Saturday, December 07, 2013

Wage subsidies



There has been a lot of talk about raising the minimum wage lately. Minimum wage is one of those things where the public strongly disagrees with economists - Americans are very strongly in favor of minimum wage hikes, but most economists think it's a bad idea. Economists generally prefer the EITC, also called a "negative income tax". Minimum wages can cause higher unemployment, and often just give money to high school kids who don't need it; EITC suffers these problems much less.

Why do Americans like minimum wage hikes and ignore the EITC? Two reasons, I'm guessing. The first reason is that people like feeling like they are being rewarded for work. Wages are money that people feel like they have "earned", even if the government has mandated above-market wage levels. Second, EITC is  just clunky to use - you have to file for it through the clunky tax system, you have to know about it in order to claim it, and the acronym "EITC" itself has no meaning for the vast majority of poor Americans. A bunch of eligible Americans don't even claim their EITC. Minimum wages, on the other hand, are easy to use, because the company does all work of administering it.

So is there a policy that would combine the economic efficiency of the EITC with the popularity of the minimum wage? I believe that there is. It's called a wage subsidy. This means paying companies to offer their employees higher wages. Jim Pethokoukis of the AEI has recently endorsed this idea (I think I managed to convince him in our recent podcast interview, if he wasn't convinced already). It's a good one.

Wage Subsidies vs. EITC

Wage subsidies are better than EITC, for several reasons. For one, they are automatic - poor people don't have to take the time and initiative and mental energy to go claim them. Second, they will probably make people feel more valuable, since people tend to view wages as money they "earn". From the worker's perspective, it will just look like wages went up. In fact, a better name for wage subsidies might be "wage matching".

Wage subsidies would replace the EITC, but in order to do this, we would have to supplement wage subsidies with some other form of welfare (such as a basic minimum income), since we don't want unemployed people to starve. 


Wage Subsidies vs. Minimum Wage

Wage subsidies are better than the minimum wage. For one thing, minimum wage doesn't necessarily raise wages for people who are slightly higher up the wage distribution but still poor. Wage subsidies can push up wages for all of the working poor.

Also, wage subsidies encourage higher employment, while minimum wage encourages higher unemployment. This is always an important difference, but much more so right now, for two reasons. First, we are in the middle of a long economic stagnation - a large number of Americans are languishing in long-term unemployment, causing their job skills and work ethic to decay. Second, we may soon face increased downward pressure on wages from increased automation - the so-called "rise of the robots" - and wage subsidies would be a way of placing our thumb on the scale for the human beings.


Problems with Wage Subsidies?

Kevin Drum highlights some potential problems with wage subsidies. This one actually isn't a problem at all:
How do you prevent employers from gaming the system and reducing wages because they know the wage subsidy will make up the difference?
This might be a problem higher up the wage distribution, because at some point you have to phase out the wage subsidy or your program ends up getting really expensive (supplementing every American worker's wages with a flat $3 subsidy would cost upwards of $1T). But if you phase it out slowly enough, this won't be much of a problem.

On Twitter, Brad DeLong noted that while minimum wages are a mandate, wage subsidies would require govt. bureaucracy to administer. True. But this bureaucracy is actually already fully in place - it's called Social Security. You see, a payroll tax cut is a kind of wage subsidy.

The final problem with wage subsidies is that they might be politically infeasible. For one thing, they would be paid for with higher taxes on the wealthy, which Kevin Drum points out is certainly going to make Republicans balk at the idea. Second, as Paul Krugman notes, the minimum wage is well-known and already has wide support.

Drum and Krugman are probably right; the minimum wage is a lot more feasible than wage subsidies, at the present moment. But if conservatives like Pethokoukis start campaigning for it at the elite level, then I think there's some chance Republicans could eventually come to see it as a more palatable alternative to the minimum wage. And if Republicans campaigned on a platform of "raise wages for working Americans", it seems to me there's a good chance they'd smash the Democrats. Supporting wage subsidies would be a way for the GOP to move from being the party of rich people (a small constituency by nature) to the party of business.

As for us technocratic-minded liberals, of course we should not let the better be the enemy of the good - we should still keep campaigning for a minimum wage hike, if for no other reason than to force Republicans to offer wage subsidies as an alternative. But if Republicans ever do get behind wage subsidies, we should join them, instead of sticking to the minimum wage out of pure traditionalism.


