Tuesday, November 28, 2006

Well, as I suggested I would do, I submitted a letter to the PG. They called and said they might publish it, so I will wait to put it up here. I will say generally I suggest the democrats propose a small increase in minimum wage as well as a bump in the EITC.

What I want to do here instead is talk a bit more about the minimum wage. My thinking on it has evolved a bit, and is still evolving. I have looked a bit for research on it, but mostly I have only found partisan stuff, the Economic Policy Institute (EPI) on the left and the National Bureau of Economic Research (NBER) on the right leaning side.

So here’s the thing: I was interested in particular in the question of whether increases in the Minimum Wage (MW) has any negative effect on employment. Of course, this is based on the assumption that an increase in labor costs will force companies to fire more expensive workers or will force companies to raise prices, which will reduce demand for the companies products, reducing income, which will result in layoffs. The EPI had, I believe, only 2 papers that dealt specifically with this subject, one from the 97 increase and one dealing with state increases in the minimum wage. The 97 increase came during a booming economy, so we would expect to see drops in unemployment anyway. The state paper chose 3 states out of a bunch, and I couldn’t help notice the graph that showed most of the states with higher MW’s than the Fed have high unemployment. Except that the study covers the time period of the last few years, when the whole country went through a recession.

The NBER paper was fairly interesting (I did download the paper, but now I don’t remember how, and all the Google citations seem to be restricted to subcribers; you might try going through the Wikipedia article on MW, and the comments page). They said that an early study (1981) showed the disemployment effect (among teen MW workers) expected by classical economic theory, but it has not been seen in studies since. So let’s be clear. At least one set of “real” neo-classical economists have abandoned the idea that the minimum wage causes unemployment, among teens or anyone. All those business men who say raising the MW will make them fire people are blowing hot air. The NBER survey of some 150 studies shows it.

Except that the NBER did not let it go so easily. What they said was that a preponderance of the studies showed a positive correlation with an effect on future hiring decisions and an increase in the MW. So raising the MW now means that some fewer number of people will get hired in the future. Something of a policy conundrum. Mind you, this is a survey of a bunch of studies talking.

I will advance my own silly theory about this, but I doubt I will win any friends. My idea is based on the thought that a lot of MW workers shop at places that employ MW workers. Not so many MW workers in occupations that require high skills and so produce expensive products or services. So when the MW goes up, places that employ MW workers may actually see an up tick in revenue, because their workers and other MW workers have more disposable income and can and do spend it. This spending spree may not last too long, though, and after a while businesses (employing MW workers) may raise prices to cover the higher labor costs. With their higher wages, MW workers may simply absorb the higher costs. Any higher wage earner who simply shops at cheaper places to stretch his paycheck may be dismayed to find higher prices (the $1 and a half store). The actual result we could project, based on my silly theory, is slightly higher inflation. Otherwise mostly a wash, workers no better off with a higher MW.

I come back to my favorite cause, the earned income tax credit. In my letter to the PG, I suggest offsetting a higher EITC with a higher tax bracket for the very rich. This has the symbolic beauty of literally taking from the rich and giving to the poor. Maybe the (made up) numbers (from the top of my head) wouldn’t work, but it would be a lot of fun.

Oops, getting late, I’m done for tonight. Stay tuned for more infrequent posts.

1 comment:

fester said...

Ed -- Just passing along another study for you to go through :)