Monday, April 7, 2014

Betting on a New Minimum Wage

     I must admit, when I heard the proposal to raise the Federal minimum wage from $7.25 an hour to $10.10 an hour, my first thought was: Wow, that's a 40% raise! I never got a 40% raise! My second thought was: Hey, why don't they increase Social Security benefits by 40% next year!

     But then, I admit that I'm selfish. I think of myself first. And it's been a long time since I worked for minimum wage -- the summer of 1966, in fact, when I made $1.25 an hour slinging hamburgers at an amusement park. (According to BLS inflation figures that $1.25 is equivalent to $9.02 today.)

     I remember that summer during high school. We had a great time, me and my buddies, until a bunch of us got fired for having a mustard and ketchup fight. (You can see, we didn't take our jobs too seriously.)

     People advocating raising the minimum wage point out that you cannot support yourself, much less a family, on the minimum wage of $7.25 an hour. They get no argument from me on that.

     Some people point out today's minimum wage, when you account for inflation, is less than it was in 1968. What they neglect to tell you is that 1968 marked the highest minimum wage in history. And in 1968 there was a booming economy, followed by the malaise of the 1970s when people felt lucky just to have a job.

     Supporters of raising the minimum wage also cite studies saying that it will have a negligible impact on employment. Very few people will get fired, they say, and it will raise everyone else out of poverty.

     But those studies come from liberals and are not to be trusted by objective measures (any more than studies coming from conservatives can be trusted). Basic economics says that if you make something more expensive, you will get less of it. If you make employing low-wage people 40% more expensive, you can bet there will be less demand for low-wage labor -- meaning some people will get fired; and a lot more people will simply not get hired (which is harder to measure).

     As you might have guessed by now, I'm skeptical of the idea of raising the minimum wage to $10.10 an hour (although President Obama hasn't exactly asked for my advice). It will help some people, for sure. But it will hurt many others -- the few who get fired, and the many who don't get hired. And it's entirely possible that those hurt the most will be uneducated workers washing dishes, and not the sons and daughters of the middle class who take on summer jobs.

     And yet, I share the sympathies of those who want to raise the minimum wage. I have a couple of acquaintances trying to supplement their Social Security with minimum wage jobs, and they don't get very far. And I certainly agree it's a miserable life for people working full-time at minimum wage, in menial jobs, trying to support themselves let alone a family.

     So do I have a better idea? Yes!

     Instead of raising the minimum wage, the Federal government should exempt the first $10,000 a person earns from the payroll tax. This would give everyone an immediate raise of some 14% on their first $10,000 of income. (The government would need to make sure employers give their portion of the payroll tax to employees, rather than keep it themselves.)

     How do we make up the lost taxes that go to Social Security and Medicare? We eliminate the salary cap on the payroll tax. So we treat everyone equally. Everyone gets the same exemption. The person making $1 million a year gets his first $10,000 of income exempt from the payroll tax. And so does the person making $10,000 a year. (This would also eliminate the silliness of a retired person receiving Social Security with one hand, while paying Social Security tax on their supplemental job.)

     Then, in addition, the  government can introduce a higher minimum wage on less drastic and more gradual basis, which would avoid any kind of shock to the economy -- and the unintended consequences such as higher unemployment, higher wage inflation, and the economic distortions that come with wage and price controls. So instead of ratcheting up the minimum wage by 40%, the Federal government could raise the minimum wage by, say, 5% this year, and another 5% next year, and another 5% a couple of years after that. And then we're back toward the levels of 1968 -- without killing any businesses and without hurting the very people we're trying to help.

     Meanwhile, it's entirely reasonable for certain jurisdictions, where the cost of living is high, to institute their own, higher minimum wage. In fact, most states already set their own minimum wage, and many have higher rates than the Federal government. After all, it makes little sense for Connecticut and California, with a high cost of living, to have the same minimum wage as Alabama and Arkansas, where the cost of living is much less.

     So you tell me. How does this not make sense? 

Bottom line shows actual minimum wage since 1938. Top line shows equivalent in inflation-adjusted dollars.

10 comments:

Kirk said...

