A Bit of Nuance on the Minimum Wage

December 11th, 2013 at 4:20 pm

When it comes to DC policy debates, we tend to devolve pretty quickly into “you’re either fer it, or you’re agin it.”

This thought came to me this week when a number of people asked me to comment on two pieces written by perceived critics–economists David Neumark and Harry Holzer–of the increase in the minimum wage, a policy of which I’ve been vocally supportive.

Readers viewed these pieces as being solidly in the “agin it” camp, and there’s definitely some of that in them.  But I thought they were both pretty nuanced, and found points to agree with in both pieces.  Importantly, while these critics are definitely not in the “fer it” camp, their recent contributions make clear that they are not solidly in the “agin it” camp either, a point about which they’re both fairly explicit.*

So perhaps we can use these pieces to derive a bit of insight as to why the academic fight over the minimum wage is so confusing.  (I stress “academic” because the lobbyist fight against the minimum wage is about protecting profits from higher labor costs.)

The Neumark piece elaborates one basic, indisputable point: the minimum wage is not as well-targeted towards low-income working families as is the Earned Income Tax Credit, a wage subsidy for low-income workers.  That’s because while the tax credit is conditioned on family income, the wage is not (it’s still the case, however, that 54% of the benefits of the proposed increase to $10.10 would reach households in the bottom third of the income scale).

But there are some key points left out of Neumark’s argument.  First, it is a non-sequitur to compare a minimum wage increase with the existence of the tax credit.  Many of those calling for an increase in the minimum wage are doing so because their paychecks are stretched to the breaking point to meet their needs.  The EITC solution to this problem is thus a higher tax credit.  Neumark and others who make the case for the EITC over the minimum wage need to be explicit about this.  It’s not enough to tell low-income workers about the EITC.  Most already know about it (the program has very high take up).  You have to call for a higher EITC and I did not see that in Neumark’s piece (though he would agree with it).

Second, you will have to look far and wide to find a bigger fan of the EITC than yours truly (though Ronald Reagan praised it as well), but nothing’s perfect.  There are two shortcomings to the tax credit that the minimum wage increase helps to offset.

The tax credit provides a generous wage subsidy for low-income workers with kids, but very little for childless adults (as the Neumark piece acknowledges).  Their EITC maxes out at $487 this year, the equivalent of $0.23 extra cents per hour.  And that’s the max.  The average childless adult recipient of the credit takes home about $270 over the course of the year.

Moreover, and this is really a very serious shortcoming of this part of the tax credit schedule, if you’re a childless adult and you work full-year at the minimum wage, you earn too much to be eligible for even the much-reduced tax credit.  So let’s be clear about who the credit is helping and who it’s helping a whole lot less.  Again, those who propose the EITC as a substitute for the minimum wage need to advocate for an expansion to this corner of the tax credit as well.

Neumark mentioned the other EITC concern: the fact that by increasing labor supply—a feature, not a bug—the program lowers wage offers in segments of the low-wage job market.  It is here that he recognizes that “there may be an argument for coupling the earned-income tax credit with a higher minimum wage.”  He adds, however, “But to be clear, the higher minimum wage entails some job loss.”

That brings me to the Holzer piece.  Harry’s critiques are twofold.  The first agrees with Neumark on job loss.  And they’re right.  Much quality research, including work by those who advocate for higher minimum wages, finds that the policy leads to some loss jobs or cutbacks in hours among affected workers.

But the question is how much, and the answer, as Holzer himself agrees, is that job loss from moderate increases appear to be “small or nonexistent.”  Most low-wage workers, the vast majority by most estimates, including those of Neumark himself, earn more when the minimum goes up.

But what do I mean by “moderate?”  This is Holzer’s other concern: he worries that some of the recent proposals are “immoderate,” i.e., high enough to trigger unintended consequences that could change the favorable benefit/cost equation of the increases we’ve implemented thus far.

