The Best Reason to Raise the Minimum Wage

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TRB MARCH 5, 2013

The Best Reason to Raise the Minimum Wage Why Congress should raise the minimum wage

Senator Tom Harkin and Representative George Miller have introduced a bill to raise the minimum wage from $7.25 per hour to $10.10. That’s $1.20 more than President Obama asked for last month in his State of the Union address; thirty cents more than Harkin and Miller themselves proposed eight months ago; and ten cents more than Representative Jesse Jackson proposed in a separate bill around the same time (i.e., well before Jackson’s personal and legal problems ended his political career). When inflation is factored in, Harkin and Miller’s $10.10 an hour matches almost exactly what Obama proposed when he ran for president in 2008. The increase would be phased in gradually between now and 2015, and starting in 2016 the minimum wage would be indexed to inflation.

Christina Romer, the Berkeley economist who chaired the Council of Economic Advisers for much of Obama’s first term, doesn't think this is a good idea. She hasn't commented on the Harkin-Miller bill per se, but a few days ago she criticized the minimum wage as a policy tool.

In a March 3 New York Times op-ed laying out her objections, Romer began by dismissing some of the more familiar conservative arguments against the minimum wage. It isn’t true, she pointed out, that the beneficiaries would mostly be burger-flipping teenagers; half would be families now earning less than $40,000 a year. It also isn’t true that raising the minimum wage is a job-killer; “the overall adverse employment effects are small.” (In the online version, these words link to a recent literature review from the nonprofit Center For Economic Policy Research that states the case more bluntly: “the minimum wage has little or no [italics mine] discernible effect on the employment prospects of low-wage workers.”) One reason a minimum-wage increase doesn’t kill jobs is that the increase in the price of labor is balanced out by reduced turnover and a general increase in productivity.

So why is Romer wary of raising the minimum wage? Because, she argued, some of that productivity increase may come not from keeping employees longer and treating them better, but rather from displacing lower-income workers with more affluent workers—“perhaps middle income spouses or retirees.” As best I can tell, Romer’s complaint here is entirely speculative; I’m not aware that middle income workers are stampeding to jobs at McDonald’s to supplement existing income from spouses or a pension, thereby denying these jobs to the poor.

Romer acknowledged that the cost of a minimum-wage increase typically gets passed through to customers. That’s well-established in research performed by Romer’s successor at the Council of Economic Advisers, Alan Krueger, in collaboration with Romer’s Berkeley colleague David Card. The pass-through helps eliminate most or all direct job-loss impact, which is obviously good. But it also means that low-income people who eat at McDonald’s or shop at Wal-Mart are going to pay more. And that, Romer argues, increases inequality.

The argument over whether it’s better to pay poor people more or to lower the cost of the things they buy has been going on for some time (click here to see Barbara Ehrenreich duke it out with Jason Furman, who is currently deputy director of the National Economic Council). My own view is that that this experiment in pushing wages ever-lower to sustain ever-lower prices has been going on for a third of a century, and at some point sanity requires that we acknowledge its failure. There is more income inequality today, not less. (Harold Meyerson would agree, and states the case more forcefully than I do here.)

Romer’s best argument is that the minimum wage isn’t as well-targeted to help the poor as an increase in the Earned Income Tax Credit would be. One imperfect aspect to the EITC is that it lowers rather than raises the cost of hiring—and in this instance the benefits go not to consumers but to employers. But that’s also a benefit, Romer argues, because it “tends to increase employment.” But Paul Krugman has argued (citing the same Center For Economic Policy Research paper) that “raising the minimum wage is a way to make the EITC work better [italics mine], ensuring that its benefits go to workers rather than getting shared with employers.”

What’s left out of this wonky argument is politics. Here in Sequesterland, Congress is in no mood even to maintain spending at current levels. That makes it unlikely there will be an increase in the EITC or any other spending program. It’s going to be hard enough just minimizing the cuts! The EITC owes much of its popularity to the fact that the EITC can also be described as a tax cut (even though it’s refundable). But if the GOP is going to give anybody a tax break right now—and I doubt that will happen—it will be rich people, not those who inhabit the lower floors of Mitt Romney’s dreaded 47 percent.

Say it with me: The minimum wage can be boosted without costing the Treasury a dime. The GOP may not go for this argument, but it’s an easier sell than asking Congress to spend money.

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posted in: economy, minimum wage, christina romer, tom harkin, george miller

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