Waylaid Dialectic

February 16, 2013

Poverty, minimum wages, efficient markets, and debt

Filed under: Random Musings — terence @ 9:19 am

At the New Zealand blog Pundit Tim Watkin makes an impassioned call for a living minimum wage – a wage floor based on estimates of enough to get by. He argues, quite rightly, that in a country as wealthy as New Zealand no one should do a full day’s work and still be living in poverty.

Is this a good idea? The textbook argument against it is that raising the minimum wage would lead to increased unemployment through making low skilled workers too expensive to employ based on what they might contribute to their employer.

Like so much of what you read in first year economics textbooks, there’s an appealing logic to the argument and you can put it on a chart. It’s also quite possibly wrong.

This post at the WP’s wonkblog lays out a number of reasons why the Econ101 objection may be wrong. (To which I’d add the overarching objection that labour markets almost certainly don’t function under anything near perfect competition (the assumption that the claim that minimum wages must lead to more unemployment hinges on), and also that the minimum wage which anyone can profitably be paid is a moving target which no one, neither worker nor employer perfectly pin to any particular point – something that provides wiggle room enough for a legally mandated floor).

Empirically, it turns out it’s hard to adjudicate between the theoretical arguments about minimum wages and unemployment – research nicely summarised here – but it’s worth noting that our own New Zealand case alone provides plenty of prima facie evidence that having a modest legal minimum wage which gradually increases cannot possibly be a major cause of unemployment. We had a minimum wage through the Labour government years (and I’m guessing it went up) and unemployment as effectively zero (that which we had was mostly short term churn and, for fear of wage-price inflation, the Reserve Bank was actively putting the breaks on our economy via interest rates hikes).

So Watkin’s right then?

As much as I sympathise I’m not a completely signed on supporter of the move to $18 dollars an hour (which is what I think he’s calling for). Why? Because that’s a large enough movement that it really might have significant employment effects (particularly during a time of economic stagnation).

So what about the alternatives then?

One is an earned income tax credit (which we effectively have in NZ in a limited form via Working for Families). As Mark Thorma points out in an economic theory sense this is tidier than raising the minimum wage but practically not so much. (As an aside Ezra Klein notes in the US at present the minimum wage makes much better political sense).

A related partial alternative would install in an income tax free threshold (which IIRC we still don’t have in NZ) so as to at least make sure that those earning too little aren’t then loosing a slice of it to tax. This (assuming I’m right in my recollection of the current state of play) would be an obvious starting point. With the revenue lost being offset by higher taxes on the wealthy.

This is the first thing I’d do. After that then I would raise the minimum wage, but slowly and cautiously, not to $18 in one big hit. I’d also boost Working for Families. (And benefits too, because just as it seems just to me that no working person should live in poverty it seems equally fair that no-one should be in poverty because they are ill.)

And then I’d boost spending on education – particularly for those at the bottom of the heap. Because ultimately the best way to have a country free of income poverty is to have a society were everyone has the skills to earn enough in a market economy to live comfortably. Once again I’d fund this by taxing the wealthy.

I’m in favour of a living wage for all New Zealanders but I don’t think the law’s the only thing we need to get there. Tax and transfer are critical too.

[Important update: Krugman, Konzal, Schmitt, Bernstein– if you’ve read this far definitely read them too.]

A couple of good unrelated links. Noah Smith on Debt and with a good ‘defence‘ of the Efficient Market’s Hypothesis.


1 Comment

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    Pingback by Poverty, minimum wages, efficient markets, and debt | Fifth Estate — February 17, 2013 @ 7:39 am

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