He may have a point.  Historically, increases in the minimum have affected less than 10% of the workforce and that has led me to define “moderate” as raises that have a sweep of this magnitude or less.  But some recent proposals have come in above this historically safe benchmark, and Harry is correct to raise an eyebrow.  I should also note here that not only does Holzer support moderate increases in the minimum wage, he actively supported an increase when he was the chief economist at the US Labor Department.

It also the case, as he argues, that in theory, national mandates should trigger fewer negative effects than local ones, since no firm can gain a competitive advantage by relocating across some border.

And yet, the best, most granular research I’ve seen on this question looks for precisely these sorts of cross-border effects and again, finds that the benefits of an increase to low-wage workers outweigh the costs.

Over decades of research, here’s what I’ve concluded from what I believe is a balanced look at the issue.  Though it reaches a lot of people and families who need it, the minimum wage is not nearly as well-targeted to those with low-incomes as the EITC.  Still, it remains an important complement to that venerable policy, and helping low-wage workers requires both.  It is wrong to aver that moderate minimum wage increases do not lead to any losses of jobs or hours by affected workers.  But the benefits of the wage increase leave them better off, on net.  Going beyond “moderate” may generate less favorable results.  But neither theory nor available evidence can determine that outcome.

This may well be why most people and even a growing share of economists support increasing the minimum wage.  Even the perspectives of these two alleged critics are not completely at odds with this position.*

 

*How do I know this? Because I asked them.  Both Holzer and Neumark were kind enough to read and comment on this post.

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12 comments in reply to "A Bit of Nuance on the Minimum Wage"

  1. smith says:

    Commented on before, but Neumark specifically critiques previous studies by questioning their research methodology. But his own corrections could be interpreted the same way, as misdirected adjustments about valid measurements. He discards data from recessions, and makes questionable assumptions about cross state and county comparisons. http://www.nber.org/papers/w18681.pdf

    Mankiw, (who recently claimed Obamacare was seriously impeding recovery)
    quotes Neumark’s NYTimes piece extensively:
    http://gregmankiw.blogspot.com/2013/12/the-eitc-is-better-than-minimum-wage.html

    http://economix.blogs.nytimes.com/2013/12/09/the-minimum-wage-aint-what-it-used-to-be/

    The EITC is perhaps an (un)necessary evil for now, but progressive tax rates should be constrained by the zero lower bound. EITC suppresses wages, everyone’s wage, not just low incomes. There is a ripple effect as slightly more experienced employees just above the minimum are given raises to stay above the minimum, and so on. It is corporate welfare. The government pays instead of business. It is payment unrelated to work performance, it is a reward for taking a low paying and probably low skilled job. It distorts the labor market and supply of goods and services offered, investment, the minimal skills perceived to be needed by those entering the job market. It puts businesses willing to pay fair wages at a competitive disadvantage, driving them out of business. We don’t need the government to do that, we already have Walmart.

    Phase out EITC completely by gradually raising the minimum. How much? Back of the envelope says $2.50/hour. But that’s 85 cents less than the current proposal raising the minimum from $7.25 to $10.10 Ok, so let’s tack on another $2.50 phased in and conditional on dropping the EITC. $12.50 minimum $25,000 vs. $20,000 annual income, about $25 billion a year, cost the government nothing, actually saves money. Generates broad support from middle class with teenagers and new job entrants. This is how you replace lost union power. Some low skill jobs disappear, that’s a feature, not a bug.

    Where is the downside?


    • smith says:

      As the minimum rises, there is some reduction in food stamps for those working, creating additional savings. Who do you think feels better, the person with food stamps and an EITC or the person with the exact same amount of spending power from a higher wage and no food stamps and no EITC?


  2. jeff says:

    It looks like the EITC for a family with children is about $ 2.50 an hour. While this may be a relief, I wouldn’t define this as generous – a loaded word that seems to be associated with pension plans that keep people out of poverty. Such as teachers generous pension plans.

