The Minimum Wage Debate and Tax Incentives

Originally when I started over at Chicago Boyz I used to write regularly about tax policy. I haven’t written as much lately on that topic because the news has been completely dispiriting… at every turn it seems that the Federal, State and Local governments have taken positions to make the system more complex, confusing, and dysfunctional.

The goal of a tax policy should be to:
1. Achieve the revenue goals that they set out to meet
2. Do so in a way that has causes the least amount of distortions to the economy

Recently the idea of “fixing” our tax policies and incentives, for me at least, is aligned with recent discussions on the idea of raising the minimum wage. The minimum wage is $7.25 / hour, although this varies with state and local laws as summarized here. A suburb in Seattle, near the Seattle-Tacoma airport (Sea-Tac), recently passed an ordinance to raise the minimum wage to $15 / hour. This ordinance is a bit more clever than most, since the airport is unlikely to close or take significant actions due to the immense capital costs and constraints associated with doing so, and has a strong public element (politicians can just try to pass the costs on to air travelers).

These same discussions come up in Chicago, as fast food workers also have had some (small) demonstrations to try to raise the minimum wage to $15 / hour. While their campaign has sputtered out, it will likely re-surface and be championed by our governor.

The obvious difficulty with raising the minimum wage is that employers are not sitting ducks. There are many low wage workers in River North, for instance, working in bars, restaurants, cleaning services, and in various security related occupations (virtually every building has a set of doormen). If you doubled the minimum wage, for instance, all of these businesses and institutions would immediately embark on a host of labor saving initiatives and automation efforts. I am not an expert in these sorts of automation experts but can imagine people being replaced by computers, call centers handling service, and moving to self-service for customers in other instances. It is highly unlikely that they would just attempt to pass on the price increases and keep the same level of staffing; that would be economic suicide, especially with their competitors scrambling to reduce their labor expenses. Efforts that could not be automated would rise in price, which would likewise discourage consumption, until an equilibrium was reached.

Wages cannot rise unless productivity rises as well; there are many jobs that are worth $15 / hour, and there are other jobs that cannot justify that rate. If skills can be increased or employee activities and incentives can drive in additional business, then a wage can be justified.

The fact that some economists say that raising the minimum wage doesn’t impact employment is astonishing; of course a significant rise in the minimum wage would compel business owners (and non-profits who face a “hard constraint” of funds) to immediately change their processes and methods to be as profitable as possible. You cannot just “pass along” these sorts of price rises onto customers; you can only charge a premium price for a premium product (think Apple, Mercedes, and even Starbucks) and this premium will constantly attract a horde of competitors.

However, there are wider benefits to society if people are working and contributing rather than just passively sitting at home, out of work (and presumably taking part in various government programs as a result). A minimum wage job is a step up the economic ladder – the new CEO of Wal-Mart started out as a warehouse employee, for instance. We need to build INCENTIVES for people to work, and ENCOURAGE businesses to employ more workers, rather than piling on burdens, paperwork, and economic dis-incentives.

From a tax perspective, Ronald Reagan hit this on the head with the “Earned Income Tax Credit“, which provides a tax incentive (payment) to workers whose earnings were below a certain level. This program, like many other programs, has been hit with fraud and certain preparers that were churning out bogus claims.

We also need to begin to consider the long-term explosive impact of youth unemployment. The countries of Western Europe are starting to see sky-high rates (up to 50%) and any student of revolutions and unrest knows that a vast pool of idle young men is a powder keg for any society. While our rates of youth unemployment are far lower than the European countries, they still are distressingly high and rising, especially in poorer neighborhoods. We should look for ways to make it easier, not harder, for businesses to employ young and entry-level workers.

Many commenters, especially on blogs like Chicago Boyz, will vociferously deny that the government should interfere at all with commerce and social goals (like general employment) should not be linked to tax policy. Yet unless the tax code is completely overhauled (a distant and receding goal, from my perspective), the EITC is one of the less onerous tools to attempt to get some useful outputs from our tax system.

