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Monday, April 4, 2016

3 Reasons the $15 Minimum Wage Is a Bad Way to Help the Poor

There Are Less Destructive Policies to Raise the Poor's Income

California’s minimum wage law is the latest and largest victory in a powerful movement pushing for higher minimum wages across the United States. Supporters of this movement argue that the current minimum wage is too low to allow workers to make ends meet.

But the minimum wage is a bad tool for those whose goal is to ease the burdens of poverty. And the California law – which mandates a very high wage across a very large population – is an especially bad idea.

Here are just a few reasons why:

  • Minimum Wages Target Workers, Not the Poor – Minimum wage policies affect people wth traditional, wage-paying jobs. The problem with this is that the class of low-wage workers and the class of poor people only partially overlap. There are large segments of the poor that receive no direct benefit at all from the minimum wage – the unemployed, stay-at-home parents, Uber drivers and other “gig” employees, etc. And there are a large number of low-wage workers – think teenagers living at home with their parents – who aren’t poor. If the goal of minimum wage policies is to fight poverty, then targeting low-wage workers is a relatively ineffective way of achieving that goal.
  • Minimum Wages Hurt Marginalized Groups – Let’s put aside for the moment the question of whether minimum wages laws create unemployment or not. Because even if they don’t affect overall levels of unemployment, minimum wage laws almost certainly change the composition of unemployment. Minimum wage laws create a barrier to getting a job that the privileged are better able to overcome than the underprivileged. When jobs are scarce, then immigrants, workers with few skills or little education, and those with limited English proficiency are going to have a harder time convincing employers that their labor is worth $15 an hour than their better-skilled, native, English-speaking competitors. As Thomas Leonard has recently shown, unemploying such marginalized groups was regarded as part of the point of minimum wage laws by early 20th century “progressives” who saw the minimum wage as a useful tool for keeping immigrants, blacks, and women out of the labor market. But the effect hasn’t changed in the last 100 years, even if our moral evaluation of it has. (Well, for most of us anyway. Ron Unz still regards the unemployment of immigrants as a positive effect of minimum wage laws)
  • Some Minimum Wages Cause Unemployment – The standard economist’s argument against minimum wage laws is that, by increasing the cost of labor, they reduce the demand for it. In other words, they create unemployment. Ever since Card and Krueger’s 1997 study, economists have been somewhat mixed on whether minimum wage laws actually have this effect in practice. But – here’s the important thing – the studies that have caused economists to doubt the unemployment effects of a minimum wage have focused on minimum wages much lower than $15/hour. Obviously, there’s some point at which a minimum wage is going to start causing unemployment – otherwise, why not set it at $100 an hour? And a lot of economists –even those who support a minimum wage in principle – believe that $15 crosses the line. Maybe not in a city like Los Angeles, where most workers are earning more than $15 already, but California’s law affects not just cities like Los Angeles but cities like Fresno and El Centro, where average wages (and costs of living) are considerably lower.

My point here isn’t that government should do nothing to help the poor. It’s that minimum wage laws are a bad way of going about trying to provide that help. That’s why even John Rawls thought that the minimum wage was a bad idea. Of course he thought we should have income redistribution. But the best way to do that is to let the labor market do what markets are generally quite good at – efficiently allocating resources and creating a social surplus – and then use the power of government to ensure that everybody gets an equitable (or, on my view, sufficient) share of the wealth the market creates.

Rawls thought that something like Milton Friedman’s Negative Income Tax could be an efficient way of achieving that redistribution. I think he’s right, and many others have made the same point. Unlike the minimum wage, a Negative Income Tax or Universal Basic Income (the two are often functionally identical) targets poverty, not employment. And it does so without creating the distortionary and unemployment effects of a minimum wage.

California likes to think of itself as a state on the cutting edge. But the minimum wage is a policy which, if it ever had a time at all, that time has past. Raising the minimum wage to $15 is an ineffective way to fight poverty which could have disastrous unintended consequences for the most vulnerable workers. If California wants to be smart about fighting poverty, it should follow the lead of the Finns, and consider a Negative Income Tax.

This post first appeared at Bleeding Heart Libertarians.

  • Matt Zwolinski is an Associate Professor of Philosophy at the University of San Diego. He is also a co-director of USD’s Institute for Law and Philosophy, a member of the editorial board of Business Ethics Quarterly, and a blogger for Bleeding Heart Libertarians.