The politics and economics of the minimum wage

So this is going on now:

Sens. Mitt Romney (R-Utah) and Tom Cotton (R-Ark.) on Tuesday rolled out proposal to increase the minimum wage to $10 an hour over four years and tighten enforcement on hiring undocumented workers.

“For millions of Americans, the rising cost of living has made it harder to make ends meet, but the federal minimum wage has not been increased in more than 10 years,” Romney said.

The bill is a counterpoint to Democrats who are pushing to increase the minimum wage to $15 per hour by 2025.

Critics of the Democratic bill say the quick increase, which would over double the current $7.25 minimum in just four years, would burden small businesses. A Congressional Budget Office (CBO) report of the plan estimated it would lead to 1.4 million fewer jobs, but also lift 0.9 million people out of poverty.

But the CBO model also finds that setting the goal to $10 would leave both employment levels and poverty levels virtually unchanged.

The Democratic plan, which is included in the $1.9 trillion COVID-19 relief bill advancing through Congress, faces significant hurdles.

Sen. Joe Manchin (D-W.Va.) said he believes an $11 minimum would be more appropriate for his state, and Sen. Kyrsten Sinema (D-Ariz.) objected to including the minimum wage hike in the COVID-19 relief bill.

From a historical perspective, a $7.25 federal minimum wage is extraordinarily low.

Let’s go back to the Communist totalitarian rule of (checks notes) Dwight Eisenhower in 1956, when Republicans controlled the Senate and Democrats — including many reactionary Dixiecrats — held only a small majority in the House.

That year, the federal minimum wage was 34.6% higher than it is today. This, of course, was in a vastly less wealthy nation than America in 2021. Sadly, the top 0.01% had to scrape along on just $4.5 million per year (2021 dollars), while by 2015 things were a bit more comfortable at the top — the average income of the top 0.01% in America in 2015 was $35 million (2021 dollars), and is no doubt quite a bit higher today, what with stonks doing so well and all.

In fact the federal minimum wage is lower now than it has been at just about any point in the past 65 years, despite the veritable explosion of affluence since JK Galbraith wrote The Affluent Society at the very beginning of this time frame.

Why? The Econ 101 answer is that raising the minimum wage actually hurts the working poor, because “artificially” raising the price for labor destroys jobs. This is the kind of glib answer beloved of right wing polemicists, who for almost all of the past 65 years have dedicated their lives to proving by geometric logic that the government can’t actually help poor people at all. Only The Market, blessed be its name, can do that.

The problem with this answer is that it’s not true:

The idea that a higher minimum wage might not increase unemployment runs directly counter to the lessons of Economics 101. According to the textbook, if labor becomes more expensive, companies buy less of it. But there are several reasons why the real world does not behave so predictably. Although the standard model predicts that employers will replace workers with machines if wages increase, additional labor-saving technologies are not available to every company at a reasonable cost. Small employers in particular have limited flexibility; at their scale, they may not be able to maintain their operations with fewer workers. (Imagine a local copy shop: No matter how fast the copy machine is, there still needs to be one person to deal with customers.) Therefore, some companies can’t lay off employees if the minimum wage is increased. At the other extreme, very large employers may have enough market power that the usual supply-and-demand model doesn’t apply to them. They can reduce the wage level by hiring fewer workers (only those willing to work for low pay), just as a monopolist can boost prices by cutting production (think of an oil cartel, for example). A minimum wage forces them to pay more, which eliminates the incentive to minimize their workforce.

In the above examples, a higher minimum wage will raise labor costs. But many companies can recoup cost increases in the form of higher prices; because most of their customers are not poor, the net effect is to transfer money from higher-income to lower-income families. In addition, companies that pay more often benefit from higher employee productivity, offsetting the growth in labor costs. Justin Wolfers and Jan Zilinsky identified several reasons why higher wages boost productivity: They motivate people to work harder, they attract higher-skilled workers, and they reduce employee turnover, lowering hiring and training costs, among other things. If fewer people quit their jobs, that also reduces the number of people who are out of work at any one time because they’re looking for something better. A higher minimum wage motivates more people to enter the labor force, raising both employment and output. Finally, higher pay increases workers’ buying power. Because poor people spend a relatively large proportion of their income, a higher minimum wage can boost overall economic activity and stimulate economic growth, creating more jobs. All of these factors vastly complicate the two-dimensional diagram taught in Economics 101 and help explain why a higher minimum wage does not necessarily throw people out of work. The supply-and-demand diagram is a good conceptual starting point for thinking about the minimum wage. But on its own, it has limited predictive value in the much more complex real world.

