Tuesday, 25 February 2014

CBO’s Minimum-Wage Report

Since the unemployment machine that is the legal minimum wage is being revved up again, for a start on April 1, here’s a guest post by Jeffrey Miron with an update on the latest report by the US Congressional Budget Office (far from a bunch of partisan small-government hacks) on the effects of raising the federal minimum wage…

In a new report, the Congressional Budget Office estimates that raising the federal minimum wage from its current level of $7.25 an hour would raise the incomes of low-wage workers who remain employed while lowering the incomes of low-wage workers who lose their jobs. CBO’s “middle” estimate is that a $10.10 minimum wage would reduce total employment by about 500,000.

These effects are exactly what textbook economics predicts; the question is then how policy should regard this combination of good news for some, bad news for others. On that score, the answer is obvious.

imageA policy that alleges to help low-wage workers, yet forces half a million to lose their jobs, is hard to reconcile with any sensible view of redistribution. People with the lowest incomes are more appropriate targets of redistribution than people with higher incomes, yet the minimum wage forces more people to have zero incomes. A minimum wage is therefore loony from the get-go, even if one believes in a government safety net.

Worse, the minimum wage is poorly targeted toward low-wage workers in poverty, even amongst those who retain their jobs. According to CBO:

The increased earnings for low-wage workers resulting from the [$10.10] … minimum wage would total $31 billion … However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold.

Thus, the minimum wage, in part, transfers income from people in poverty to people in middle- and upper-income households!

And the minimum wage’s negative effects do not stop at its perverse impact on the distribution of income. The minimum wage forces employers to substitute higher-wage workers or capital for low-wage labor, raising costs and therefore prices. The minimum wage perpetuates the notion that evil employers, rather than low skill, explain low wages. And the minimum wage pretends to fix a problem without imposing any costs, except that the costs are merely hidden, not avoided.

The right minimum wage is not $10.10, or $7.25 [or NZ$14.25]. It is zero.

* * * *

Jeffrey Miron is a Senior Fellow at the Cato Institute and the Director of Undergraduate Studies in the Department of Economics at Harvard University. Miron has served on the faculty at the University of Michigan and as a visiting professor at the Sloan School of Management, M.I.T. and the Department of Economics, Harvard University. From 1992-1998, he was chairman of the Department of Economics at Boston University.
He is the author of Drug War Crimes: The Consequences of Prohibition and The Economics of Seasonal Cycles, in addition to numerous opeds and journal articles. He has been the recipient of an Olin Fellowship from the National Bureau of Economic Research, an Earhart Foundation Fellowship, and a Sloan Foundation Faculty Research Fellowship.
This post first appeared at Cato at Liberty.

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