So I think that wage subsidies - or "wage matching", if you prefer - are a great idea, even if we can't manage to implement them right away.


Update: Via Carola Binder, I see that I am very, very, very late to the wage subsidy party. Here is a letter sent by a whole bunch of prominent economists in 2010:
Dear Speaker Pelosi, and Messrs. Boehner, Reid, and McConnell: 
A great number of different policy actions--including the American Recovery and Reinvestment Act, the financial rescue, and the extraordinary monetary policy measures taken by the Federal Reserve--have in their sum played an important role in changing the trajectory of the economy from one of terrible decline to one of growth.  But with the latest unemployment rate at 9.7 percent, it is clear that additional emergency policy measures to jump-start job creation are still warranted. 
A well-designed temporary and incremental hiring tax credit is a cost-effective way to create jobs, and could work well in the current environment.  At a time when GDP is beginning to rise and demand is starting to return, private firms are likely to respond to such a tax incentive by hiring sooner and more aggressively than they otherwise would have done. Such a credit could thus help put Americans back to work more quickly than otherwise. And by targeting firms that are growing, such a tax credit supports the businesses most likely to lead the recovery of employment. 
There are many ways to design an effective hiring tax credit, but in general the beneficial effects will be greater the stronger the hiring incentives and the lower the administrative burdens placed on firms.  It is critical that such a tax credit be put into place quickly and that it is publicized widely.  Firms will begin to accelerate hiring only when know they can count on such tax relief. 
We judge that a well-designed hiring tax credit is a well-targeted and economically sound strategy for aiding job creation at this phase of the recovery, and so we support a well-designed hiring tax credit. 

In our personal capacities, we are sincerely yours, 
Mark Zandi
Justin Wolfers
Laura Tyson
Mark Thoma
Peter Temin
Joseph Stiglitz
Betsey Stevenson
Isabel Sawhill
Dani Rodrik
Robert Reich
Richard Portes
Larry Katz
Barry Eichengreen
Peter Diamond
Brad DeLong
David Cutler
Robert Cumby
Tyler Cowen
Menzie Chinn
Alan Blinder
George Akerlof
Now, they were talking about it as a temporary measure to deal with the recession, but I think it works as a long-term distribution and incentive program as well.

51 comments:

  1. Anonymous9:59 AM

    Is minimum wage really useful? Does it have a reason to exist?

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    1. Ask the 76% of Americans who support a higher minimum wage.

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    2. Anonymous11:26 AM

      Mm... I meant from an economist's or political perspective does it make sense? Can it do some good?

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    3. Probably only if the wage elasticity of labor demand is really low.

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    4. You really wonder if a minimum wage is needed? Considering the history of corporate greed and the avarice of the rich? Really? That amazes me.

      All I can do is point you both to Paul Krugman's blog post from February 16, 2013, and remind you both that prior to the minimum wage, working men were being offered less than a dollar a day to work in factories and coal mines, all so the Morgans and Vanderbilts could buy pretty plates to feast off of and have extra homes to live in. If that's what you want to return to, then you've chosen a jungle society over a civilized one.
      ---------------------------------
      "Minimum Wage Economics" (http://krugman.blogs.nytimes.com/2013/02/16/minimum-wage-economics/)
      Paul Krugman
      I’m doing this kind of backwards, writing about the politics first. But I wanted to have my intellectual ducks — or rather, my lucky duckies — in a row before taking on the economics. And while I was grubbing around, Mike Konczal produced the perfect post summing it all up.

      So what should you know? First, as John Schmitt (pdf) documents at length, there just isn’t any evidence that raising the minimum wage near current levels would reduce employment. And this is a really solid result, because there have been a *lot* of studies. We can argue about exactly why the simple Econ 101 story doesn’t seem to work, but it clearly doesn’t — which means that the supposed cost in terms of employment from seeking to raise low-wage workers’ earnings is a myth.

      Second — and this is news to me — the usual notion that minimum wages and the Earned Income Tax Credit are competing ways to help low-wage workers is wrong. On the contrary, raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers. This actually is Econ 101, but done right: given a second-best world in which you use imperfect tools to help deserving workers, two tools together can produce a better outcome than either one on its own.

      So a minimum wage increase isn’t some kind of counsel-of-despair way to help workers a bit in a dysfunctional political scene (although there’s that too); it’s actually good policy.

