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Minimum wages. People are not all the same.

Summary:
The ancient argument over the minimum wage (WSJ) is heating up, another of economics' many perennial answers in search of a question. As in the linked article, I think it is a mistake to focus entirely on overall employment of low-skill workers. That is surely an issue. But the wage is one part of a detailed bargain between ...

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The ancient argument over the minimum wage (WSJ) is heating up, another of economics' many perennial answers in search of a question. 

As in the linked article, I think it is a mistake to focus entirely on overall employment of low-skill workers. That is surely an issue. But the wage is one part of a detailed bargain between workers and employers. By putting its thumb on one part of the bargain, the government will ensure that other parts squish out. That's the larger issue. 

Does the job allow flexible hours? Does it provide other benefits -- transportation, employee parking, uniforms? How hard do you have to work? Which workers get the jobs, not how many get jobs overall? 

A near universal fallacy is to treat people in any group as identical, to have one stereotype in mind and apply that to the entire category. Minimum wages advocates often paint a picture of the sole breadwinner of a family valiantly struggling to provide on the low wages. Doesn't she deserve more? Well yes, we all deserve more, but that emotional appeal does not make the minimum wage a good idea. 

Not all minimum wage workers are the same.  Some are young kids who need some slack from employers as they learn about showing up on time, being polite to customers. Some are ex cons, recovering drug addicts, homeless needing a job so they can pay rent, or others with a spotty record, needing an employer who will take a chance on them. Some are recent immigrants, who don't speak English very well or understand American workplace culture. Many have complex family responsibilities, which means they can't take higher paid jobs with more rigid schedules. Some are old people, with health problems, who have social security and medicare but want a little extra cash -- Walmart greeters. A vanishingly small number are the stereotype, sole breadwinner of a family with children who if single has regular child care and can work an 8 hour shift on a regular basis. 

The minimum wage makes it easier for employers to engage in racial, ethnic, gender, age, orientation and other more subtle but legal discrimination. That was, for many years its purpose. Minimum wages were there to stop blacks moving from the south to northern cities compete for jobs held by whites. Even left-wing causes have a sordid racial past. 

Since about forever, young unskilled and poorly socialized people have worked for a while at low or no wages while they pick up skills. Historically it was understood, and part of the employer's obligation to give them skills and training as part of the deal, to "teach them the trade." This still happens. Hang out at any small business, and see a teenager sweeping up and learning a lot about how the world works. For rich white college kids it's called internships. The minimum wage,  restrictions on gig work, and other labor force interventions saying employers must offer either 8 hours full time work with benefits or nothing, cut off this long-standing institution for those on the lower end of the labor market. 

So the main effect of minimum wages is to encourage, nay to force, employers to be more picky about who they hire. It benefits the few who are already good workers and can put up with a harder, less flexible schedule, fewer other benefits, and so forth. It hurts the others, many of whom miss the second chance, the on-ramp to legal work. 

It's not so much about how many jobs there are. It's about who gets them. 

Minimum wages also affect some kinds of employers more than others. McDonalds "jobs" may increase. Why? Because the taco stand down the street, which pays less than McDonalds, goes under, and McDonalds gets more business. Like workers, the rule benefits businesses slightly higher up on the ladder at the expense of those at the bottom. 

Where do these workers and businesses go? How do they live? Many now go to illegal operation and employment, which is unsavory in many ways. Worker protections, access to the legal system to address mistreatment, wages paid in to social security and disability programs, are not advantages to be thrown away lightly. Why was Eric Garner selling illegal cigarettes in the first place, rather than working a legal job? 

The minimum wage is also (perennially) about who pays. Our government has a habit of deciding a group needs favor, and rather than raising taxes and sending them a check, it decrees that someone else must do so. See health care and insurance mess. Here, those running the government decide that people who earn less than $15 (or maybe now $22, or more) per hour should earn more per hour. Well, they could just pass a tax and send the workers a check. (Roughly, the earned income tax credit.)  In fact the minimum wage is entirely the same as payroll tax on low-skill labor plus a transfer to the employee. Even our government understands the disincentive effects of a payroll tax on low-paid workers. 

Why make business pay rather than raise general tax revenue? Well, that would look bad. And there is another fallacy around that "business'' -- especially the kind of small businesses that hire lots of low-skill labor -- have lots of money to hand around. Uh, look out the window at the boarded up restaurants that we are also paying trillions of dollars to try to keep afloat. (Michael Salzman notes this irony.)

So here we are in another puzzle. Our government seems to feel that interest rates are low so borrowed money is free. And its's sending rivers of that money to employers. Why is it so vital to make employers pay added costs and feel the disincentives to hire people?

Well, because it's an answer that has for 100 years been in search of a question, and it's hard to change that answer once you think rationally about questions. 

However to my free market friends, I think we too make too much fuss about the minimum wage. There are hundreds if not thousands of labor market distortions from federal state and local levels. The whole argument about "employee" vs. "contractor" tells you about the thousands of pages of regulation attached to each. Occupational licensing, mandated benefits, comparable worth, hours and terms of service, high payroll and income tax rates, the absurd growth of HR and compliance departments, union-friendly laws, and so forth are in my view bigger labor market distortions than the minimum wage. The minimum wage attracts attention because its so simple once you understand basic econ 101, and because it attracts so much unthinking spend-other-people's-money-to-make-me-fee-good adulation from its attractors, but that does not mean we should elevate it to the top issue in labor economics. 

(Jonathan Meer has done good work on this issue. A nice interview.)



John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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