Are the minimum wage and EITC complements? And if so, when?

by on January 7, 2014 at 7:20 am in Economics, Uncategorized | Permalink

In response to Greg Mankiw’s recent NYT piece, I’ve been hearing the argument again that the minimum wage and wage subsidies are complements.  According to this view, if you have only wage subsidies, employers will lower what they offer to the workers and capture too much of the value of the subsidy.  A higher minimum wage is supposed to prevent this from happening and thus ensure that workers capture more of the gains.

Even if you accept every premise of this argument, I am not sure how it is supposed to apply today, at least within a Keynesian framework.  For the Keynesians, the employment problem today is almost purely one of demand, not labor supply.  To spur more hiring, we therefore should wish the employers to capture more of the surplus.  A belief in hysteresis makes it all the more compelling simply to get potential workers into a job as soon as possible.

So a higher minimum wage and wage subsidies might be complements at some time period, but they should not be effective complements today.  Furthermore, if demand problems are going to be with us for a long time (not my view), a higher minimum wage and wage subsidies might not be complements anytime soon.

I recall @ModeledBehavior having made some related points on Twitter.

Slocum January 7, 2014 at 7:28 am

It seems to me that the reason we need some minimum wage to go along with the EITC is that, without it, the employer and employee would collude against the taxpayer. So I ‘hire’ you at 5 cents an hour with 100% ‘telecommuting’, and you thereby qualify for EITC. You slip me a little of that money back under the table (or, say, mow my grass once a week or whatever). Without a minimum wage the EITC devolves into welfare with no time limits or actual work requirements.

JWatts January 7, 2014 at 1:13 pm

I think you have a point, but I don’t that anybody is strongly advocating for a repeal of the minimum wage law. If we instead assume that the conversation is about a choice between raising the minimum wage or increasing the EITC (and raising taxes to pay for it), then the point is moot.

Slocum January 7, 2014 at 3:30 pm

Among libertarians/classical liberals advocacy for the abolition of the minimum wage is quite common. And I’m sympathetic to that — I think the minimum wage should be lower rather than higher. But I think we have to recognize that as long as eligibility for the EITC depends on employment, we do need *some* non-trivial minimum wage to ensure that the qualifying jobs are genuine — that the employee is really working and that the employer is actually operating a going concern.

JWatts January 7, 2014 at 4:07 pm

Yes, I see your point and agree. Furthermore, I originally missed this line in Mankiw’s article: “And a good case can be made for eliminating Plan B entirely by repealing the minimum wage. ”

So, your post is spot on. I do agree that a really low minimum wage would allow the gaming of the EITC system. So ensuring that the EITC is always less than the national minimum wage for the number of hours worked is probably a good bulwark against fraud.

Uninformed Observer January 7, 2014 at 7:41 am

Unreal. So we’re going to give employers welfare, then pass a law that says they have to share it with their employees? (I know we’ve been doing just that for years, but bear with me) Have to make that pretty generous to offset all the fees we’re recovering through Obamacare!

It’s almost like we’re deliberately setting up a system to be gamed, by the right people. /tongue firmly in cheek

DJ102010 January 7, 2014 at 7:54 am

The “EITC suppresses wages” premise is an interesting one coming from those who usually advocate for wage floors. Would many of them be willing to endorse the more general statement: “safety net payments suppress wages?”

I did not see too much engagement with this idea during the recent discussions about guaranteed minimum income / guaranteed basic income, either. If you accept the “EITC suppresses wages” premise, should you also advocate for “guaranteed basic income PLUS higher minimum wage?” Seems like most wouldn’t.

Lucas January 7, 2014 at 8:15 am

The EITC is different than other safety-net programs because it is conditional on working. The after-tax wage is thus made higher because of the EITC.

Nathan Goldblum January 7, 2014 at 10:11 am

Precisely.

DJ102010 January 7, 2014 at 12:50 pm

I agree with your statement, but what about the argument: “Safety net programs in general suppress wages because they make it easier to make ends meet. That is, if you have guaranteed food, child care, etc. you’re willing to accept a lower-paying job than you might otherwise.”

JWatts January 7, 2014 at 1:16 pm

Well you are certainly willing to work less hours at a given wage if you are receiving higher benefits. So yes, safety nets probably do lower the average wage.

Hazel Meade January 7, 2014 at 2:15 pm

I don’t see it.

