Our Children’s Economics
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The Minimum Wage Debate

Jonathan B. Wight

Krugman's column today endorses Obama's State of the Union proposal to raise the minimum wage from $7.25 to $9.00.

Do the math: That's a whopping increase of nearly 25! Seems strange Krugman would argue this is just a marginal change, with potentially minor labor effects.

Opponents of the wage hike point to the cascade effect this would have on everyone else's wages. Seniority and other factors would likely mean increases in wages above the minimum. While a business might afford to raise the wages of a small share of workers by 25%, it likely would struggle to do so across the board. Wage compression might then cause labor friction that could reduce the productivity spike Krugman relies on.

Proponents of the wage hike have some natural experiments to point to in which minimum wages rose with no increase in unemployment. It may well be the case that demand for unskilled labor is inelastic (unresponsive to price) in the short run. This means stores need to hire workers to clean up, and will pay the higher wage and continue to hire as many workers in the measured time frame. In the long run businesses will try to substitute capital for labor (better cleaning machines). So unemployment may rise, but only after the time it takes to develop and implement substitutes, which could take a decade or more.

The issue of the minimum wage is ethically significant. President Obama clearly believes in a "living wage":

"Tonight, let's declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty…."

The idea of a "living wage" is wrapped in confusion. There is no such thing as a biologically-determined living wage. Do we mean the money needed to buy nutrients that would keep the body from disintegrating and dying? Or, is it the money required to live in a minimally acceptable level socially? Adam Smith thought it clearly related to the latter concept, arguing that a linen shirt was a necessity even to the poor—since going without it would make you appear disreputable.

Likewise, Adam Smith endorses a type of living wage for manual workers:

"Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole." [Here Smith is talking about productivity improvements that have increased the real wages of laborers.]

"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed and lodged" (Wealth of Nations 152).

Being "tolerably well fed, clothed and lodged" might then require the intervention of the minimum wage (although Milton Friedman's negative income tax might be a preferable policy). As is well-known, the minimum wage was higher in real terms about a half-century ago than it is today, despite dramatically increased productivity and wealth growth over that period. If the minimum wage increase of 25% happens, it will be an interesting experiment. I would be thrilled for the working poor who manage to keep their jobs, but saddened by the teenagers and others who will likely go without a job at that wage.


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