Monday, October 27, 2014

Minimum wage, maximum damage |

Minimum wage, maximum damage |

There are few policies more popular than increasing the federal minimum wage. In a 2013 Gallup poll, 76 percent of respondents approved of the idea. It seems to make economic and moral sense on an intuitive level. President Obama reflected this sentiment in his Oct. 11 weekly radio address, saying, “We believe that in America, nobody who works full time should ever have to raise a family in poverty. … America deserves a raise right now.”

Yet most economists oppose the concept of a minimum wage at all, and data back them up. In fact, the minimum wage harms those it is intended to help.

The federal minimum is now $7.25 an hour, but it is higher in some states and municipalities. There is a movement, headed by the president, to raise this to $10.10 an hour, with the ostensible goal of reducing poverty and inequality. Some states and cities are on board. California will raise its minimum to $10 on Jan. 1, 2016, and San Diego will raise it to $10.50 on the same date, with another dollar on top of that a year later. SeaTac, Washington, the area around Seattle-Tacoma International Airport, has already raised its minimum to $15 an hour with unhappy consequences, as we shall see.

Most economists agree that the minimum wage cannot achieve its aim. Harvard economist Greg Mankiw’s “Ten things economists believe” is a list of statements that members of the economics profession finds uncontroversial. Here is one of the statements: “A minimum wage increases unemployment among young and unskilled workers.” This proposition is supported by 79 percent of economists.

James M. Buchanan, Nobel Prize winner for economics in 1986, put it thus:

“Just as no physicist would claim that 'water runs uphill,’ no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests.”

The overwhelming majority of empirical studies into the effects of the minimum wage find that it erodes employment. In 2007, David Neumark of the University of California-Irvine and William Wascher of the Federal Reserve surveyed over 100 minimum wage studies published since the early 1990s. They discovered that over two-thirds of them found negative effects on employment, while only about an eighth found positive effects. Worse, those studies that focused on the low-skilled people including youths found particularly bad damage done.

Wascher and Irvine also looked at the quality of the studies. They found 33 studies that were robust to most criticisms, of which 28 found negative employment effects. (Notably, much of the evidence for positive employment effects in the larger sample came from the United Kingdom rather than the United States, and that those studies may have failed to account for complicating factors during the 1980s, when the UK had sector-specific minimum wages. But the more recent evidence from the UK’s introduction of a national minimum wage in 1997 mirrors the American evidence.)

The federal minimum wage was raised in 2007, and again in a couple of steps until 2009. There has been recent research into the effects of that increase. One study, by Aspen Gorry of the University of California-Santa Cruz, focuses on the effect on youth unemployment. He found that minimum wages effect unemployment, especially youth unemployment, “because they interact with a worker’s ability to gain job experience.” While the minimum wage increase pushed the general unemployment rate 0.8 of a percentage point higher over the study period (compounding the misery of the economic downturn), the unemployment rate for 15- to 24-year-olds surged by almost 3 percentage points.

Gorry also looked at youth unemployment in France, where the minimum wage is about $12 per hour, considerably more than America’s, and where the youth unemployment rate has hovered around 24 percent, double the U.S. rate. Gorry finds that the different minimum wage levels account for nearly the entire difference between France’s and America’s youth jobless rates. That means France could find jobs for about half its unemployed youngsters by reducing its minimum wage to American levels.

Such a preponderance of evidence is reflected in official studies. When the Congressional Budget Office earlier this year reviewed the probable effects of a minimum wage increase to $10.10 an hour, it took into account the findings of over 60 studies on the issue. The CBO report suggested that the increase would help lift 900,000 families above the poverty line, as the president touted, but at the cost of killing the jobs of half a million other people.

The minimum wage transfers resources not from the rich to the poor, but among the poor. Some of America’s least well-off workers would get a raise, but many more others would see theirs hours cut, or lose their jobs entirely. Obama’s radio address concluded, “America should forever be a place where your hard work is rewarded.” But those whose jobs are destroyed by a minimum wage increase have neither hard work nor reward.

So why is the minimum wage so popular? The answer is that there are economic effects that are seen and others that are not seen, as the great French economist Frederic Bastiat noted. As he explained, any new economic policy “gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen.” In the case of the minimum wage, what is seen is the increase in many workers’ pay packets. What is not seen is workers losing their jobs.

The public may not attribute those job losses to a minimum wage increase, blaming instead other factors such as increasing automation, a company’s contraction, or an employer’s greed. Yet the underlying reason is the same in all these cases: A corporation invests in a machine because it is less expensive than paying workers the higher minimum wage, the company contracts because it cannot afford to keep the same number of workers with the same wage budget, and the employer, far from being greedy, sees the new wage cutting into his bottom line and he chooses to do other things rather than pay a marginally effective worker more than he thinks he is worth.

Yet job losses are just the beginning of the unseen effects. There are other workers, particularly inexperienced young ones, who will not be hired in the first place because the cost of their wages is too high. As Gorry found, jobs that never come into being prevent potential workers from gaining experience. Young would-be workers are denied the chance to gain basic job skills. Instead, they set off down the road to long-term unemployment. This is what is happening in France.

Those who lose their jobs or never get them are not the only ones to suffer. Even those workers who keep their jobs and are paid a higher wage and are “lifted out of poverty” often fail to account for these changes.

One unintended consequence is that taxes on wage earners go up. A higher minimum wage can make employers less inclined to offer non-wage benefits such as generous leave policies or insurance, as well as on-the-job perks such as free meals and parking. Non-cash perks such as parking and food are not taxed. But when these non-wage benefits are converted to wages, they become subject to income and sales taxes. So not only do workers have to pay for perks that used to be free, they get taxed for them, too. ....

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