Safety nets cause people to drop out of the labor force. Which should cause wages to rise. Employers have to offer higher wages to attract workers.

Also, when we’re talking about people living at minimum wage levels, I have a hard time seeing how people would accept LESS because the government is giving them is a benefit. I don’t know anyone who doesn’t try to get the best wages thy can, and I’ve never known anyone living at or hear the poverty line who would go into a waging negotiation thinking “Well, I guess I don’t *really* need the extra $1 per hour ..”

DJ102010 January 7, 2014 at 2:53 pm

Re: Hazel Meade, two replies:
(1) “I have a hard time seeing how…” might mean you’re not sitting on that margin, not “that margin doesn’t exist”
(2) When I suggest one might be willing to work for a lower wage, I also mean to imply that getting a higher wage is not costless – that is, it takes resources to bargain, to get training, etc.

JWatts January 7, 2014 at 3:25 pm

“Hazel: I don’t see it.

Safety nets cause people to drop out of the labor force. Which should cause wages to rise. Employers have to offer higher wages to attract workers.”

I think you are ignoring the effects of incremental (marginal) work hours, particularly overtime wages and shift premiums. A hourly wage employee who drops from 45 hours a week to 40 hours per week, has a drop in his average wage rate, due to not accumulating overtime hours. Furthermore, many smaller businesses pay a wage premium to work odd shifts. Those are the kind of shifts people only work if they feel they have to.

All that being said, there would certainly be pressure on employers to hire replacement labor. So maybe on net you’d see a rise in wages to counteract the decrease in employee desire to work?

Steve January 7, 2014 at 2:37 pm

Safety net programs act like an tax on working since you lose the benefits as you earn more money. So it reduces labor supply and increases wages. This is just the standard labor supply-demand analysis so there are other factors that could be at play.

Phill January 7, 2014 at 5:31 pm

I’m having a hard time thinking of someone who qualifies for safety net help being in a position where they’re exchanging *some* income for leisure, rather than a step-wise reduction (i.e. I no longer have to work this second job is an entirely different kind of problem).

Who are these people scaling back from full-time to down-time – other than to engage in childcare?

Brandon Berg January 7, 2014 at 11:16 am

They make exactly that claim when the topic is whether the government should force employers to pay higher wages. Surprisingly, this claim is nowhere to be seen when the topic turns to whether welfare spending should be cut.

Kaleb January 7, 2014 at 12:31 pm

I’d agree that safety net payments can be used as a culturally or politically acceptable excuse to suppress wages. As for those who advocate wage floors, the position from which I argue for them is this: I basically think we should do our best to provide a healthy standard of living for our citizens, given our technological constraints, while encouraging citizens to do productive work and give back to society.

If you have a weak social safety net (which many argue is what we have now; alternatively it could be a very low minimum income), which is strong enough that employers will use it as a justification to suppress wages but not strong enough to provide workers a healthy standard of living, then maybe a complimentary minimum wage can be used in conjunction with the relatively weak safety net to buttress your minimum standard of living. That’s assuming that the minimum wage doesn’t substantially reduce employment (and as automation becomes cheaper that’s an increasingly fragile assumption).

If you have a strong social safety net (whether through a substantial guaranteed minimum income or some combination of welfare programs), that gives recipients a reasonable healthy standard of living, then I think the argument for the minimum wage becomes less important. Again this is all based on the premise that those advocating for the minimum wage, for basic income, for a stronger social safety net in some form, are doing so from the fundamental position that they want a higher standard of living for the lowest members of society.

So when you say “seems like most wouldn’t” advocate for guaranteed basic income plus higher minimum wage, i would say that depends on the size of the basic income you are talking about. The goal, I believe, is a certain standard of living; there are a lot of ways to get there.

Handle January 7, 2014 at 8:06 am

It’s almost like they care more about hating evil employers than they do about maximizing hiring.

dave smith January 7, 2014 at 9:12 am

Yep.

Leon January 7, 2014 at 8:14 am

Surely the lack of demand for jobs is due to the lack of demand for goods and services, which would be boosted by raising the minimum wage, due to the employees earning more and therefore consuming more.

The Anti-Gnostic January 7, 2014 at 10:37 am

Right. And after the cost structure adjusts up and down the production chain, what are your plans for the next pay period?