    When was the last time a billionaire was described in the news as having a generous salary or pension ?


  3. Jeremy says:

    Isn’t one advantage of a higher minimum wage over the EITC that with an increased minimum wage, taxpayers won’t have to supplement the wages of, say, Walmart and McDonald’s work force? In other words, if we’re artificially inflating the earnings of Walmart workers, why should the taxpayers bear that burden rather than Walmart?


  4. Denis Drew says:

    According to David Neumark, all of $55 billion transferred to poor families by the E.I.T.C. and that says it all. That represents about a third of one-percent of our $16 trillion economy.

    That closely matches a minimum wage raise of $1 an hour — which would shift about a one-quarter of one percent of overall income from the 85-90% above $8.25 an hour to the 10-15% below (I don’t have exact figures) — about $40 billion out of $16 trillion.

    In the case of the wage increase: the bottom 20% of earners now get 2% of overall income — big help. In either case, they will definitely not lift families out of poverty. The E.I.T.C. does not pretend to help the unmarried worker at all.

    A $15 an hour minimum wage OTH would shift about $560 billion from the 55% who now take 90% of overall income to the 45% who take 10% — or about 4%. Don’t think the 55% are going to tell the 45%: Go home; we don’t need your output anymore, over a 4% overall increase in prices.
    *************
    I just had the idea yesterday — after reading a very pro-minimum wage hike piece in the NYT — that most of of today’s pro-raise pieces could have been written in January 1967, when the potential minimum was near $11 an hour (as we know historically) — but WHEN PER CAPITA OUTPUT WAS H-A-L-F today’s (to be precise, that would be if the minimum were $7.25 in 1967 January rather than $8.75).

    A BIT OF NUANCE THAT IS PERPETUALLY LEFT OUT OF ACADEMIC CONVERSATIONS is that we have twice as much money to pay workers now as we did in 1968.
    **************
    A $15 an hour minimum wage would not have been “feasible” in 1956 – when economic output per American was only 40% of what it is today – when (Senate Majority Leader) LBJ’s minimum wage was $8.50 an hour. $100 an hour minimum wage should actually, literally be “feasible” (:”feasible” is the operative word for this whole essay), in something like 100 years – if productivity goes on doubling every 40 or 50 years.

    It was “feasible” to raise the federal minimum wage from $8.50 an hour in 1956 to almost $11 an hour in 1968 because overall productivity – not the minimum wage workers’ productivity – grew 25%. Barbers get paid more in France than barbers get paid in Poland because France has a lot more money to pay barbers with.

    A $15 an hour federal minimum wage need not be sold on humanitarian – nor least of all welfare – grounds. It can be sold on the simple premise that the free market is ready and willing to bear it – on the simple basis that it is “feasible.”


    • smith says:

      Very interesting nuance. It’s also worth repeating a higher minimum wage tends to bump up everyone’s wage. Studies occasionally mention those near the minimum get a bump, but common sense says everyone eventually does. That’s important considering stagnant wages have been affecting nearly all income levels the last ten years, save the top 1%. The minimum bump is similar to the effect that occurred when labor unions constituted 25% of the private work force (vs. 6% today) as recently as the early 1970s. Blue collar benefits pushed up those of in the office ahead of them and dragged along those behind them, and got closely linked to compensation offers from businesses trying to stave off unionization.
      Higher minimum means higher wages for everyone. Now if I only had some proof of that.