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    5. Anonymous1:30 AM

      Just because Schmitt says so doesn't make it right. Here is some evidence to the contrary:
      http://ideas.repec.org/p/nbr/nberwo/12663.html
      http://ideas.repec.org/p/nbr/nberwo/18681.html

      Here is what Krugman wrote back in 1998:
      http://www.pkarchive.org/cranks/LivingWage.html
      And this is what Christina Romer, not exactly a libertarian economist, wrote recently:
      http://www.nytimes.com/2013/03/03/business/the-minimum-wage-employment-and-income-distribution.html

      The reason why the minimum wage is popular? Because nobody cares about the disenfranchised, since they don't vote anyway. It is all about buying the votes of the middle class, whose kids benefit from minimum wage increases. Nobody cares that a minority kid, the product of the ghettoization of America through PUBLIC housing projects and of a failing PUBLIC school system, will be even more unemployable. Hey, thanks to our drug prohibition, he has excellent prospects to pursue a great career in crime. Have you ever wondered why unemployment rates for blacks and whites were the same prior to the establishment of the minimum wage, and now the rate for blacks is twice as high? What a beautiful liberal world!

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    6. Anonymous11:21 AM

      Raising wages is "Hoover" economics. President Hoover figured that higher wages of employees would lead to more spending, and lead us out of the deflatonary period. President FDR continued those poliices. Look how THAT turned out.! -Alan McIntire

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  2. What about the "teenagers" problem you referenced with minimum wage hikes? Wage subsidies also wouldn't be means-tested. If wage subsidy dollars came at the expense of EITC dollars the problem would be exacerbated right?

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    1. EITC would ideally be scrapped and replaced with a combination of wage subsdies and welfare.

      The teenagers problem is real, but if you wanted you could modify it by age. The payroll tax system already records workers' age.

      Also, wage subsidies could be done locally, and adjusted for the local cost of housing.

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    2. Ooh, nifty. This is a really cool idea (said the layperson). Minimum wage doesn't account for geographic differences in cost of living either. I guess theoretically it could, though.

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  3. This brings up something I have wondered about for many years, what is it about our system that many average people can not make a living wage and need rent subsidies, travel subsidies, and now massive food subsidies et. al. I just don't believe that all the millions of workers who get subsidies in some form are takers or politically powerful enough to create a system that so benefits them (although surely many are not doing everything they can and need to step it up.

    How come the market hasn't raised the minimum wage? Has business just found a way to make the government make up for the wages they don't pay? Hypothetically, if government ended all the benefits would business have to raise wages to get even entry level workers. Something isn't right here. I see this as part of a much bigger question.

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  4. Making people feel like their work is more valuable than it is makes me uncomfortable. I see the benefit now, but I'd love to see e.g. a minimum basic income, along with evolving social institutions that address your concern in other ways. A social norm that everyone deserves to be taken care of, but in return they should try to figure out something valuable they would like doing (whether or not anyone can pay them for that valuable thing). Institutions that help people carry this out.

    Let the robots do robot work. I have to believe we can do better than keeping people in robot work.

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    1. Hmm, I think that would be good for a lot of people...see my recent column in The Week!

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    2. Yeah, I had enjoyed that article (and was really glad I read the John Cochrane post you linked to -- thanks). I'd have loved to see more detail on how "the economy's loopholes and flaws" redistribute wealth. Who is it going from and to? (I guess it's: from the owners of capital inefficiently deployed, to people who manage to stay in jobs where they aren't adding value for their employer? But it doesn't quite sound like that's the story for the hedge fund trader you mentioned...)

      I'm a bit surprised the same person wrote that article and this blog post. Wouldn't wage subsidies be another inefficiency further entrenching this "insidious" (your word) system?

      I'd agree it's better than no redistribution and probably better than minimum wage. So I don't know, maybe it's the best we can hope for politically.

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  5. I've always felt that small wages and talk of raising the minimum wage is perceived to be more of a problem during recessions, so maybe we should fix that first.

    If there is something close to full employment only teenagers will bother and will be hired in the minimum wage jobs and they wouldn't care to ask for more, because they'll grow up in a few fun years, right?

    So, how about investment subsidies? If they are significant, they can produce investment booms which can increase employment. And since they are pro-business, they are easy to pass. Everybody loves them. Countries join the EU for them.