Cross posted at LITGM

9 thoughts on “The Minimum Wage Debate and Tax Incentives”

  1. They need to tighten up the relationship rules for the Earned Income Tax Credit. An unmarried taxpayer with no dependents making $20,000 gets no money from the EIC. However if that same individual claims two dependents under 18, and states that they’re his “niece” or “nephew”, he’d get about $5,000 from the EIC. This has lead to some serious horse trading among certain segments of America’s population or outright theft of SSN numbers and birthdates.

    There are many tests (relationship, support, residence, income) that set the rules for EIC eligibility. It seems to me the relationship one, if tightened up a bit, would be the easiest to enforce and clamp down on fraud. Only genetic, legally wed step, or officially sanctioned foster-parents should be eligible for EIC.

  2. The farm workers found out about minimum wage and automation. There is a burger cooker that will do 600 hamburgers an hour. Combined with an order kiosk, this might appear when the striker win. Obama hired the academic who wrote a phony study of minimum wage in the fast food industry as his economic adviser. He has since pulled back his assertion.

    I heard from Michael Saltsman, a research fellow at the Employment Policies Institute (EPI), a free market-leaning think tank in Washington, D.C. Saltsman, who earlier served a stint as an economist at the Bureau of Labor Statistics, wrote to me about Krueger’s work on the minimum wage. Saltsman tells me that what’s getting lost in the coverage is the fact that scholars challenged Krueger and colleague David Card’s provocative findings on the minimum wage, and that Krueger and Card subsequently backed off their assertion that raising the minimum wage can boost employment.

    As I mentioned previously, Krueger is most well-known for a study he did with U.C. Berkeley economist David Card, that upset the conventional wisdom that raising the minimum wage depresses job creation. The two studied employment at 410 fast-food restaurants in Pennsylvania and New Jersey, arguing in a 1994 paper that raising the minimum wage in New Jersey boosted employment.

    Liars hire liars.

  3. A couple of random thoughts.

    People in government or people who have never run a business or thought about business costs see this differently. They think, There’s people at the top making a lot of money, they could give more of that to the lowest paid workers.

    People in government especially think of money as something you just take more of if you want more. It’s how their world works. I think of people like Paul Krugman as scam artists seeking power and fame. He tells these people, We just print more money, then there is more money, then you can have more.

    There’s an old joke. What’s the difference between scientists and economists? Scientists make observations about the world, then develop a theory about how things really work. Economists develop a theory about how the world should work, then attempt to adjust the world to get it to match their theory. I think more accurately that joke is about is about different brain types and different educations. Each side, generally, is convinced they’re doing and seeing things correctly. There are also scammers (like Krugman on the Left or investment scammers on the Right) playing their side for fools and doing lots of damage in the process.

  4. Wouldn’t it be interesting if the new minimum wage made people (with jobs) worse off? Under Obamanomics, it’s not unrealistic. Now they may lose food stamps, Obamacare subsidies and so forth. Marginal tax rates have become very steep for a lot of the working poor so that this would not be unusual.

  5. There will be real and powerful negative effects on these people from a higher minimum wage.

    The government intrudes on the employee – employer relationship and they attempt to tilt it in favor of the employee. But one thing they cannot do is mandate that an employer hire MORE staff, and any sensible employer things long and hard about adding employees, especially when each individual one in effect represents another potential lawsuit or disability claim.

    I believe that it is critical that our citizens have access to jobs and opportunities or our society will face a bad outcome. Thus playing with the minimum wage is like fire that can have a very negative effect on our country.

    The economists that convince themselves that there won’t be repercussions to raising the minimum wage are either blind or willfully doctoring the specific circumstances to support their arguments. It is kind of like a drug study where you keep putting your results forward and removing the negative results until you get the outcome you want. Unfortunately that doesn’t work very well in real life, either.