  5. Ted says:

    David Neumark just completed a study for the DC Chamber of Commerce and DC Restaurant Association on the impacts of a minimum wage in DC. I would call this lobbying…
    http://www.dcfpi.org/there-is-agreement-lets-raise-the-minimum-wage


  6. Peter K. says:

    related to earlier post:

    http://www.bloomberg.com/news/2013-12-11/u-s-stock-index-futures-little-changed-after-budget-deal.html
    U.S. Stocks Drop as Budget Deal Spurs Bets on Fed Cuts

    “U.S. stocks fell a second day, giving the Standard & Poor’s 500 Index its biggest back-to-back drop in two months, as a congressional budget accord fueled speculation the Federal Reserve could trim stimulus next week. “


  7. Fred Donaldson says:

    The EITC is an example of the middle class taxpayer subsidizing businesses that do not pay a living wage. It is an indirect subsidy, so why should a company give you a raise if you then lose some or all of your EITC? Or why a raise if you will lose food stamps, subsidized housing, lower utility bills? Or why pay a living wage if the middle class taxpayer funds you with just enough food, tax credits and other help to insure you show up to work at the local sweatshop at the least cost to their bottom line?

    An adult minimum wage of $14 to $15 an hour (France, Australia) pulls nearly every worker out of poverty and qualification for EITC or any other welfare-degrading program. Wouldn’t it be nice to see proud workers all over America, never lined up to complete papers for a hand out approved by millionaire politicians. You’d think the GOP would applaud, but perhaps their interest is in saving money for investors, not improving their nation.

    A class in America favors such things as FICA payments for the disabled and the high benefits percentage-wise for the lowest earners and contributors to Social Security, instead of using aid from general funds that include contributions from the wealthy.. The result is the use of only working class income to help the poor and disabled.

    This current “deal” with its 2% ten-year cut to Medicare providers is another example of the war on the working class, and the 12% average cut in retirement benefits for working veterans is just a disgrace overlooked by most of the media in the past two days. It’s as though the deal is if we don’t talk about it, we don’t have to think about it and the shame it brings to a country that breaks its promises to everyone but bank and big corporate execs.


    • smith says:

      A point to note about the question “so why should a company give you a raise if you then lose some or all of your EITC?” At the lowest incomes you lose none of your EITC. In fact you gain EITC by earning more, that’s ‘E’ part of EITC. There is a helpful graph here:
      http://www.cbpp.org/cms/?fa=view&id=2505
      At first you gain more by earning more (the upward slope), then you lose nothing by earning more (the flat plateau) then you gradually lose part for earning even more (never 1 for 1, you always come out ahead, hence the gradual downward slope).

      Despite all this, the disadvantages of EITC should lead to it’s eventual expiration, replaced with a higher wage floor paid by businesses, not the government. The estimate is this would only mean an additional $2.50/hour increase at whatever level the minimum is set.

      Social Security should never come out of general funds, which would make it subject to a great deal more political machination. It is a universal benefit, everyone participates, everyone collects, and the tax should be dedicated and separate. Just adjusting the income limit taxed or including more types of income would help fund greater benefits, younger retirement, and deal with the baby boom bulge while adding more progressiveness. It’s not broke, don’t fix it.

      Expanding EITC is surrendering the future to Downton Abbey http://krugman.blogs.nytimes.com/2013/12/11/upstairs-downstairs-outside/


      • Fred Donaldson says:

        An employer will pay you more if they cannot get anyone to work at a low wage. The EITC supplement more or less raises the wage paid by the employer, which removes their incentive to pay you a decent wage. As long as you can survive with low pay and a subsidy by the taxpayer, they won’t increase your pay to insure that you are still living for the next shift.

        My thought of a raise was to say, $15 an hour, that would lift you out of poverty, would eliminate so-called welfare payments, and put all the onus on the employer, not the taxpayer. It is not odd that some GOP members advocate for the EITC, rather than a minimum wage hike, since they see the irony of the middle class subsidizing the poor, rather than fair pay for fair work.


  8. Nick Batzdorf says:

    The point needs to be finer: it’s obscene and unsustainable NOT to raise the minimum wage AND expand the EITC!

    A high percentage of SNAP recipients are working – I believe 40% of the recipients are in families with someone working full-time…while the four Walmart heirs each live on top of mountains made out of $1,000,000 bills.


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