Two Ways to Help Poor and Low Wage Workers
Suppose that an employer pays some or all of his workers the minimum wage. If the minimum wage is raised, he might respond by raising the wages of his workers to this new minimum. But this is hardly his only option. Instead of raising wages, he might decide to move the jobs in question to a place where the minimum wage law in question does not apply. He might decide to automate the jobs, so that they are done by machines instead of workers. He might decide to lay off workers (or to hire fewer new workers than he otherwise would have done), and indeed he may be forced to do this if the higher labor costs imposed by the new minimum wage law render his business unprofitable.
To deny that an increased minimum wage law decreases employment is to claim that no employer would respond to an increase in the minimum wage in any of these ways, or that any employer who did respond in one of these ways would be canceled out by other employers who responded to the minimum wage hike by hiring more workers than they otherwise would have. This, needless to say, does not strike me as being very plausible.
This negative employment effect is one argument against minimum wage laws, but it isn’t the only one. Another common argument involves demographics. Minimum wage laws aim to help poor workers, yet they apply to low wage workers, and these are not always the same people. Around half of minimum wage workers, for example, are teenagers, many of whom, presumably, do not rely on the wages from these jobs for their daily bread. This is a particularly vexing problem for those who want to use minimum wage laws as a proxy for a just wage, defined as a wage sufficient to support oneself and one’s family, since a just wage will be higher for those with families than for those without.
One might think that the negative effects of a minimum wage law are great enough that, if given a choice between a minimum wage law and nothing as a means of helping the poor, one would prefer doing nothing. As in medicine, so with anti-poverty measures, the Hippocratic principle “first do no harm” seems rather apt. On the other hand, one might concede these downsides to minimum wage laws while claiming that the benefits to those poor low wage workers who aren’t disemployed outweigh the harm that comes to those poor low wage workers whose jobs the law destroys. One would then favor minimum wage laws according to the maxim: “if the shoe fits, wear it; if it doesn’t fit, well, it’s still better than nothing.” Such support, however, would be conditional on their not being any alternative means of achieving the same end (helping poor workers) without the accompanying negative consequences.
As it happens, though, there is such an alternative: the negative income tax. Normally a person pays a certain percentage of his income in taxes, so that, for example, if he is taxed at a uniform 20% rate, then for every dollar he makes in income he will pay twenty cents to the government in taxes. The negative income tax operates according to the same principle, except that for every dollar one makes (up to a set amount), it is the government who pays the percentage to the worker, rather than the other way around. So, for example, if a worker made $10,000 a year, and the applicable rate for that level of income was 20%, he would receive an additional $2,000 from the government. The percentage received depends both on the level of income (the less you make overall, the higher the negative tax rate) and on the number of dependents a worker has (i.e. you get a better rate if you have two kids than if you have one or none). And since it is tied to work, there are none of the disemployment concerns typically associated with government welfare payments.
Did I mention that this system is already in place, and that it’s currently the largest poverty reduction program* in America?
A negative income tax like the EITC does what minimum wage laws are supposed to do, only more efficiently and without the negative effect on employment. It isn’t costless, of course. Tax money has to come from somewhere (just as any increased wages as a result of a minimum wage law have to come from somewhere). There’s no such thing as a free lunch. But the cost of the meal is much cheaper than with minimum wage laws, and the quality of the food is better too.
Given the existence of the EITC, I find the vehemence with which many people support minimum wage laws to be somewhat strange. Is it simply that people aren’t aware of the program, or is there some other objection to the idea that has thus far escaped me?
*Okay, so technically this isn’t true, as money received though the EITC isn’t counted as income when calculating the poverty rate, and thus doesn’t reduce poverty in the official statistics. In terms of real life, however, it does have such an effect.
Trackbacks
Comments are closed.
Minimum wage advocates (not the straw men opponents respond to) propose that the minimum wage is not just a matter of raising wage rates in isolation of any other factors, but has a positive impact on the organization of work. Let me offer some commentary.