    In fact they seem to be the only addictive stimulus there is, as exemplified by the EU (so called structural funds). This only makes the euro-depression sadder.

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  6. Anonymous7:23 PM

    One question? Why do economist think that what people make is equivalent to amount of value they add to the system?

    If we assume the wage is reflection of leverage and negotiation power which is more realistic, then raising minimum wage would make much more sense. It is about raising wages for the workers with least amount of leverage.

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    1. Why do economist think that what people make is equivalent to amount of value they add to the system?

      Because it's simple and easy for them to think that.

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    2. Anonymous3:44 AM

      So why do you take it so seriously? why do you make assertion on minimum wage which is the opposite of what historical data suggest and why you make policy recommendation based on it?

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    3. jtroll12:36 PM

      We should keep a minimum wage, even if it's low, just to prevent outright exploitation, and as was pointed out in the Krugman link above (who links to Konczal) and perhaps inadvertently by Anonymous, Christy Romer, that rewarding work could put downward pressure on wages, allowing the subsidy to be captured by the employer.

      Nice to see more talk of a basic income though. Would we even need a work subsidy if we had a basic income? Perhaps if we eliminate the minimum wage (which we shouldn't) and/or wanted/needed to incentivize work.

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  7. Silvano8:19 PM

    It's an old fashoned capitalist dream being able to hire cheap workers payed by the government.

    Maybe minimum wage works better.

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  8. Anonymous9:25 PM

    To be blunt, the idea that wealthy Republican elites will ever come to think of higher taxes on themselves as "a more palatable alternative" to higher wages for others seems daft.

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    1. Then we'll just roll with minimum wage increases! *whistles*

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  9. Noah, I was quite pleased to see this post. For a while now I have been supportive of wage subsidies, for one additional reason. The policy makes sense if we believe that people's skills dissipate the longer they have been unemployed. A subsidy that is more generous for workers that have been unemployed longer, and which is phased out slowly, as the worker regains experience, is a way of pushing the economy from a low-employment equilibrium to a high employment one.

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    1. Agreed. Not just skills but work ethic too.

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  10. What do you think about making it incremental (i.e. a hiring tax credit) as DeLong and a bunch of other economists suggest here?: http://delong.typepad.com/sdj/2010/02/economists-for-wage-subsidies.html

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  11. And this may be where the science of economics diverges from the real world. Theory tells us that if we eliminated the payroll tax that the employer portion would flow to employees as wages (perhaps not all since eliminating the payroll tax would result in higher general taxation).
    Real life tells us that employers would likely try and capture the gains as much as possible. As fewer firms offer pensions and as many drop health coverage we don't see those savings flowing to employees as higher wages. What we see is the bar dropping.
    Economics, in the policy area, has to be wedded to political science. Maybe in a perfect world wage subsidies are more efficient, provided that efficient is defined in its narrowest sense, but in the real world where politics dictates that some vote against their own interests and where groups like the ones Pete Peterson sponsors use their great economic advantage to engage in great demagoguery, the minimum wage is probably the better policy.
    The teenager issue keeps getting brought up but I don't see a lot of teenagers working at Wal-Mart or even in fast food restaurants. It seems the composition of the low wage work force has changed significantly and this part of the argument may not be valid anymore.

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  12. Anonymous10:46 AM

    Don't you already have wage subsidies? It's just works somewhat differently and is called food stamps... When companies start advising their employees to seek food stamps they must consider it a wage subsidy.

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  13. Anonymous11:10 AM

    Has people "feeling like they earned" higher wages been shown to have any actual value?

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    Replies
    1. Think carefully about how this could be shown... ;-)

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  14. Not to quibble Noah, but my understanding is roughly 1 in 2 economists support the MW-of course, logically that means about the same amount oppose it. If I'm not mistaken this is up considerably from where it was certainly when FDR first signed the MW into law in the 30s.

    In any case those economists who I at least consider most worth listening to support it strongly. As Krugman says:

    Second — and this is news to me — the usual notion that minimum wages and the Earned Income Tax Credit are competing ways to help low-wage workers is wrong. On the contrary, raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers. This actually is Econ 101, but done right: given a second-best world in which you use imperfect tools to help deserving workers, two tools together can produce a better outcome than either one on its own.