Increasing the earned income tax credit is a more efficient way of getting money to poor workers than raising the minimum wage.

Eliminating the income cap on SS contributions is a good idea in any case.

Tom Sightings said...

Good point about the EIC, Kirk, and we can read more about it at the IRS [www.irs.gov/Individuals/EITC,-Earned-Income-Tax-Credit,-Questions-and-Answers and also here: www.cbpp.org/cms/?fa=view&id=2505. The only drawback I see is that it complicates matters, and every time things get more complicated some people miss out.

Stephen Hayes said...

This is all above my pay grade, which has never been set very high, but your proposal makes sense to me.

kelly@thehungryegghead said...

That makes a lot of sense. My aunt and uncle both earn minimum wage in NYC and it is getting harder and harder for them to save even though the minimum wage went up.

And because their boss has to pay the workers more he wants to move the factory to a place where the rents are cheaper. My aunt and uncles' commute times are already 90 minutes each way, if the factory was to move it would be 120 minutes each way!

Mac n' Janet said...

Increased employer costs are always passed on to the consumer effectively wiping out any pay increase. If you don't want to work for minimum wage, and who does--been there, done that---get more education, gain some work skills to move up the ladder.

Kirk said...

There was an interesting discussion on PBS Newshour about replacing all government poverty programs with a guaranteed monthly basic income. This is something both liberals and conservatives could buy into, and was in fact proposed by Milton Freedman years ago. The proposed amount would be $1000/month for every adult citizen regardless of any other income. This would be paid for by eliminating EBT, EIC, and most other anti-poverty programs; minimum wage would also be eliminated. The amount would be indexed to inflation.

Obviously if wages were not high enough to attract workers to earn beyond this payout, companies could not attract workers, so there would certainly be a wage equilibrium point where work would be attractive.

Higher paid workers would have their payments re-absorbed by taxes, in a manner similar to how SS payments are absorbed by those still working.

See http://en.wikipedia.org/wiki/Basic_income for more info. The PBS program can be found online at http://www.pbs.org/newshour/bb/swiss-consider-welfare-overhaul-guaranteed-minimum-income/

Janette said...

I would agree with Mac and Janet if I did not know, personally, a number of people (from my sister in law to my nephew to my good friend) who all have degrees and still work min wage. Unfortunately, there can only be so many highly paid engineers or librarians…..
I like your idea Doug. Have you sent them to your representative in DC?

Barbara Torris said...

Tom, I am not clear on when employers have to pay minimum wage. I alway thought that employees had to work a minimum numbers of hours before they are eligible for minimum wage or any benefits.

Could it be that those working for minimum wages now will have their hours cut? There is always someone willing to take a part time job, including retirees.

Maybe, in the end, nothing will change!

Retired Syd said...

I get your point, that higher wages should mean fewer jobs, but in neighboring states with higher minimum wages, there are actually more jobs, not fewer.

And that's because another factor is at work. When workers have more money in their pockets, they buy more stuff (especially at the lower end.) That's why Henry Ford paid more, so his employees could afford to buy his stuff. When they by more stuff (increase demand), business sell more stuff. When they sell more stuff, businesses hire more workers. The virtuous cycle that grows the economy.

Contrast that to Walmart, where 15% of its employees are on food stamps. They can afford the stuff because the taxpayer is paying the difference. Shouldn't the employer pay full fare (not receive a government subsidy to pay employees in the form of food stamps)? With all the talk about cutting food stamps right now, shifting the actual cost of employees to the actual employers through increasing the minimum wage would solve that debate.

Also, I just saw today, that the increase in minimum wage (which would surely be passed through to the consumers anyway), would only increase Walmart's product's costs by 1.4%. We gotta pay it one way or the other, either through our tax bill or penny more for that box of macaroni and cheese.

Dick Klade said...

I've heard all the arguments and seen results of many studies. When all the smoke clears, my heart says it basically is unfair to reward full-time workers with poverty pay that forces them to accept charity (food stamps) to feed their families. We ought to be better people than that.

Sorry Tom, but fixing this injustice through the Earned Income Tax Credit may be efficient but it would add to the unsustainability of social security and medicare funds. Raising the minimum wage is the way to go.