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The public policy blog of the American Enterprise Institute
Barack Obama will use his State of the Union speech to again call for a higher minimum wage. And since Republicans seem unwilling to play along, the president will take executive action and unilaterally raise the minimum wage to at least $10.10 an hour for employees of federal contractors. Maybe in a few years the raise will affect, according to The New York Times, “several hundred thousand workers.” It’s really a move of signaling and symbolism rather than substance.
More to the point: how does raising the minimum wage affect labor markets, other than more money in the pocket of those low-wage workers with jobs? A 2013 study by Texas A&M economists Jonathan Meer and Jeremy West finds raising minimum wage levels may discourage firms over the long-term from hiring new workers.
And “Minimum wages: the effects on employment and labour-force turnover” by Pierre Brochu and David Green finds that for less educated workers, an increase in the minimum wage results in more stable jobs, perhaps, but fewer of them. They offer this useful context for policymakers:” … the policy debate should not just be about the employment rate effects of minimum wage increases but about the trade-off between good jobs with higher wages and more job stability versus easier access to jobs.”
Politician don’t like to talk about trade-offs, even though they are at the heart of politics. And is the possibility of fewer jobs in this economy an acceptable trade-off for a suboptimal policy that really has little effect on poverty? A 2010 study by researchers by Joseph Sabia and Richard Burkhauser found that state and federal minimum-wage increases between 2003 and 2007 “had no effect on state poverty rates.”
A much better idea is a wage subsidy that avoids distorting the hiring behavior of business. Even better, combine a wage subsidy with a lower minimum wage for the long-term unemployed. A possible compromise would be to (a) boost the federal minimum wage to $8.50 an hour – which would put it at all-time high, properly adjusted for inflation — and then (b) index the wage to inflation, and finally (c) top it off with a $1.50 wage subsidy, also inflation indexed. If Obama proposed some version of this, he might be surprised at the Republican response.
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