Even if a higher minimum wage does cause some people to lose their jobs, that cost has to be balanced against the benefit of greater earnings for other low-income workers. A study by the Congressional Budget Office (CBO) estimated that a $10.10 minimum would reduce employment by 500,000 jobs but would increase incomes for most poor families, moving 900,000 people above the poverty line. Similarly, a recent paper by the economist Arindrajit Dube finds that a 10 percent raise in the minimum wage should reduce the number of families living in poverty by around 2 percent to 3 percent. The economists polled in the 2013 Chicago Booth study thought that increasing the minimum wage would be a good idea because its potential impact on employment would be outweighed by the benefits to people who were still able to find jobs. Raising the minimum wage would also reduce inequality by narrowing the pay gap between low-income and higher-income workers.

In short, whether the minimum wage should be increased (or eliminated) is a complicated question. The economic research is difficult to parse, and arguments often turn on sophisticated econometric details. Any change in the minimum wage would have different effects on different groups of people, and should also be compared with other policies that could help the working poor—such as the negative income tax (a cash grant to low-income households, similar to today’s Earned Income Tax Credit) favored by Milton Friedman, or the guaranteed minimum income that Friedrich Hayek assumed would exist.

In other words, the answer to the question of whether a higher minimum wage is good or bad for the working poor is that, unlike Econ 101, it’s complicated, but there are all sorts of reasons to think that the net effect of raising it is positive for both the working poor, and for society as a whole. This is especially likely to be the case when the federal minimum wage rate is as low as it is today.

But all this is a distraction from the real conflict in American politics and culture, which isn’t between economists who think the minimum wage decreases poverty on net and those who think it doesn’t. The real conflict is between people who think that the government helping the poor be less poor is a good thing, and those who think this is a bad thing:

Sunstein goes on to argue that progressives need to remember that conservatives really want to help the poor, combat climate change, etc., but that they’re just skeptical of progressive methods for pursing these admirable goals that any decent person naturally supports.

This is complete nonsense. The radical right in this country — which again is now totally synonymous with the Republican party — has zero interest in helping the poor or protecting the environment, because it’s in the grip of among other things apocalyptic Calvinism on meth (dibs on the album title).

ACOM rejects the whole idea of helping the poor via government intervention, not because government intervention has perverse effects, but because poor people deserve to be poor, and helping them is morally wrong, except via private charity, maybe.

Similarly, the Green New Deal isn’t a bad idea because it won’t work, but because climate change is a liberal hoax and Jesus is coming soon anyway. (If you think I’m being hyperbolic, welcome to America, I hope you enjoy your time here, and avoid the fried Twinkies at the state fair, they’re not worth it believe me).

The reason Even the Liberal Cass Sunstein won’t or can’t understand this is because he needs to invent an imaginary reasonable center right party that doesn’t exist in this country, because otherwise he and the rest of his pals at Harvard and Yale couldn’t in good conscience spend so much time trying to hook up their kids with clerkships for Brett Kavanaugh, Amy Coney Barrett etc etc.

All the cites to Friedman and Hayek, all the Cato and Heritage position papers, all the more in sorrow than in anger op-eds about how liberals just don’t understand that trying to help the poor actually hurts them — all this is just designed to throw up an ideological smoke screen over what the right wing in this country, especially in its evangelical Protestant manifestation, actually believes, which is that rich people are rich because they work hard and save money, while black poor people are poor because they are lazy and squander their welfare checks on riotous living, and that it’s simply morally wrong to try to change this situation.

The fake outflankening indulged in by the senator from Bain and his authoritarian-worshiping colleague is just another attempt to hide a fact that would be extremely obvious if it wasn’t so disturbing to the mental equanimity of our Even the Liberal elites.