Trade-off this!

Posted: 10 October 2015 in Uncategorized
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Alan B. Krueger wants the United States to raise the minimum from $7.25 an hour to $12 (“phased in over several years”) but not to $15 an hour.


Research suggests that a minimum wage set as high as $12 an hour will do more good than harm for low-wage workers, but a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences. . .

Although the plight of low-wage workers is a national tragedy, the push for a nationwide $15 minimum wage strikes me as a risk not worth taking, especially because other tools, such as the earned-income tax credit, can be used in combination with a higher minimum wage to improve the livelihoods of low-wage workers.

Economics is all about understanding trade-offs and risks. The trade-off is likely to become more severe, and the risk greater, if the minimum wage is set beyond the range studied in past research.

While conservative mainstream economists want to abolish (or at least not raise) the minimum wage and to rely on the earned-income tax credit (which, remember, places all the burden on taxpayers and none on employers), liberal mainstream economists (like Krueger) suggest mixing the earned-income tax credit with a slightly higher minimum wage.

What both wings of mainstream economists share is a view of the labor market shown above, characterized by an equilibrium wage rate and the existence of unemployment at a minimum wage above that equilibrium rate. That, for them, is the trade-off: a higher minimum wage that will benefit the workers who keep their jobs versus the workers who will be laid off if the minimum wage is increased.

What Krueger and other mainstream economists don’t explain is a different tradeoff: between doing nothing and adopting measures to increase the demand for labor. As all of my Principles of Microeconomics understand, it’s possible to increase both the minimum wage and the demand for labor. As a result, all workers (including those who are currently earning more than the minimum wage) will be better off.

How is that possible? Well, the demand for labor on the part of employers can increase as a result of increases in the minimum wage itself, as poorly paid workers have more money to spend on goods that are produced by other minimum-wage workers. It can also increase through public jobs programs, if government revenues are used to hire unemployed and underemployed workers. (Together, those two effects would shift the demand for labor out to the right, through the point marked B on the chart.)

When mainstream economists like Krueger don’t present that possibility, of hiring the workers private employers are unwilling to take on at a higher minimum wage, they’re failing to present the real tradeoff we as a society face: on one hand, continuing to allow private employers to pay low wages to workers and to lay off any workers they don’t want to keep on if the minimum wage is actually increased and, on the other hand, making sure all workers are paid a decent wage and are guaranteed a job at that wage.

The only risk of doing the latter is to the standing of mainstream economists themselves—and, of course, to the private employers whose profit-making decisions they take as given.

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