Kaleb January 7, 2014 at 12:17 pm

Does minimum wage labor make up a significant portion of the final cost of goods? In other words, if boosting the minimum wage raises bottom level wages by 20%, but only increases the final cost of the goods those customers are purchasing by .2% or even 2% or 10%, isn’t there still a significant net growth in the ability of the minimum wage worker to purchase additional goods and services?

JWatts January 7, 2014 at 1:20 pm

“Isn’t there still a significant net growth in the ability of the minimum wage worker to purchase additional goods and services?”

So aren’t you just arguing for a wealth transfer from most of society in the form of slightly higher costs to the minimum wage worker in the form of a significantly higher pay check? If so, why not just raise the EITC and taxes directly rather than raising the minimum wage?

Kaleb January 7, 2014 at 1:54 pm

That might be better policy. I’m not sure what, if any, advantages the minimum wage has over the EITC.

Matt January 7, 2014 at 9:28 pm

The main advantage the minimum wage has over EITC is related to its implementation. The EITC has a not-insignificant rate of mispayment. Application for the wage subsidy can confuse some people, especially since the rules governing its payment aren’t the same rules for similar tax credits (like the Child Tax Credit). It’s administered mainly by the IRS and tax preparers, which has created some problems. Minimum wage is largely self-enforcing.

Still, the EITC is probably the best-administered welfare program we have. The forms are shorter and a lot of it is privatized out to tax preparers. It has a remarkably high rate of participation (I think Brookings put it at about 80 percent of eligible people).

Of course, the minimum wage is also poorly targeted when compared to the EITC. I tend to favor the EITC, but in my reading, the implementation angle does come up.

The other big one is political: the EITC has to be paid for on-budget and the minimum wage is a hidden tax on employers. One of these things is MUCH easier to accomplish in Congress right now.

Chris Brown January 7, 2014 at 9:06 am

One problem with the US economy is that US companies are under-investing, ie generating above normal profits and sitting on them in cash, paying out dividends or doings share buy-backs. For reasons I don’t understand, competitive pressures are not forcing them to invest.

From a Keynesian perspective giving companies the subsidy is inefficient as this will likely add to these corporate cash piles. Better to pay the subsidy direct to the workforce who are more likely to spend it.

Uninformed Observer January 7, 2014 at 9:16 am

Employers are sitting on cash, and don’t want to invest? While their healthcare laws get “amended” weekly by presidential fiat? I can’t imagine why they wouldn’t want to invest in more workers right now.

Jon Rodney January 7, 2014 at 12:13 pm

It isn’t a big mystery why businesses are hoarding cash. There’s a fair amount of polling data targeted at business owners and executives. The single most important reason employers aren’t spending more is weak sales, i.e. lack of demand. Regulatory concerns don’t come anywhere close.

JWatts January 7, 2014 at 1:23 pm

“Regulatory concerns don’t come anywhere close.”

Worried about sales: 71%
Worried about health care costs: 48%
Worried about new government regulation: 46%

http://www.gallup.com/poll/152654/health-costs-gov-regulations-curb-small-business-hiring.aspx

Jon Rodney January 7, 2014 at 2:16 pm

My instinct tells me you’re trying to dispute my point, but the data you’re citing supports it …

JWatts January 7, 2014 at 3:27 pm

You used an imprecise metric, “Regulatory concerns don’t come anywhere close.”. I added the numbers for context. I’ll leave it up to the reader to determine how they feel about the particular numbers.

Jon Rodney January 8, 2014 at 4:04 pm

Fair enough — thanks for the context!

Peter N January 7, 2014 at 9:07 am

It’s much easier to win a debate if you get to supply the questions as well as the answers.

This is from

INSTITUTIONAL ECONOMICS AND THE MINIMUM WAGE: BROADENING THE THEORETICAL AND POLICY DEBATE
by Bruce E. Kaufman

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1629775

“Part of my argument in this paper is that the “competitive versus monopsony” way of framing the minimum wage debate is too narrow. In particular, it ignores most of the theory and policy rationale advanced by institutional economists for a minimum wage.

All of these criticisms and negative findings are plausible and in some cases likely true, even if the magnitudes are open to considerable uncertainty and debate. They also, however, are only loosely and often indirectly related to evaluation of the real purposes of the minimum wage, as originally stated in the Fair Labor Standards Act and contained in the voluminous Congressional testimony that preceded its enactment in 1938.

