Raise the Minimum Wage Without Increased Inflation or Unemployment

[Free Bird]

I am of the belief that if you work full time, you shouldn't be below the poverty line, especially if you are on your own. But, raising the minimum wage to combat this, to me, seems like a recipe for more inflation and unemployment (you can only pay so many people so much, and increasing what you have to pay them, to me, seems like an invitation for layoffs to pay those you keep, more) due to the increased operating costs that this increase would bring, perhaps even an accelerated rate of automation. We've all seen the pictures of the self-service kiosks at places like McDonald's, and they do raise genuine concerns to me, even as I desire to stop people working full-time from being poor. We've also seen a referendum being overturned in DC because of these effects, and businesses closing in cities because of the new mandated wages.

How would you propose raising the minimum wage to, say, $15 an hour, while minimizing, or even canceling out, these effects? Would you cut taxes on businesses? Offer a tax credit of some sort? Would you limit the full increase to those working full-time? Something else? I'm interested to hear your viewpoints.  

[RI]

Well, the canonical Econ 101 answer is that you really can't. Even if you implement the minimum wage, induce a labor surplus, and boost labor demand to match, you'd still be boosting aggregate demand which increases the overall price level, unless you can shift both the short and long run aggregate supply curves outward (which is really difficult to do intentionally). In that case, the answer simply devolves to: boost economic growth. Of course, boosting economic growth by itself without a minimum wage hike might do as much or more good for the effected workers than growth with a minimum wage hike.

The more complicated Econ 301 answer is that firms act intertemporally and based on heuristic decision making. Small minimum wage increases may not be salient to most businesses, but large increases certainly are. Minimum wage increases tend to impact future hiring over current employment. Thus you would need to provide incentives for future hiring rather than current hiring. Perhaps alter the expectations about future business growth opportunities or increase the rate of minimum wage-employing firm creation, but either of these would probably work better alone than in conjunction with the minimum wage hike, so the combination seems a bit pointless overall.

Personally, you don't bother with the minimum wage; you let labor market wages float, and you go straight to NIT/EITC reform.

[💥💥 brandon bro (he/him/his)]

The more complicated Econ 301 answer is that firms act intertemporally and based on heuristic decision making. Small minimum wage increases may not be salient to most businesses, but large increases certainly are. Minimum wage increases tend to impact future hiring over current employment. Thus you would need to provide incentives for future hiring rather than current hiring. Perhaps alter the expectations about future business growth opportunities or increase the rate of minimum wage-employing firm creation, but either of these would probably work better alone than in conjunction with the minimum wage hike, so the combination seems a bit pointless overall.

Personally, you don't bother with the minimum wage; you let labor market wages float, and you go straight to NIT/EITC reform.

I've heard increasing the EITC is a better solution than raising minimum wage from several on the wonky left (I've looked into it a couple of times, sort of followed the argument, but never quite fully grasped it). Is raising minimum wage in a high CoL area, rather than a flat increase where wages grow too quickly in areas with slower economies, still inferior to increasing the EITC? Or are the problems with raising wage strictly problems related to a flat rate that is not responsive to or reflexive of local variation in CoL/demand?

Your Econ 301 explanation is clear and helpful to someone with only an Econ 101 background by the way - thank you.

[muon2]

I've posted on this topic a number of times, and if needed I'll find some links to those posts. The short answer is that in this economy a raise to $10.50-$11.00/hour would not cause significant negative impact in inflation or unemployment. That range is also consistent with Obama's original SOTU request adjusted for inflation and the inflation-adjusted minimum wage during the late 1960's through the mid 1970's (the peak period in US history for minimum wage). There are many local areas that can go higher than $11 and sustain that minimum with little downside, but nationally there would be negative impacts in many other areas if it rose much above $11 in today's dollars.

[Torie]

In my area most are paying above the minimum wage now for what were formally minimum wage jobs, and there are a lot of help wanted signs. The city of Hudson just increased the minimum wage to $15. That probably is not much above market at the moment. The sad thing is that those who don't work at all has become so engrained, and the incentives are so bad, that the labor force is pretty inelastic. Over time I suspect that some of the empty slots will be filled by those moving into the area for the life style.

