The Maximum Impact of the Minimum Wage

Cristina Romer, Berkeley economics professor and the former head of President Obama’s Council of Economic Advisers, passed judgment on the merits of raising the minimum wage in Saturday’s New York Times, and in the process made clear why she wasn’t a member of the president’s de facto council of political advisers. She argued, as some mainstream economists do, that the merits of a heightened minimum wage were slight—that it may, for instance, raise prices, offsetting the gain to low-wage workers. The better solution, she argues, is to raise the earned income tax credit (EITC)—the government’s payment to the working poor—and to support universal pre-K education. “Why settle for half-measures,” she concludes (by which she means raising the minimum wage), “when such truly first-rate policies [by which she means the EITC and pre-K schooling] are well understood and ready to go?”

Ready to go? Congressional Republicans are rarin’ to increase government spending on the working poor and create a funded federal mandate for universal pre-k? To be sure, you could argue that Republicans will be equally resistant to raising the minimum wage. But that would present them with a political problem that declining to raise the EITC would not: The American people understand the minimum wage and virtually always support raising it. Unlike the EITC, it does not involve government spending, which garners far less public support. A Pew poll in February found 71 percent of Americans, and 50 percent of Republicans, support the president’s proposal to raise the federal minimum from its current $7.25 to $9 an hour. The issue is so potent that House Democratic Leader Nancy Pelosi has vowed to make House Republicans’ opposition to raising the wage a major campaign issue in 2014.

And if, indeed, the Democrats do retake the House in 2014, it’s likely that they’ll vote to raise the minimum wage—and just maybe increase the EITC as well, inasmuch as wages are stagnating or declining not just for the most underpaid workers but for the vast majority of American workers. Raising the minimum wage, and raising the issue of raising the minimum wage, precedes raising the EITC, as Romer fails to realize.

What’s disquieting about Romer’s piece, however, isn’t the political obtuseness it displays. It’s the economic obtuseness to the plight of the American people. Universal pre-K is an excellent idea, with positive economic implications that kick in 20 or 30 years after the pre-schoolers have been pre-schooled, but to suggest it as a substitute for the glaring underpayment of American workers today is to take the kind of long view of things that Keynes neatly dispatched with his observation, “in the long run, we are all dead.”

Wages today constitute the lowest share of corporate revenues and of GDP that they have since World War II, while profits as a share of both corporate income and GDP haven’t been this high in many decades. The United States also has the highest share of low-wage workers of any nation with an advanced economy, and those workers don’t all work in mom-and-pop bodegas. Millions of them work for Wal-Mart, Target, Home Depot, and other mass-market retailers—companies that already receive indirect governmental subsidies when their workers are compelled to rely on Medicaid for their health care. To raise the EITC only, and not raise the minimum wage, is to give these corporate giants a second public subsidy.

By emphasizing pre-K as her one long-term solution, Romer echoes the establishment mantra that American workers have deficient skills. Many of them may, but then, as Heidi Shierholz of the Economic Policy Institute argues, if deficient skill levels are really behind the stagnation of wages, you’d expect to see those Americans whose skills are in demand see their wages rise—and that isn’t happening, either. What American workers really lack is power. With the virtual disappearance of unions from the private sector economy, workers can’t collectively bargain for wages any more. Since Romer isn’t averse to multi-year solutions to the problem of undercompensated work, she should champion not just universal pre-K but also legislation enabling workers to join unions without fear of being fired. The rising inequality in workplace power that has resulted from the eclipse of unions is a chief culprit in the rising inequality in the broader economy. To dismiss the importance of raising the minimum wage is to sidestep the imbalance of workplace power and to minimize the role the state can play in setting standards for employer conduct. Our private sector economy has become grossly unfair. That’s why the government should raise the minimum wage.  

Comments

The "black hole theory" of the minimum wage:
Physicists theorize that inside a black hole the laws of physics breakdown. When the minimum wage falls far enough below what the market would bear the laws of supply and demand breakdown. Doubling today's federal minimum wage should lead to a disproportionate explosion of demand for the goods of minimum to median wage paying employers.

If we cut today's minimum to median wages in half that wouldn't help McDonald's or Wal-Mart, would it? This wage cut must already have taken place when we would need to triple today's minimum wage to catch up with doubled productivity since 1968 (almost quadruple the early 2007 minimum wage -- the median wage stagnated as productivity doubled too).
http://www.huffingtonpost.com/2013/03/18/elizabeth-warren-minimum-wage_n_2900984.html%3Cbr

Doubling today's minimum wage to $15 an hour would add 50% to Wal-Mart's wages but only 5% to Wal-Mart's prices – 100% to McDonald's wages but 33% to McDonald's prices. $15 an hour being today's median wage, half the workforce would get raises percentage multiples of pass through price increases.

This win-win effect could not go on forever. At $30,000 a year consumers would buy a lot more fast food and retail items than they will at $15,000 a year – hugely pent-up demand. Going from a $30,000 year minimum wage to $40,000 would raise prices (3% at Wal-Mart; 11% at McDonald's) but not add much to demand – though some people would have more money to spend -- a wash? Somewhere in between is the edge of the black hole.

The Federal minimum wage hike is a big help for average workers. But yeah, we will be affected by the respond inflation rate of most business establishment. But a rate of $9 per hour from $7.25 an hour is not bad. Isn't it? Costco's CEO in fact also extend his support for what President Obama's minimum wage hike proposal about this Fair Minimum Wage Act of 2013. Approach a financial support if you suffer from great inflation rate though minimum wage increases.

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