Minimum Wage Rises Don't Help The Poor; So Why Raise The Minimum Wage?

Minimum Wage Rises Don't Help The Poor; So Why Raise The Minimum Wage?

Oh dearie me, this research paper is cruel, very cruel indeed. It’s on one of the great questions of our time, what happens when you raise the minimum wage? Who benefits and who loses? Now yes, there have been any number of such papers and almost all of them end up proving what the writer of the paper would originally have asserted. People who think that the unemployment effect of higher labour costs will lead to jobs losses will write papers that tell us that unemployment effects lead to job losses. Those who believe the opposite, that the marginal propensity to consume of the poor will lead to more jobs as a result of directing more money to those poor will make assumptions in their papers that lead to that result. And so on through all of the various assumptions that we can make about what is going to happen when the minimum wage is raised. Most papers reflect the priors of the authors. For the obvious reason that the priors will influence the estimates of the elasticities of the various things (employment, propensity to spend, demand etc) and it’s those very elasticities that lead to the varied conclusions.
However, this paper (via Mike Munger) is cruel, very cruel indeed. It’s pretty obvious where the author’s sympathies lie. He thinks that a rise in the minimum wage just ain’t a great way of helping the poor.

The efficacy of minimum wage policies as an antipoverty initiative depends on which families benefit from the increased earnings attributable to minimum wages and which families pay for these higher earnings. Proponents of these policies contend that employment impacts experienced by low-wage workers are negligible and, therefore, these workers do not pay. Instead proponents typically suggest that consumers pay for the higher labor costs through imperceptible increases in the prices of goods and services produced by low-wage labor. Adopting this “best-case” scenario from minimum-wage advocates, this study projects the consequences of the increase in the national minimum wage instituted in 1996 on the redistribution of resources among rich and poor families. Under this scenario, the minimum wage increase acts like a sales tax in its effect on consumer prices, a tax that is even more regressive than a typical state sales tax. With the proceeds of this national sales tax collected to fund benefits, the 1996 increase in the minimum wage distributed these bulk of these benefits to one in four families nearly evenly across the income distribution. Far more poor families suffered reductions in resources than those who gained. As many rich families gained as poor families. These income transfer properties of the minimum wage document its considerable inefficiency as an antipoverty policy.

The cruelty comes from the fact that he’s not running the model on his priors nor his estimates of those elasticities and so on. Rather, he’s running the model on those of those who support the minimum wage as an anti-poverty measure. That is, it’s not his prejudices being examined here, he’s teasing out the implications of the prejudices of others. And even when you use the arguments commonly used in favour of the minimum wage we still find that it’s not a good anti-poverty measure. Which is really cruel, taking someone’s argument seriously and then still showing that they’re wrong.
In the end the point is that the extra wages that are paid to people as a result of a higher minimum wage have to come from somewhere. Those who favour the minimum wage tell us that there aren’t any jobs losses as a result of this. OK, so that extra money can’t come from the wages of other workers. A second place the extra cash can come from is from the profits of the business. But we’ve an average level of profits across the economy and if low wage sectors start to have a lower profit margin than that in the general economy then capital will move away from the sector. At which point the sector will shrink causing jobs losses. So that can’t happen as we’ve already said that there aren’t going to be any job losses as a result of the new minimum wage. The only other place the money can come from is consumers: if they get charged higher prices as a result of the new minimum wage.
And we do see many such analyses shouting that $15 an hour or whatever would only raise the price of a Walmart can of creamed corn by 2 cents or something (I’m pretty sure that was the example that Slate used, a can of creamed corn at Walmart).
So, we’ll get price rises and we’ll also get wage rises. But we also need to see the distribution of those two. For example, Whole Foods doesn’t pay minimum, it pays well above it. So the wage rise won’t have any effect there. But it’s largely richer people who shop at Whole Foods. And they’ll not be affected. Walmart pays close to minimum wage (and $15 an hour would definitely impact them) and it’s also largely poorer people who shop at Walmart. So, it’ll be both the workers and also the shoppers at Walmart who gain or lose from the minimum wage rise. This is in fact generally true. It tends to be those on or near minimum wage who are the consumers of the production of other minimum wage workers.
If that’s all there was to it then it would be much of a muchness. The actual living standards of minimum wage workers wouldn’t have changed because they are both bearing all the costs and getting all the benefits. But various Progressives could slap themselves on the back for a job well done and that’s of course terribly valuable in this modern economy of ours.
However, that’s not all there is to it. For the majority of minimum wage workers aren’t in fact the poor. There’s a goodly number of teenagers living at home, second wage earners in families that aren’t poor and so on and on (to say nothing of tipped employees, I’ve been one and believe me I wasn’t poor despite being paid only 70% of minimum wage at the time). Which means that some large portion of the benefits of the new, higher, minimum wage go to people who are not poor. But we’ve still left almost all of those costs of that new, higher, minimum wage upon the poor. Given that the benefits and the costs are going to be the same (we’ve not invented any new money, we’re just shifting extant cash around) that will mean that the poor are left worse off after a minimum wage rise.
Do recall that this isn’t using all the conservative, neoliberal and just plain awful right wing style assumptions to prove this point. This is using all of the standard liberal and Progressive assumptions about the minimum wage to make it. There won’t be any job losses, meaning that the extra wages cannot come from less labour being employed nor profits falling, it must come from increased consumer prices. Those increased consumer prices falling almost entirely upon the poor while the benefits of the new higher minimum wage do not go exclusively to the poor.

That’s what’s really cruel about this paper, really, very cruel indeed. Yes, I hear your arguments, let’s take this seriously and see where it leads. Ah, sorry, it still doesn’t work.
We’re back to the old point that I’ve made so many times here before. If you want the poor to have more money then the obvious thing is to give the poor more money. Which does, yes it really does, mean that we’ve all got to put our hands in our pockets and stump up the cash to be given to the poor. There just isn’t a magic wand we can wave to increase the living standards of the poor otherwise.