The first section in the FLSA, “Congressional Finding and Declaration of Policy,” outlines the goals of the legislation. One immediately notes that this section says nothing explicitly or implicitly about reducing poverty. Reducing poverty was expected to be a benefit of the FLSA, but an indirect benefit achieved by accomplishment of other direct goals. What were these direct goals? A reasonably close synthesis of the language of the section leads to these four:

• eliminate labor standards that are so low they harm the ongoing efficiency, health, and well-being of workers.

• prevent unrestrained competition in labor markets from further lowering laborstandards in affected industries, or spreading low standards to other industries.

• prevent low labor standards from interfering with attainment of full employment and sustainable economic growth.

• eliminate low labor standards because they lead to labor disputes and divisive relations between employers and employees, thus further harming economic activity. ”

The neoclassical microeconomic case should thus be considered inapposite.

Moreover if you want such an analysis, consider the minimum wage as a tax on negative externalities of low wage employment. The difficulty in assigning an exact cost to these externalities is no greater than it is with many other sorts of taxes and regulations. Why should this be a special case?

The law was passed when memories of the labor unrest of the 1870-1940 period were fresher. Maybe rather than they being influenced too much by this history, we are being influenced too little. After all we’ve managed to forget lots of other political and economic lessons.

CPV January 7, 2014 at 9:09 am

Edmund Phelps has done a lot of work on this:

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/11/nobel-winner-edmund-phelps-on-his-plan-to-help-low-wage-workers-without-raising-the-minimum-wage/

The existing EITC is OK but preferentially targets people with families. Also since it pays annually on the income tax cycle, it is not a good solution to the hysteresis problem.

A direct employer subsidy for low wage hiring makes more sense than the existing EITC or the minimum wage.

Mike January 7, 2014 at 3:56 pm

Since income taxes aren’t normally paid in a lump sum in April, the EITC would pay evenly over the year if people understood it and dealt with their withholding accordingly. One suspects that the median EITC collector is not an expert in tax withholding.

Morgan Warstler January 7, 2014 at 9:10 am

Minimum Wage raises prices on the goods and service the poor buy with the $750B in welfare that we give them.

MORE: Ending minimum wage and moving towards wage subsidy with a job requirement will increase consumption by the poor by 30%+ without spending another new dime on them.

http://www.morganwarstler.com/post/44789487956/guaranteed-income-choose-your-boss-the-market-based

JWatts January 7, 2014 at 5:49 pm

Yes, but how do you fund a guaranteed income?

“Expect 30M to register so approx $375B is our cost assuming 30M are auctioned at $1. This is of course lower than the market will bear. At an avg. bid of $3 per hour the govt. is spending $312B per year. At $5 per hour, the govt. is spending $250B per year.”

That’s an awful lot of money to come up with. The current state budget for Texas is roughly $85 billion per year and yet this plan could easily cost hundreds of billions per year.

DanC January 7, 2014 at 9:16 am

Look to Vegas, high minimum wages, high unemployment. Wasn’t Vegas once upon a time used as a model where high minimum wages don’t affect employment?

Would more flexible wages lead to greater employment? What is the size of the underground economy in Vegas? Would the demand for labor increase if wages could drop? Or are wages trivial compared to other issues?

dave smith January 7, 2014 at 9:16 am

Maybe I am missing something, but wouldn’t this story depend on some market power on the part of employers? I mean, wouldn’t we expect workers to be paid their marginal revenue product independent of any subsidy or other endowment?

CPV January 7, 2014 at 9:32 am

The idea of subsidized wages (payments to companies who employ low wage workers) is that it would increase low income employment. The market would still clear at its own level. There is an argument to be made that since demand for low wage workers would increase, the market wage for low wage workers would rise. These programs have to be designed carefully to keep incentives properly aligned.

Might be interesting for a state or city to try a program like this.

dave smith January 7, 2014 at 9:38 am

Thank you.

derek January 7, 2014 at 10:37 am

No, what it does is set the ceiling for wages for low skilled workers. Someone who employs low skill workers at more than minimum wage (there are relatively few receiving minimum wage) would be replaced by those who get a lower subsidized wage.

brickbats and adiabats January 7, 2014 at 10:55 am

Seems that that is dependent on a specific policy itself setting an explicit wage ceiling below which subsidies can be given. Properly designed with smooth incentives, as CPV notes, you can ensure that increasing hours worked and wages of said work monotonically increases income, with a minimum of disruptive discontinuities.

mavery January 7, 2014 at 9:21 am

The reason to support a higher minimum wage rather than the EITC is political. Higher EITC explicitly lowers revenue. This will have to be offset by cuts to something else or else it’s just another government giveaway to the poor on the backs of your children’s future taxes. And what about the marginal tax rate implications? Isn’t the EITC one of the biggest reasons marginal tax rates for the working poor are so wonky? I thought Mankiw hated that.

