Better than a Minimum Wage Hike

The employment survey’s strong figure for March of 196,000 jobs confirms the much weaker figure for February of a 33,000 job gain was anomalous. The monthly average over the last three months remained a very solid 180,000. The curiosity in this report is found in the household survey, which indicates almost no increase in the total number of employed individuals over the last four months. Can both be true? Yes, if we’re seeing an increase in the number of workers holding multiple jobs, a reasonable outcome given the tight labor markets and pickup in wage gains.

Mike Trout, widely regarded as the best baseball player in America, recently signed a contract for $426.5 million, a record for North American sports, eclipsing after about 20 days Bryce Harper’s relatively paltry $330 million contract (sorry Bryce). The federal minimum wage has remained $7.25 an hour since 2009. While Trout’s contract is more emblematic than relevant to the debate, nevertheless it’s easy to understand the renewed interest in raising the minimum wage.

The best way to raise workers’ incomes is to adopt policies that help the economy prosper, such as improving the regulatory environment for businesses. President Trump’s reversal of many of the Obama administration’s most heavy handed regulations played a major role in pulling the U.S. economy out of the doldrums experienced in previous years. Reforming the tax code to make it more growth friendly is another major accomplishment that will pay major dividends in the years ahead.

A stronger economy means more jobs and higher wages for many, in contrast to a higher minimum wage which means fewer jobs and higher wages for a few. Raising the minimum wage involves government by fiat distorting the marketplace in ways that benefit some, injure others, and will generally reduce economic efficiency and future wage gains. As to these latter effects, the magnitudes are debated, but the direction cannot be in doubt unless one insists on suspending the most basic laws of economics because they are simply too politically inconvenient.

Jobs will be lost and hours reduced, often leaving workers with less income overall, if the minimum wage goes up. These effects will appear first as a matter of immediate response and then, over time, as businesses affected by the higher minimum wage find new and better ways to use technology and capital to substitute for their previous workers

Job destruction is the outcome but obviously not the intended goal of minimum wage advocates. Their interest first and foremost is social policy, specifically, the nation’s demonstrated responsibility to low-income workers and their families. In this regard, it’s essential to consider the options.

Consider the following proposed policy: The federal government would establish a minimum income grant to low-income workers and their families, the costs of said program paid for in full by an income tax surcharge of appropriate magnitude levied on all taxpayers whose last names begin with a vowel.

So if your family name is Adams, you pay the surcharge, but if it’s Wilson, you don’t. Using the membership of the House of Representatives as a guide, roughly 20 out of every 435 citizens would be called upon to pony up for this social policy.

If this seems unfair, then it is likely because of a sense that an agreed upon social policy should be paid by everyone in society to one degree or another. No one group should be singled out to carry the whole burden.

Yet this is precisely the effect of a minimum wage, raised or otherwise. It is a transfer of income to a select few, paid for at least initially by the businesses, most typically the small businesses, who hire them. This leads to the obvious question: What sin have these businesses committed in hiring low-wage workers that they should be punished this way, paying the total cost of a social policy?

The costs of a social policy should be systematically socialized, not heaped upon an unfortunate few. Fortunately, we already have mechanisms in place to achieve the policy goal associated with a minimum wage: Reforming the Earned Income Tax Credit (EITC) and possibly related credits like the Child Tax Credit.

Both policies as currently implemented substantially raise economic security by increasing the purchasing power of low-income families. Further, proposals abound to make them more generous and more effective. As generous as some of the suggested minimum wage hikes? Yes.

For example, in his fiscal year 2015 budget, President Obama proposed major reforms to the EITC. More recently, Isabelle Sawhill and Christopher Pulliam of Brookings provided a fine overview of the issues. The Tax Policy Center has advanced some useful ideas. Jason Fichtner of George Mason University’s Mercatus Center and Indavar Dutta-Gupta of the Georgetown Center on Poverty and Inequality have proposed other EITC reforms advertised as explicitly “bi-partisan.”

Tax reform addressing issues raised by the minimum wage debate would be expensive, no doubt, which raises the issue of spreading the costs widely. The magnitude of the expense underscores the wrong inflicted by asking a relatively small portion of society, indeed a relatively small subset of the business community, to bear the burden of a minimum wage hike. If we as a nation are unwilling to find the broad spending reductions or broadly imposed tax increases needed to pay for these reforms, then we should just shelve them and the minimum wage debate altogether.

About the authors

J.D. Foster

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.