Minimum Wage, Maximum Waste?

Kennedy and MillerThe House passed a minimum wage increase today amid the usual rhetoric of salvation from the Democrats and doom from the Republicans. As an issue, the minimum wage seems easy to understand – all workers make $7.25 per hour (the new minimum) or more. The reality, of course, is not so simple.

Minimum wage arguments are economic in nature but the issue is one that splits economists. A November survey of economists by Robert Whaples found that 47% believe it should be eliminated while 38% favor increasing it. The rest would leave it alone (14%) or decrease it (1%).

The rhetoric is quite fanciful as reporters and politicians alike speak of giving low wage earners a “raise,” as if the same people have populated that category for ten years. Of course, one of the characteristics of the US economy is the fact that people tend not to stay in the low wage category for long. The AP story also notes a statistic from the “Economic Policy Institute, a liberal leaning group,” which pegs the number of people who would benefit from an increase in the minimum wage at 5.6mm. That is a number that is difficult to find in the BLS table of minimum wage workers. The real number from 2005 is 1.8mm. Furthermore, of that 1.8mm, only 479k actually made the exact minimum wage. As Alan Reynolds points out in a January article, it’s difficult to understand how a minimum wage hike will raise the pay of people who were never making the old minimum wage to begin with! Reynolds notes that:

Any employer with an annual income below $500,000 is free to ignore the minimum wage [and it] does not apply to workers on small farms or at seasonal amusement or recreational facilities. It does not apply to newspaper deliverers, companions for the elderly, outside salesmen, U.S. seamen on foreign-flagged ships, switchboard operators or part-time babysitters. Such handy loopholes aside, there is sure to be some outright evasion of any minimum-wage law, since it is impossible to monitor all the casual day labor and home care going on.

Reynolds goes on to say that “Whenever the minimum wage has been increased, the most obvious result was an increase in the number earning less than the minimum.” In 1997 when the last increase occurred, workers earning the minimum doubled from 1.5mm to 3mm. The whole debate then, appears to be about a pay increase for 479,000 workers, out of a total of about 142mm workers. Well, that’s not quite true since there is an unknown number of workers earning over $5.15 now, but less than $7.25. Of those two groups, some certainly do receive a pay raise while some lose their job or are forced into part-time work (remember the 1.5mm jump from 1997). Most troubling, however, is another point made by Reynolds:

Those displaced from job opportunities by a higher minimum wage have to abandon the job search or they have to compete in larger numbers for scarce jobs that pay less than the minimum wage. Such intensified rivalry must push the lowest wages even lower.

So minimum wage increases are far from simple. It’s tempting just to ignore the whole thing because it only affects a very small group, some of whom are benefited and some of whom are hurt. Sounds like a wash, right? Well maybe, but it does have a bit of a different effect than most government redistribution policies. Usually government takes a little bit away from each member of a large group and bestows a lot on each member of a small group. Here, government takes a lot from a small group (total or partial job loss) for the relatively smaller benefit of a larger group (higher wages). It makes one wonder just what the characteristics of the winning group are that makes them favored by government.

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