    So a minimum wage increase isn’t some kind of counsel-of-despair way to help workers a bit in a dysfunctional political scene (although there’s that too); it’s actually good policy.

    http://krugman.blogs.nytimes.com/2013/02/16/minimum-wage-economics/?_r=0

    When I'm taking policy advice I care more about what Krugman, Delong, Reich, etc say than folks like Sumner or David Henderson.

    A good point that a very great economist once made is that not all policies are necessarily the outcome of a private debate among economists-there are social and political forces at work as well. American society long decided that the MW is a very good thing long prior to many economists liking the idea.

    Who can say the lay public was wrong? One complaint I have with opponents of the MW is their rationale is much more theoretical than empirical-where is the empirical proof that the MW in any way has harmed the U.S. economy or raised the unemployment rate over time?

    I can't help but notice that in 1969 we had the highest U.S. MW in history-adjusted both for inflation and productivity gains-and yet this correlated pretty closely to the best years in the U.S economy. I know correlation doesn't prove causation but it sure doesn't disapprove it and we had our best economic years-the immediate postwar era in the years after the MW.

    My point is that the models show the MW may be a drag but empirical history shows no sign of this-kind of like the models that claim capital gains taxes destroy growth-where's the proof?. As for the Wage Subsidy I'm all for it if this doesn't mean the end of the MW-which no doubt defeats the purpose for why so many conservative economists support it.

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    1. Bill Ellis7:30 PM

      Mike, well said.
      I don't think any reputable economist would disagree with the Idealized models that predict bad things (lower employment )caused by minimum wage laws, but a lot of economist recognize that Idealized models are often (always) messed up by the real world---people being people.

      So even though models are necessary for thinking about econ, they should never be mistaken for reality and must be confirmed by the data, by empirical evidence. The empirical evidence shows that minimum wages do not result in the negative predicted outcomes.

      Noah seems to be ignoring the empirical evidence in favor of the theoretical ideal.

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  15. As for wage subsidies themselves, it's rather ironic that conservatives find them a more palatable alternative to the MW as with the WS you are literally awarding people 'a handout' even if it's for workers it's not money they strictly 'earned' whereas a higher MW directly rewards greater work effort.

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  16. Oops! That 'very great economist' I had in mind is Arthur Okun in his "Growth and Inequality'

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  17. Bill Ellis6:30 PM

    Noha, I don't think you really addressed this objection: "How do you prevent employers from gaming the system and reducing wages because they know the wage subsidy will make up the difference?"

    I think this objection is about employers capturing the subsidy at the bottom of the wage scale. They could capture it by simply not giving raises that keep up with inflation. Why would they ? A minimum wage that kept pace would inflation would prevent this.

    Some of the research on the EITC says that it suppresses wages just for this reason, Right? So why would wage subsidies be any different ?

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    1. It seems like worries about employers "gaming the system" are unnecessarily hyperbolic. Of course employers will capture some of the subsidy, and workers will capture some of the subsidy. How they'll be divided is the interesting question.

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    2. Bill Ellis7:12 PM

      I don't see how workers can capture any of the subsidies unless we could count on near unending full employment---or universal strong Unions.

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    3. I also don't understand how Noah came to the conclusion that such a scheme would suspend the law of demand and supply and suddenly make either employees demand or employers offer non-market clearing wages.

      Under competition I would expect the bulk of the subsidy to be captured by customers -- the immediate effect of lower employers' net wage bill being soon competed away into lower prices -- which is much diluting the intended effect as most customers are not poor. The poor only get a bit of residual benefit in that they (hopefully) don't pay the tax that funds the measure.

      The great thing about a minimum wage scheme is that it takes the price of labour intensive services up, and these services are overwhelmingly bought by (relatively) well off people with inelastic demand, that is most rich people will rather sacrifice something else (like say buying Treasuries) than stop going to restaurants or clean their place themselves. That seems consistent with the low impact on unemployment observed about every single time a minimum wage scheme is introduced in a new country.

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  18. The notion that if we got rid of the minimum wage we'd be going back to the exploitation found in Upton Sinclair's age is utterly ridiculous. The existence of the minimum wage isn't the only difference between then and now - there's also significant welfare programs in place. We've decided that as a country, we should provide government aid to those unable to fully provide for themselves. Regardless of your position on whether the current welfare floor that we've set is high enough for people to subsist on, the presence of welfare programs profoundly affects low-wage labor markets.