He might decide to automate the jobs, so that they are done by machines instead of workers. He might decide to lay off workers
If this is true, it strikes at one of the cardinal assumptions of conservatism, namely the efficiency of capitalism. So if an employer does the above in response to a rise in the minimum wage rate, it means that he previously had forgone technological innovation and hired excess staff beyond what was needed for the enterprise, simply because labor was so cheap and abundant. So a low minimum discourages technological advances, which is probably not good for the employment or profits of other companies that manufacture or design advanced machines. We keep one employee employed at a low wage and limit employment in a skilled, high wage industry. Further, we also encourage cheap, disposable, nonessential labor rather than stable, secure labor.
Excessively low wages encourage the hiring of part time, transient, temporary teenage workers. Payment of fair wages encourages an employer to hire full time, permanent employees. With a respectable minimum wage, low wage adult workers find themselves less in competition with teenagers. Beyond the issue of wage rates, they also find that their jobs are more stable in duration and schedule which is very helpful for family life.
Clearly there is an issue of re-location of enterprises to places with a lower minimum. This has been the argument for a federal minimum wage increase rather than state laws. Globalization presents new challenges as well.
The question needs to be asked, if capitalism is noted for its economic efficiency, can we really call a man a successful businessman if he can take the brawn of the back and the sweat of the brow of another man 40 hours a week and 52 weeks a year and only add $10,000/year in value to his business? Conservatives praise capitalism’s “destructive creativity” — enterprises rise and fall and workers thrown out of work all for long term good of the economy. Can we applaud the ‘destructive creativity’ of capitalism when it throws workers out of their job but suggest a boss such as I described must be saved from the same fate because he cannot find how to add more than $10K of value with the labor of another human being? Some businesses should fail and such may be one of them.
Minimum wage advocates (not the straw men opponents respond to) propose that the minimum wage is not just a matter of raising wage rates in isolation of any other factors, but has a positive impact on the organization of work.
If increasing wages were a free lunch, that is, if it resulted in a corresponding increase in worker productivity, then it would be a mystery why employers didn’t increase wages voluntarily.
if an employer does the above in response to a rise in the minimum wage rate, it means that he previously had forgone technological innovation and hired excess staff beyond what was needed for the enterprise, simply because labor was so cheap and abundant. So a low minimum discourages technological advances
This doesn’t follow. If automating a particular job costs more than it would to pay human beings to do it, then automating would be a waste of time and money, and would not be an “advance” at all.
This doesn’t follow. If automating a particular job costs more than it would to pay human beings to do it, then automating would be a waste of time and money, and would not be an “advance” at all.
half empty/half full. If labor can be found so cheap that their is no incentive to technologically advance, then there will be no technological advancement. If a sanitary workplace means that $5/hour employees are out sick three less days, it may not be worth it. It might be worth a sanitary workplace if it means $9 employees are not out sick three extra days a year.
Blackadder,
In general, I think there is a lot going for the negative income tax/EITC approach. A couple concerns I have:
A) It’s difficult to administer. Some percentage (I would guess not insignificant) of workers don’t get the EITC they’re owed because of incorrect tax filing. I guess it could be simplified (a generally simpler tax code would help), but I don’t think the current EITC instructions are very easy to follow.
B)How can it be paid out on a timely basis. With my wage, I get paid every two weeks, and it’s spread out relatively easily. With EITC, it’s all paid in a lump sum, and so it is all paid at once (at least that’s my understanding). Theoretically you could cut checks more often, but that increases administrative costs substantially, I would think).
B1)Because it is paid out in a lump sum, it’s more likely to be used for large purchases than to improve households overall budget (meaning purchase of healthier, slightly more expensive food, or regular savings, or cover the necessary heating and electricity bills, etc.). This statement, I admit, is largely anecdotal, but it rings true from my experience and that of the EITC recipients I’ve worked with.
B2)Because it isn’t a component of the paycheck but a lump sum, doesn’t it run the risk of appearing to be a government handout rather than the just reward for work. If so, it doesn’t realize the incentive for hard work that it is supposed to, and encourages a mindset of government dependency.
None of these are necessarily deal-breakers, but they’re points I’d appreciate being addressed. There may be good ways of getting around these problems that I just don’t know about.
Zack,
Good points. Ideally, I would think you’d want to do something akin to reverse withholding, so that the extra money shows up in your paycheck every two weeks. Whether this is practical or not, I don’t know.
I once came up with an elaborate tax system that solved all of Zak’s administrative concerns in the form of a government-issued debit card.