Whatever. National changes to the minimum wage are dumb. It needs to be increased, but at a local level. $10 per hour is fine in DC or SF or NYC (in those locals, you could almost certainly go higher), but try that in rural wherever and you cost people jobs. As public policy, its gotta be a local thing.

coleu January 7, 2014 at 10:29 am

but there’s a collective action problem if you make states or communities compete over minimum wage. the moment governments all start to believe that having a slightly lower minimum wage than nearby states/counties/cities will lead to more tax revenue, you have a multiplayer prisoner’s dilemma game. a national minimum wage floor of some kind is totally necessary.

mike January 7, 2014 at 1:00 pm

So your premise is that state and local governments are less responsive to their constitutents’ wishes than the Federal government?

JWatts January 7, 2014 at 1:29 pm

“a national minimum wage floor of some kind is totally necessary. ”

Sure, as long as you are willing to use the prevailing wage in Mississippi as your base line.

mavery January 7, 2014 at 1:44 pm

I should note that the EITC gets around this issue of localities nicely, and I’m generally in favor of it. It’s a bit hard to reconcile this view with Mankiw’s repeated complaints about marginal tax rates being too high for the working poor, but there ya go.

Lord January 7, 2014 at 9:44 am

Because profits are so low? It is not shortage of profits that prevent hiring but lack of demand and a higher minimum will increase demand at least over the short term.

The main complementarity of the minimum wage is limiting the size of welfare and government programs, taxes, and deadweight losses to provide it. Are we to believe, believers in smaller government want more welfare?

Bill January 7, 2014 at 9:48 am

what if you looked at the choice of minimum wage v. EITC from a behavioural economics perspective?

With minimum wage, evey payday is a small distribution.

With EITC, low income individuals receive a relatively large lump sum, and many recipients borrow against it before receiving it by paying high interest rates to borrow from H&R Block.

Morgan Warstler January 7, 2014 at 10:04 am

With Guaranteed Income / Choose Your Boss

http://www.morganwarstler.com/post/44789487956/guaranteed-income-choose-your-boss-the-market-based

We can have the weekly hit, but also the weekly search / clearing / feedback loop to reward entrepreneurism and give signals about the value of different low end skills.

There’s a huge difference between what’s worth $1 per hour and $6 per hour.

We live in interesting times January 7, 2014 at 12:13 pm

With federal & state withholding, individuals receive a relatively large lump sum as well. I’ve never heard of borrowing against it, but since there’s a market for everything?

mike January 7, 2014 at 1:01 pm

I believe H&R block will give you an advance on your tax return.

yep

https://www.hrblock.com/tax-offices/tax-refund-payment/

We live in interesting times January 7, 2014 at 1:19 pm

I am in the wrong business.

JWatts January 7, 2014 at 1:31 pm

Isn’t the “fix” just to have the poor adjust their withholding amount per pay check? That’s a pretty trivial solution.

Bill January 7, 2014 at 2:31 pm

JW, since it is a payment to the recipient, withholding is inapplicable because the person pays no taxes.

JWatts January 7, 2014 at 3:34 pm

“The AEITC allowed people to get a portion of the Earned Income Tax Credit in their paychecks, instead of receiving all of it when filing their year-end tax return. The Education Jobs and Medicaid Assistance Act of 2010, signed into law in August 2010, repealed the Advance EITC. After December 31, 2010, workers could no longer get the benefits of this credit in their paychecks.”

So low income workers used to be able to get money back in their paycheck, but it was repealed.

Bill January 7, 2014 at 5:30 pm

Here is apparently the reason:

“The decision to remove the AEITC program is based on recent findings that it is underutilized by eligible employees and abused by employers and employees alike. Government research suggests that only 3% of qualified employees participate in the program and that 20% of claimants have invalid Social Security Numbers. Thought of as a wasteful program, eliminating the AEITC will save the taxpayer $1.1 billion over the next ten years without affecting the eligibility of low-income employees and their ability to still claim the credit.” http://compliancecentral.accero.com/2010/08/16/advance-earned-income-tax-credit-to-be-repealed-effective-2011/

JWatts January 7, 2014 at 5:50 pm

So basically, it was tried and it didn’t work.