    I'm aware I'm simplifying the structure of welfare programs, but hear me out. If I am able to get a basic level of government welfare aid without having to work, then for me to accept a job, my wage needs to be equal to at least my welfare amount plus some valuation for work and time. The existence of welfare winds up raising the market's minimum wage, even in the absence of a government-mandated wage floor.

    Moreover, in order to encourage people to work, though, welfare programs can't just cut off the aid spigot once somebody gets a job. Rather, they gradually reduce aid as income reaches certain levels. With these types of welfare and poverty programs, what we wind up with is a decent number of people being paid at the official minimum wage, while still being on government welfare rolls. Increasing the minimum wage is one way to increase the money provided to low-wage families. Increasing the wage also a) improves the incentives to maintain a job vs. rely on government aid, and thus b) reduces (by at least a small amount) the welfare aid the government pays out.

    Thus, the minimum wage winds up being only one of a set of tools in place to provide aid to low-wage families. But given the existence of the other government social programs, it's a required piece of the equation. I kind of cringe when I hear fellow conservatives decry raising the minimum wage as being another example of a government aid program. Yes - but we have many other programs already in place that wind up paying out more anyway! Raising the minimum wage is just a way to re-jigger the balance between all of those tools. Ideally, you want to set the minimum wage at an amount that improves work incentives and shifts some responsibility for welfare from government to employers. Who's to say $7.75 is actually hitting that balance right?

    One final note - yes, there are economic studies that suggest raising the minimum wage has only a minimal, if any, effect on employment. But don't forget about the limits of that finding - these were studies of small, marginal changes in the minimum wage. Significant shifts in the wage (like the $15 suggested by fast-food strikers) is likely to have many, many unforeseen effects. Very dangerous territory they're lurking in. It's tough to know how far beyond "marginal wage shifts" the unemployment cliff lies.

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    1. Anonymous1:41 PM

      you really have no idea of the real world, do you ?
      I mean, I'm trying to be polite, but the idea that lack of a min wage would not lead to horrible, horrible exploitation...you are on planet republican.

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    2. Social welfare programs have changed the dynamics of the labor market. Employers have to offer a wage at which they have an adequate supply of labor. If you set that below the benefits level of welfare, nobody will work. That's not planet republican - it's ECON 101.

      There is one slice of the labor market where we do indeed see exploitation - the market for undocumented immigrants. But their exploitation is in large part because they're excluded from all social programs and are completely off the government map, not just because their employers don't have to abide by the minimum wage.

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  19. Anonymous1:39 PM

    noah, why don't you consider the alternate choice, that economist are wrong..I mean, a rare thing, the profession being wrong, but it might happen, every now and then.

    Your problem is that you have suffered deformation professionalle; to survive the economics phd program, you had to loose certain abilities; one is to understand that *power* - raw, naked, undiluted power, the ability of a boss to say If you want your job, have your spouse in my office, unclothed...
    well that is only a slight exaggeration.

    respectfully

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  20. To the Signers:
    Another reason Americans don't like the EITC: poor explanations.
    From your first two paragraphs, I posit that anyone - or almost anyone - can understand the min wage, and very few can understand the EITC
    why should people support something that PhD economists are to condescending to explain ?

    Anyway, you guys are all, from the perspective of a min wage worker, part of the 0.1% (or, more precisely, you signers are all high class in house servants of the 0.1% - like veblen said, they cut you some slack cause you are exoteric).

    I don't think I have to take any of you seriously until you have spent 6 months working at a min wage job.
    like they say, in theory, theory and practice are the same; in practice, they ain't

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  21. Noah is there anyway to do a cost analysis of this? Also if it were combined with a lowering or abolishing of the minimum wage would a simulation have to be used to predict annual cost? I posted a similar question on Tyler Cowen's blog but no reply. This is real crappy but in assessing cost I used this link http://www.bls.gov/cps/cpswom2011.pdf. Page 48. I really wish I could learn how to simulate policy cost.

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  22. "I'm aware I'm simplifying the structure of welfare programs, but hear me out. If I am able to get a basic level of government welfare aid without having to work, then for me to accept a job, my wage needs to be equal to at least my welfare amount plus some valuation for work and time. The existence of welfare winds up raising the market's minimum wage, even in the absence of a government-mandated wage floor. "

    Patrick, I'm interested whether you or anyone else for that matter can name what 'welfare programs' that are available to any single male provided he has no legally recognized disability. I count one-maybe food stamps but that's been remorselessly cut over the last 3 years since the Tea Party rode into town.

