relatively low-skilled individuals, as described by their ages and education levels. I also employ a triple-difference framework that utilizes continuous variation in the minimum wage's bite across skill groups. In both frameworks, estimates are robust to adopting a range of alternative strategies, including matching on the size of states' housing declines, to account for variation in the Great Recession's severity across states. My baseline estimate is that this period's full set of minimum wage increases reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points. This estimate accounts for 43 percent of the sustained, 13 percentage point decline in this skill group's employment rate and a 0.49 percentage point decline in employment across the full population ages 16 to 64.

Boudreaux on the Minimum Wage

GMU econ prof Donald Boudreaux writes about the minimum wage. His bottom line:

We don't know exactly how, or exactly by how much, employers as a group respond to higher minimum wages -- but the theoretical case that they do respond in ways unfavorable to low-skilled employees is too powerful to dismiss.

This sounds right to me.

But Boudreaux's arguments will not convince a hard-core egalitarian. Suppose these unfavorable responses are small in magnitude. Isn't it possible that the minimum wage on net helps poor families because the direct effect of higher wages more than offsets the adverse response from employers? Since Boudreaux is making a theoretical argument, he has to admit that it is possible. The minimum-wage debate will not be resolved with an appeal to theory alone.

In the end, there is no good substitute for an appeal to facts. What the facts show is that the minimum wage is poorly targeted as an anti-poverty program. Moreover, while the evidence is controversial, some studies find significant long-term adverse effects. As a result, most economists prefer more efficient and better targeted anti-poverty tools, such as the EITC, which has grown significantly over the past few decades.

Minimum wage vs EITC

The CBO today released a brief report comparing an increase in the minimum wage with an expansion in the Earned Income Tax Credit. The report shows that the EITC is far better targeted as an antipoverty policy.

Here is the summary:

On the basis of data from the March 2005 CPS, about 18 percent of the 12 million workers who were paid an hourly wage rate between the federal minimum wage of $5.15 and $7.24 were in families that had a total cash income below the federal poverty threshold in 2004. Had all of the workers in that wage range, instead, received $7.25 per hour, they would have gotten about $11 billion in additional wages in that year. About 15 percent of those additional wages ($1.6 billion) would have been received by workers in poor families.

As requested, CBO examined the potential effects of hypothetical expansions in the EITC that would have provided additional payments to workers in poor families similar to the amount of additional earnings poor workers would have received by increasing the minimum wage rate to $7.25 per hour. One option was to increase the subsidy rate for childless workers by 50 percent. Another option was to increase the subsidy rate for workers with three or more children by 25 percent. On the basis of data from the CPS, combining those options would have increased total EITC payments by roughly $2.4 billion in 2004, with workers in poor families receiving $1.4 billion of that total.

Minimum Wage Redux

In his Times column today, Paul Krugman argues in favor of a higher minimum wage, suggesting that the adverse employment effects are trivial. Unfortunately, Paul presents a highly selective review of the literature. For example, this paper is relevant. From its abstract:

"new evidence based on methods that let the data identify the appropriate control groups leads to stronger evidence of disemployment effects, with teen employment elasticities near −0.3. We conclude that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage."

Addendum: This old post by Steve Landsburg on the unfairness of the minimum wage is worth rereading.

Henderson on the Minimum Wage

Economist David Henderson has a piece in today's Wall Street Journal with a great opening paragraph:

"The Right Minimum Wage: $0.00." So read an editorial headline in one of the most respected newspapers in America. The editorial stated: "There's a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market." Can you guess the newspaper? The Wall Street Journal, perhaps? Right city; wrong paper. This editorial appeared on Jan. 14, 1987, in the New York Times.

CBO on the Minimum Wage

NPR reports:

Raising the federal minimum wage to $15 an hour by 2025 would increase wages for at least 17 million people, but also put 1.4 million Americans out of work, according to a study by the Congressional Budget Office released on Monday.

A phase-in of a $15 minimum wage would also lift some 900,000 out of poverty, according to the nonpartisan CBO. This higher federal minimum could raise wages for an additional 10 million workers who would otherwise make sightly above that wage rate, the study found.

Potential job losses were estimated to affect 0.9 percent of workers, the CBO wrote, adding: "Young, less educated people would account for a disproportionate share of those reductions in employment."