Bill January 7, 2014 at 6:10 pm

So, sounds like minimum wage works better to deliver low doses of income.

JWatts January 7, 2014 at 7:16 pm

“So, sounds like minimum wage works better to deliver low doses of income.”

Except that a national minimum wage fails any kind of localization, imposes significant costs on a minority of employers and if it rises above the local effective minimum wage, leads to lower employment.

Crazy Jane January 8, 2014 at 12:09 am

Bill’s point resounds for me. It has been estimated that 20 to 25 percent of the payout of EITC credits are for fraudulent claims. It is hard to justify abuse on this scale, but massive IRS audits of poor people to assure compliance would be expensive and feel like harassment to legitimate claimants.

No one brings it up now, but one way to increase wages for lower-paid workers might be to raise the floor of full-time employment from 30 hours a week — the Affordable Care Act definition — to 40 hours a week. Employers then could give their employees 39 hours of wages instead of limiting them to 29 hours. The workers likely would continue to qualify for subsidies, but they wouldn’t have to take two jobs, with the hassle of coordinating schedules and burdensome transportation, to get in a basic workweek.

JWatts January 8, 2014 at 10:24 am

“No one brings it up now, but one way to increase wages for lower-paid workers might be to raise the floor of full-time employment from 30 hours a week — the Affordable Care Act definition — to 40 hours a week.”

That’s a great idea. But the Democrats in Congress would never go for it.

Jacob A. Geller January 7, 2014 at 1:31 pm

The difference exists today, but doesn’t need to exist in principle. The EITC could be paid out on payday no problem. It’d be like federal withholding in reverse…

Bill January 7, 2014 at 2:33 pm

Transaction cost of government issuing small checks don’t make this an option.

JWatts January 8, 2014 at 10:26 am

The government wouldn’t have to issue small checks. The employer could just reduce the employees income tax and FICA withholdings. Then the Federal government could issue transfer checks to SS to make up the difference once a month. Those would be large checks.

Hazel Meade January 7, 2014 at 2:38 pm

With EITC, low income individuals receive a relatively large lump sum, and many recipients borrow against it before receiving it by paying high interest rates to borrow from H&R Block.

I don’t doubt this is correct, but I have a hard time understanding what society is supposed to do if the poor insist on being relentlessly stupid.

Bill January 7, 2014 at 3:00 pm

It’s not just the poor who are stupid, if you follow behavioral Econ.

How many BMWs are sold at bonus time?

Mike January 7, 2014 at 6:40 pm

That’s not quite the same thing as taking out a loan against your bonus. A more relevant comp would be people who lease BMWs at high implied interest rates.

kebko January 7, 2014 at 10:13 am

Is there an industry with lower barriers to entry than low wage employers? Where does this limitless power for low wage employers to capture surplus profits come from? Is there any evidence for outrageously high returns on capital for low wage employers?
Here, I compare one estimate of minimum wage gains that assumes no job loss to the historical evidence:
http://idiosyncraticwhisk.blogspot.com/2013/12/more-on-minimum-wage-labor-force.html?m=0

Bill January 7, 2014 at 10:52 am

McDonalds, and national food franchises.

You can have low scale at the local level but high barriers with national advertising.

kebko January 7, 2014 at 11:01 am

So McDonalds prevents you from hiring landscapers or babysitters or day care assistants?

Bill January 7, 2014 at 11:42 am

kebko, landscapers, babysitters, McDonalds workers or day care assistants are all employed in very local markets…you don’t go interstate to get you lawn cut. So, given that these are local service industries, if their cost of labor goes up, there is no loss of business to another state, is there?

You notice — I answered your question of whether there are high barrier industries that employ low wage employees==by pointing to national food franchises like McDonalds….You didn’t reply to that, but I was happy to show that there are low barrier industries that employ low wage workers that are unlikely to lose business to other states.

Thanks for the opportunity to point this out.,

Mike January 7, 2014 at 6:42 pm

But there is business lost to those who figure out how to make do with less labor and more capital or to people who elect to cut their own lawn instead.

Bill January 7, 2014 at 7:16 pm

Is there business lost if every one of your competitors also has to pay a minimum wage?

Will there be one less Chicken McNugget, or a few less french fries?