Anyway, the number that will not cause substantial economic disruption is a moving target, at least in some areas.

[Very Legal & Very Cool]

Eliminating both employee and employer payroll taxes on income below some minimum threshold would be helpful.

It's ridiculous for the federal government to take a large cut of anyone's compensation while telling that person's employer that they're not paying their workers enough.

EITC is clumsy in terms of making sure that everyone gets the credit that is due to them in a timely manner. It's also hard to means-test these benefits in a way that (A) isn't hopelessly confusing and (B) does not create horribly high effective marginal tax rates for the just-barely-not-poor.

Anyway, the emphasis on minimum wage laws in the US is discouraging. Employees would be treated better and compensated more appropriately if our labor laws emphasized strong collective bargaining rights, employee ownership, cooperative management.

But several decades of political choices have guided our economy toward a different paradigm - one that involves a growing underclass of families who survive on part-time, short-term, low-skill service work.

This is the context in which large minimum wage increases have become an important political issue. It's a compromise: On one side are the large private sector employers who rely on this labor force. On the other are the financially stressed government agencies that have become responsible for containing the social pathologies of this underclass.*

*This explains why so many government agencies are exempted from minimum wage laws. They could not get away with this if these laws were passed because of pressure from workers and activists.

Eliminating employer taxes below a certain income threshold will keep wages for certain sectors down permanently. You're also overlooking one of the key proponents of minimum wage increases--large unions with contracts tied to the minimum wage.

[Very Legal & Very Cool]

Eliminating employer taxes below a certain income threshold will keep wages for certain sectors down permanently.

WTF??????

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Unions that represent approximately 6% of private sector workers are "key proponents" of the minimum wage? 

There's a popular conspiracy theory making the conservative econ media rounds about unions pushing minimum wage laws to "protect union jobs" (?) at the expense of others. High grade stuff, if you're up to smoking it. Better than your weak story about contracts, at any rate.

Okay, I misunderstood your first point but referencing private sector workers when clearly the public sector is heavily unionized. Minimum wage isn't solely an employer vs. employee issue. I'm referencing contracts that are often tied to minimum wage or include automatic increases based on minimum wage, which are more common among public sector unions than any private sector unions I can think of. Nothing I mentioned was any sort of right wing propaganda about "protecting union jobs", I've seen that stuff and it carries little weight in my mind but it's pretty apparent that minimum wage going above a certain threshold will simply result in even more automation. I'll let others be the judge of whether or not that would be a net benefit.

[Karpatsky]

Well, the canonical Econ 101 answer is that you really can't. Even if you implement the minimum wage, induce a labor surplus, and boost labor demand to match, you'd still be boosting aggregate demand which increases the overall price level, unless you can shift both the short and long run aggregate supply curves outward (which is really difficult to do intentionally). In that case, the answer simply devolves to: boost economic growth. Of course, boosting economic growth by itself without a minimum wage hike might do as much or more good for the effected workers than growth with a minimum wage hike.

The more complicated Econ 301 answer is that firms act intertemporally and based on heuristic decision making. Small minimum wage increases may not be salient to most businesses, but large increases certainly are. Minimum wage increases tend to impact future hiring over current employment. Thus you would need to provide incentives for future hiring rather than current hiring. Perhaps alter the expectations about future business growth opportunities or increase the rate of minimum wage-employing firm creation, but either of these would probably work better alone than in conjunction with the minimum wage hike, so the combination seems a bit pointless overall.

Personally, you don't bother with the minimum wage; you let labor market wages float, and you go straight to NIT/EITC reform.

Agreed in principle, though this solution would also require a massive reevaluation of America's relationship with organized labor. The reason minimum wage is necessary is that contrary to the simplifying assumptions made by economic models, individual workers have essentially no bargaining power, meaning in many industries employers could (and used to) act essentially as price-fixers. A total elimination of the minimum wage would require almost universal unionization to produce an economically efficient result.

[136or142]

It also seems to be the case that many more employers are monopsonies than was previously believed.  So, raising the minimum wage in those cases may actually reduce unemployment.

[Amenhotep Bakari-Sellers]

Raising minimum wage will encourage, the long-termed unemployed to look for work again.

[pops]

the minimum wage should really be $50/hr