    Anyone who figures they don't have to work because they're going to get a $135 dollar packet of food stamps every month is a little math challenged.

    What I find interesting is that those who want to cut back on the MW can't show that we've lost anything in the 76 years we've had it. So what's the need to go back?

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  23. Edmund S. Phelps, professor emeritus of economics at Columbia University, wrote an entire book in 1997 advocating wage subsidies: Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise (Harvard University Press). A second edition was published in 2007.

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  24. " Americans are very strongly in favor of minimum wage hikes, but most economists think it's a bad idea."

    "most economists" here means those who are mostly not labor economists. These "most economists" will naturally have their Econ 101 model in mind and will say "but demand curves always slope down!"

    The empirics suggest that the aggregate labour demand curve does indeed slope down but is almost flat at the bottom end - which suggests a modest minimum wage increase can get an awful lot of gain for the working poor with only a very small increase in the non-working poor. There are well developed theories, backed by the empirics, for this flatness - basically around information aymmetries and consequent match rents for employers.

    On wage subsidies, the conventional wisdom is that you have to offer them to EVERYBODY on the unskilled job market for them to work. If you just give a voucher for them to those perceived most in need of it then you're providing any potential employer with a certificate of unemployability for that person. Signalling effects are very, very strong in the job hire process because of those aforementioned information asymmetries.

    And yes, the Phelps book is worth a read if you want to pursue the issue further. It's not the last word though - there's quite a literature on this stuff.

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  25. Nathanael11:02 PM

    " Minimum wages can cause higher unemployment,"

    No they can't. That's a *disproven* hypothesis!

    Every single empirical study says that minimum wages cause LOWER unemployment. Do I know why? No! Does it matter why? No, it's just a FACT.

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  26. I do not understand why there is no discussion on the price-fixing effect of a federally-mandated minimum wage. Also, what evidence exists that wages would be lower without the minimum wage? By acting as a universal reference point, doesn't the minimum act as a tremendous drain on workers' bargaining power? As a result, low-skilled workers are confined to poverty while employers enjoy excess profits protected by law. I am afraid Wage Subsidies and EITC are nothing more than subsidies to employers who should've been paying higher wages to begin with. More thoughts on this here: http://tinyurl.cm/lzcf25b

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  27. Anonymous8:20 PM

    "Why do Americans like minimum wage hikes and ignore the EITC? Two reasons, I'm guessing. The first reason is that people like feeling like they are being rewarded for work. Wages are money that people feel like they have "earned", even if the government has mandated above-market wage levels. Second, EITC is just clunky to use - you have to file for it through the clunky tax system, you have to know about it in order to claim it, and the acronym "EITC" itself has no meaning for the vast majority of poor Americans. A bunch of eligible Americans don't even claim their EITC. Minimum wages, on the other hand, are easy to use, because the company does all work of administering it."

    The feeling that the extra money is coming directly from corporate profits is much larger than either of those. At least that is what I have gathered from reading the comments section of the NYT, Slate, and The Atlantic.

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  28. Noah,

    Indeed, you are very late to the basic income party! But welcome....

    EITC and minimum wage are not alternatives. Wage subsidies depress wages: there is both theory and empirical evidence for this. You need either a minimum wage or a basic income to prevent employers bidding down wages to the floor. I prefer the latter, personally - but it must come with a guaranteed right to refuse work. If there is any element of workfare, or if basic income is below EITC, wages will be depressed. Ideally you have basic income instead of both EITC and minimum wage, and you tax it away at higher levels rather than removing it.

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  29. If administration of the wage subsidy is left to employers, all they need offer the worker is the latter's reservation wage and pocket the subsidy in its entirety. Why should whether the subsidy is phased out quickly or slowly matter?

    The conflation of the EITC and NIT is just wrong. The EITC matches the first dollar of earnings up to some maximum, plateaus, then phases out. The NIT provides a minimum payment at zero income (earnings or otherwise), then phases out as income grows. Totally different.

    As far as participation goes, the EITC compares well with other benefit programs -- over 80% participation. It could be improved in various ways, but it beats the hell out of wage subsidies, IMNSHO. It also complements the minimum wage, since for an employer paying the minimum, there is no way to benefit from the EITC. It must supplement rather than supplant the wage.

    -- The blogger formerly known as MaxSpeak


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