Friday, February 09, 2007

Minimum Wage Symbolism

The minimum wage is in the news once again. Despite having taken sides on this issue (I’m opposed), I’m increasingly of the opinion that the minimum wage is an almost entirely symbolic matter for both sides.

The minimum wage is obviously symbolic for its advocates, especially the politicians who back minimum wage hikes. It’s a relatively cheap way for them to say, “I’m on the side of the poor and downtrodden.” But informed advocates almost certainly know that the minimum wage is a lousy way to help the poor even if the disemployment effect is small or nonexistent. It’s simply not well targeted to help who it’s supposed to help. Many of the beneficiaries are teenagers, sometimes from reasonably well-to-do households, not single moms trying to support families. It doesn’t distinguish between sole wage earners and members of multi-income households. If you really wanted a policy that helps those who need it, you’d create a means-tested transfer program or expand the EITC, not go mucking around with market wages. But the minimum wage is appealing politically because it’s easy to understand (let’s pay people more!), and to the public at large – which doesn’t see or understand the trade-offs – it sounds like either a pure free lunch or a simple transfer from rich firms to poor employees.

But the minimum wage is also symbolic for its opponents, myself included. The best evidence indicates that the disemployment effects of the minimum wage, while real, are probably small. Since most people already earn more than the minimum wage, not that many people are actually affected. Apparently the demand for labor is relatively inelastic, since a 10% increase in the minimum wage results in a decrease in employment (of the relevant group) of only 1% to 3%. One likely reason for the small impact is that employers probably adjust other aspects of the job package, such as cutting free meals or requiring employees to clean their own uniforms. This is not great news, but it’s not terrible, either; it means that most affected workers are probably just getting a slightly less desirable compensation package, trading away some small benefits for a modest increase in pay. As bad policies go, my guess is the minimum wage is one of the more innocuous. Our efforts would be better spent fighting more disastrous policies. So why do we spend so much time on this one? Because the minimum wage is a classic, straightforward example of how ham-handed government intervention in the free market yields unintended and harmful results. Government-set wages cause unemployment! Yeah yeah, the harms (and benefits) are probably small, but that’s not the point. The point is that if we can get people to see how even this very popular policy is crummy, maybe they’ll begin to question the wisdom of other interventions whose bad consequences are more difficult to grasp. So the issue is just as symbolic for free marketeers as it is for the interventionists.

That said, I should note that large increases in the minimum wage will of course produce worse consequences, and the currently proposed increase from $5.15/hour to $7.25/hour – a more than 40% increase – might therefore be cause for real concern. So maybe this time around the debate is more than symbolic.


600,000,000 Dollar Man said...

I don't think it's at all symbolic for the person whose wages go from $5.15 to $7.25/hr. For a 40 hr. work week that comes to $84 extra a week before deductions. I know that they'll just spend the extra money on lottery tickets, booze, cigarettes, pornography, etc. But don't you think that workers in those foul industries deserve a raise as well? How come you never rail against the ridiculous saleries of fat cat CEOs like that guy from EXXON who got $600,000,000. Now THAT is symbolic of something: pure unadulterated greed. Why not a peep out of your mouth about a sick econo-political system being run into the ground in order to benefit the few at the expense of the rest of us? Btw, I'm not in favor of a minimum either, but I don't think it should be abandoned until there is a maximum wage law to stop all this greedy nonsense.

Steven Horwitz said...

Well Glen, I think you make several good points here, but let me try one counter-argument that suggests the stakes are higher.

If the negative effects are small but concentrated on particular groups who can least "afford" the negative effects, then perhaps it is more than symbolic. If minimum wage earners are disproportionately young and non-white, then even a small loss of employment might have significant effects on the ability to accumulate the sort of general human capital necessary to climb the job market ladder. The same might be said of natives versus immigrants as the wage goes up.

After all, if it's largely symbolic, why did so many white folks fight so hard to get it passed in 1930s and 40s as a way to price out immigrant labor, not to mention its role in apartheid?