  6. My simple comment on minimum wage: In a growing economy a reasonable minimum wage will have little effect, in a declining or flat-line economy, as we currently have, the minimum wage destroys wealth, reduces opportunity by destroying or minimizing the important entry level job that provides the skills and habits necessary to economically move ahead. In my opinion, another point on the excessive minimum wage is it reduces union membership. Unions grow when labor is in short supply and employers will do “anything” to get the needed people, unions have clout in this situation as the market clearing price is high. When excess labor is available the market clearing price drops and people are more interested in earning enough income to provide food and shelter, less in the benefits union membership supposedly provide. Other government hand-outs of course distort the labor market and when too good, or are easily defrauded, provide a significant incentive to not work; a situation that I call “the tragedy of the margin.” Simple minded definition: Say government has a $1,000 payment for those earning less than $1,000, you earn $999, you get the $1,000 payment, you earn $1,001, no payment. I know government programs are not that simple but it does easily illustrate my “tragedy of the margin” concept. One more point, state-wide or nation-wide minimum wage laws are stupid, for example if there were no set minimum wage in the Rio Grande Valley of Texas people would still line up for jobs owing to the few work opportunities and competition from across the border, in Fargo, ND fast food jobs go for about $14-$15/hr.

  7. I believe (hesitant as I am to post anything on the Depression these days) that a major cause of the Depression, or at least the unemployment, was the effort by Hoover and Roosevelt to keep wages high in spite of declining business revenues. The result was more unemployment that might have occurred if wages had been allowed to fall in parallel to business income. This has implications for the minimum wage debate.

  8. MikeK Says:
    November 30th, 2013 at 7:15 pm

    Two burger restaurants; computerized, automated, with order kiosks, are set to open in Capitol City early next year. In theory it is capable of custom ordering a wide variety of burgers and sides. No cash; debit or credit cards only. We will see if it works, but I think that if it doesn’t version 2.0 will.

    There are already similar kiosks with mecha-baristas capable of doing pretty much any fancy coffee-like-substance from scratch with greater speed and consistency than those Seattle-critters turning up on campuses and airports.

    This is exactly the wrong moment for low skilled, low productivity workers [sorry, but a barista or burger flipper is not a high technically skilled career field. It is entry level] to demand more money without any payback to the company. With the Federal government making every employee, especially a full time employee, a liability; no one in their right mind hires anyone they don’t have to. Especially recent college graduates with a non-STEM degree and an inflated sense of their own worth.

    European levels of unemployment are coming if we do not turn things around.

    Subotai Bahadur

  9. Labor, even unskilled labor, is not homogenous, both locationally and basic skill wise. Any national minimum wage likely puts some willing entry workers out of work or into exempted jobs including the cash economy, regardless of the state of the economy. Such effects do as described well by Stan and others discourage the incentive to enter the work force as well as the opportunity. Not the difference in long term unemployment rates based on ethnicity/educational/cultural/experience groups across business cycles. Stan is correct that the minimum wage effects are greater in a downturn and I add they effect lower skill groups disproportionately even in the unskilled category.

    Raising the minimum wage is always supported by unions because it reduces competition for union labor from substitution of unskilled, non unionized labor with capital and technology. While increasing the full time, and developmental opportunities for unskilled entrants.

    The means tested welfare system benefits also serve as the opportunity cost of working,effectively putting a floor under the unskilled wage. The growth in the underground economy, including criminal endeavors, is made more attractive to the unskilled especially if augmented by social welfare payments. With any government programs, there is little incentive to detect fraud, abuse or waste. Success is measured by budget growth and numbers served. Many (most, all) targeted tax incentives are fraught with similar distortions in economic choices and fraud. 70,000 pages of national tax code? 40 million on food support? Unemployment among black urban young men at over 40% This thing is going to crash. The significant specific benefits far outweigh the general, defused costs felt by the stuckees, much of it hidden by indirect taxation and artificially high resource costs.

    I don’t think tinkering around the edge of these issues is going to reverse or even slow our course and I don’t see a ground swell of support for significant reform. I can not see the federal level giving up more than 50% of their financial power to generate political support.

    As for the comments about Krugman and the like, they are a disgrace to economics and are recognized as such by most in their field. Their support comes largely from lucrative political/media patronage. As a economist, I used to use their pronouncements as straw man examples for class discussions. Putting economists like Milton Friedman, Thomas Sowell, Gary Becker, George Stigler, Robert Ekelund and Friedrick Hayek up against them was decisive. The sad thing to see is the economic field being overtaken by ideological progressive agendas, weak minds and poor research. Politics corrupts and federal research money corrupts absolutely.


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