Hazel Meade January 7, 2014 at 2:44 pm

Actually iti s getting difficult to hire a babysitter at a reasonable prices because “child care workers” have organized to require licensing or permits in many areas. It’s easy to scare parents about untrained babysitters harming your kids.

Bill January 7, 2014 at 6:11 pm

What other good news do you have to report.

Try an illegal.

JWatts January 7, 2014 at 1:34 pm

“McDonalds, and national food franchises.

You can have low scale at the local level but high barriers with national advertising.”

That’s an artificial distinction with no merit. There are plenty of local/regional competitors to national food franchises, that have a very low barrier to entry. For that matter the cost of a Subway franchise isn’t particularly high.

Bill January 7, 2014 at 2:35 pm

The point is that local firms will not lose business to national firms. They will all pass on the costs. No one goes to another state for a cheaper hamburger

JWatts January 7, 2014 at 3:36 pm

“They will all pass on the costs. ”

Well yes. Nobody operates at a loss.

chuck martel January 7, 2014 at 10:36 am

Apparently it hasn’t penetrated the consciousness of you ivory tower types that it’s an infringement on personal liberty for the state to get in the middle of a voluntary transaction between two parties.

derek January 7, 2014 at 10:42 am

Oh no, they know what they are doing. Similar to Obamacare forcing folks onto medicaid will produce a large enough constituency for higher standards of service and care under that regime, setting not a floor for wages but a ceiling will create a very large constituency of folks whose wage is set by political considerations. People who now get higher wages will lose them as the low skill wage drops to the ceiling.

All the fuss and bother about minimum wage laws sidesteps the fact that relatively few people receive minimum wage. That is the problem that needs to be solved.

mike January 7, 2014 at 11:28 am

How can it ever be only a demand issue (or only a supply issue for that matter)? Especially when it would be much easier to reduce supply (deport all non-citizens) than to satisfy demand (gov’t hires all unemployed).

mike January 7, 2014 at 11:29 am

err, I meant increase demand enough to satisfy the goal

We live in interesting times January 7, 2014 at 12:08 pm

This is a backdoor raise for all unions which have a provision in their contract that if the minimum wage increases, their members get an increase.

How many small businesses this inhibit or kill? My friend works for a farm which hires a lot of teenagers for a short period of time. I don’t eat McDonald’s. I do like my local fast food restaurants. EITC may be many things, but doesn’t the EITC have a cap on how much savings you can have before you’re penalized?

Jay January 8, 2014 at 2:26 pm

No that is Food Stamps you are thinking of in some states, EITC has no such requirement.

Urstoff January 7, 2014 at 12:14 pm

People sure do jump through a lot of intellectual hoops to support the minimum wage for which the evidence of it being beneficial is mixed at best. The BHL (and others) stance of basic income + unregulated labor markets seems fairly unassailable from the liberal point of view.

We live in interesting times January 7, 2014 at 12:25 pm

TRENTON, N.J. (AP) – New Jersey voters have approved a raising the state’s minimum wage Jan. 1 and then every year.
The Democrat-led state Legislature put the constitutional amendment on the ballot after failing to strike a deal with Republican Gov. Chris Christie on the changes.

The wage is to go up by $1, to $8.25 hourly on Jan. 1. It also calls for automatic increases every Sept. 1 based on cost-of-living changes.

Business owners say they’ll be forced to lay off workers, cut employee hours or raise prices to compensate for having to pay a higher minimum wage. They also say they’ll be hamstrung by the constitutional amendment if there is another economic recession.

The state’s AFL-CIO union and Working Families United for New Jersey had backed the measure.

TD January 7, 2014 at 1:01 pm

It would be good if you would link your viewers to examples of the opposing argument instead of just to Mankiw. Media bubbles are bad and this is an obvious place to help fight against bubbling.

JWatts January 7, 2014 at 1:36 pm
TD January 7, 2014 at 1:41 pm

I was thinking more along the lines of Jared Bernstein, eg:

http://jaredbernsteinblog.com/greg-mankiw-offers-a-false-choice-re-minimum-wage-or-eitc/

JWatts January 7, 2014 at 3:51 pm

Ok, fair enough. But the author of that article isn’t impressing me with his intellect.

” He views the minimum wage as a tax on companies that hire low-wage workers, and as such, believes it’s unfair to concentrate that “tax” on the businesses that hire such workers.

