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2007 No. 2
Table of Contents
THE ECONOMY:
Paycheck Politics
ByGary S. Beckerand Richard A. Posner
Increasing the federal minimum wage sounds humane, but doing so would only make the poor poorer. By 
Gary S.Becker 
and 
Richard A. Posner 
.
The strong bipartisan support for increasing the federal minimum wage to $7.25 an hour from the current $5.15—a 41 percentincrease—is a sad example of how interest-group politics and the public’s ignorance of economics can combine to give us laws thatmanage to be both inefficient and inegalitarian.An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor.Producers adjust both by substituting capital inputs and high-skilled labor for minimum-wage workers and, because the substitutes aremore costly (otherwise, the substitutions would have already been made), by raising prices. The higher prices reduce the producers’output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivatednot by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor. That increase has thesame misallocative effect as monopoly pricing.Although some workers benefit—those who were paid the old minimum wage but are worth the new, higher one to the employers —others are pushed into unemployment, the underground economy, or crime. The losers are therefore likely to lose more than thegainers gain; they are also likely to be poorer than the gainers. And poor families are disproportionately hurt by the rise in the price offast foods and other goods produced with low-skilled labor because they spend a relatively large fraction of their incomes on suchgoods. And many, maybe most, of the gainers from a higher minimum wage are not poor. Most minimum-wage workers are part-timeand supplement their minimum-wage income with other sources. Examples are retirees living on Social Security or private pensionswho want to get out of the house part of the day and earn pin money, stay-at-home spouses who want to supplement their spouses’earnings, and teenagers working after school. An increase in the minimum wage will thus provide a windfall to many workers who arenot poor.Teenagers and retirees who have trouble finding a job probably won’t realize that it’s because there are fewer jobs around forminimum-wage workers.Some economists deny that a minimum wage reduces employment, though most disagree. And because most increases in theminimum wage have been slight, their effects are difficult to disentangle from other factors that affect employment. But a 40 percentincrease would be too large to have no employment effect; about a tenth of the workforce makes less than $7.25 an hour. Evendefenders of minimum-wage laws must believe that, beyond some point, a higher minimum would cause unemployment. Otherwise,why don’t they propose $10 or $15 or an even higher figure?A number of countries, including France, have conducted such experiments; the ratio of the minimum wage to the average wage ismuch higher in these countries than in the United States. Economists Guy Laroque and Bernard Salanie find that the high minimumwage in France explains a significant part of the low employment rate of married women. Salanie has argued that the minimum wagealso contributes to the dismal employment prospects of young people in France, including Muslim youths, an estimated 40 percent ofwhom are unemployed.As a means of raising people from poverty or near poverty, the minimum wage isinferior to the earned income tax credit (EITC), which compensates for lowwages without interfering with the labor market or conferring windfalls on thenonpoor. The EITC is not completely devoid of effects on efficient resourceallocation because, like any other government spending, it is defrayed out oftaxes and has been abused by those underreporting income and overreportingdependents. But it is a more efficient tax than the minimum wage, as well asbeing more effective in redistributing income to the poor.So why push to increase the minimum wage rather than the EITC? For one thing,unions strongly favor the minimum wage because it reduces competition fromlow-wage workers (who, partly because most of them work part time, tend not tobe unionized) and thus enhances unions’ bargaining power and so their appeal toworkers. For another, increasing the EITC would mean increasing governmentspending, which might require higher taxes; there is no public support for explicittax increases, and most people don’t understand that regulatory laws can havethe same effect as taxes.
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Hoover Institution - Hoover Digest - Paycheck Politicshttp://www.hoover.org.proxy.lib.uwaterloo.ca/publications/digest/74655...1 of 203/03/2009 12:42 PM
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