What’s odd here is that he then goes on to argue that the decline in the real value of the minimum wage which advocates hope to correct is “beside the point.” But if the minimum wage is a tax on low-wage employers, then a decline in its real value is a tax cut. Replacing its lost historical value and indexing to inflation, as are other taxes (including the EITC), thus makes sense, even within his own model.”

Is he really silly enough to believe that “it’s unfair to concentrate the “tax” on businesses” suddenly becomes moot because the relative cost on the tax is dropping? Or does he just assume his audience isn’t smart enough to catch on to the strawman aspect of the argument.

And this:
“He may mean that because of the existing minimum wage, they’re paying above what the market would dictate. But that’s actually a key point of the minimum wage: the bargaining power of low-wage workers is so weak that Congress steps in to offset a “market wage” that risks being unfairly low.”

Again the author has a logic problem. Just because low wage workers might need higher income, doesn’t mean that minimum wage is the correct solution. And honestly, his language seems designed to evoke irrational emotion.

“It’s not that there are “no side effects”—Mankiw’s straw-man assessment of those who defend an increased minimum. ”

The author needs to look in the mirror. First, he’s already used a straw-man assessment in his own post, and secondly, there are people arguing that there are no side effects. In point of fact the President is the most outspoken proponent on raising minimum wage and no where in Obama’s speech did he mention any ill side effects to raising the minimum wage.

Ashok Rao January 7, 2014 at 1:56 pm

I think this is why a procyclical minimum wage (paired with a subsidy) would be a big improvement over either.

JWatts January 7, 2014 at 3:58 pm

I tend to agree, but I also think the current call for a large minimum wage increase, is the wrong answer.

“The federal minimum wage currently stands at $7.25 an hour, or about $15,000 a year. Obama renewed his call for it to be increased, and has already indicated he will back a Senate measure to increase the minimum statutory pay to $10.10. ”

While, a minimum wage rate of $10.10 is unlikely to effect employment in NYC, a 40% increase in minimum wage will probably diminish working hours in southern Mississippi. It seems like the correct approach is to let states adjust minimum wages on their own. This call for a hike to the national minimum wage seems like a one sized fits all policy where a more intellectual and nuanced policy is called for.

Oh wait this is an election year. Never mind.

Jimbino January 7, 2014 at 1:59 pm

There are big differences between a minimum wage and EITC.

EITC is a wealth-transfer program that our socialists use to favor certain groups among us. You get more EITC if you’re married and even more if you’ve bred and have mouths to feed at home. The sensible single and childfree male doesn’t qualify for much aid.

Minimum wage, on the other hand, will favor the single, childfree male. Who the hell would hire a breeder or potential breeder who might take advantage of FMLA to your detriment. Furthermore the minimum wage, like labor laws, is used to deselect Black Amerikans and undocumented aliens from the pool of applicants. This is what unions have perfected: unions flourished in New York once everyone figured out that they were a great vehicle for eliminating competition from Jews, Blacks, new immigrants and so on.

Prevailing Wage Acts, for example, insure that an employer working on a gummint contract need not hire any minorities or aliens. Anyone but the White Male will be virtually excluded.

Racism is so alive and well in Amerika.

Steve January 7, 2014 at 2:45 pm

You don’t get an EITC if you are single and work full time at minimum wage. If you have kids then you get $3000+other benefits.

David Brown January 7, 2014 at 3:40 pm

Higher minimum wage will directly do some combination of reduce jobs, lower profits and increase prices. If the main effect is to lower profits, than EITC and minimum wage are complementary.

If increasing minimum wages has chiefly an effect on profits, than low minimum wages are a transfer from the infrastructure of low-wage municipalities and states to consumers of those products. Local schools and hospitals suffer when enterprises with very low wages move in. The example that comes to mind is the agricultural cities of California. But certainly there are many low wage jobs in which the consumers who benefit and the locals who’s infrastructure is taxed are not the same groups.

Robert Boxer January 7, 2014 at 5:55 pm

I recently wrote an article about how an increase in the minimum wage rate increases unemployment. You can read it here: http://wp.me/p3N9zD-4e

Floccina January 9, 2014 at 10:40 am

If the EITC suppresses wages then wouldn’t that be to the benefit of the employee? Nobody works for less for no reason at all. If you end the min wage and start an EITC and employees therefore decide to work for less, it is because working for less is a better option than taking more leisure, working for in home consumption, working under the table for cash, looking for a higher paying job or taking a job that requires harder work but pays more.

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