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Peter Passell
Editor, The Milken Institute Review; Senior Fellow
California and Capital Markets and Europe and Finance and Global Economy and Labor and Public Policy and U.S. Economy
Peter Passell is editor of The Milken Institute Review, the Institute's economic quarterly. A senior fellow, Passell joined the Institute after eight years as economics columnist for the news department of The New York Times. He previously served on the Times' editorial board and was an assistant professor at Columbia...
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The minimum wage debate aEUR" or the CBO meets Rashomon
By: Peter Passell
February 19, 2014
   
   

The new Congressional Budget Office report fits neatly into a hyper-partisan Washington. For while the report itself shows not a hint of bias, its headline conclusions can be spun any way oneaEUR(TM)s lying eyes desire. On one hand, we learn that President ObamaaEUR(TM)s proposal to raise the federal minimum wage by about half (to $10.10 an hour) by 2016, and then index it to the cost of living, would cost an estimated half-million jobs. On the other, it would increase the earnings of minimum wage workers in aggregate by $31 billion and nudge some 900,000 households above the poverty line.

My own reading (like that of most two-handed economists, I suspect) is somewhere in the middle, with a slight tilt toward the grimmer side. If I had to choose, IaEUR(TM)d opt for the higher minimum. The most important takeaway from the report, however, ought to be a renewed sense that we shouldnaEUR(TM)t rely on wage floors alone to cope with income stagnation at the bottom.

The obvious problem with the minimum wage is that the demand curve for unskilled labor slopes downward. But not always: David Card and others have made a solid case that relatively small changes in the minimum can increase some employment because the market for unskilled labor isnaEUR(TM)t fully competitive. For just as a monopolist selling products has an incentive to charge high prices, a monopsonist (here, an employer with market power) has an incentive to pay low wages. So, in this case, government intervention increases employment even as it raises the wage.

But everyone agrees that, sooner or later, a rising minimum will indeed price some workers out of jobs aEUR" and at wage levels that are hardly impressive. Actually, this doleful effect may be worse than anticipated over time if the higher minimum leads to the design and use of robots to replace workers doing simple tasks like busing tables and fetching boxes in warehouses.

The less obvious problem is that the minimum wage is a sloppy, sometimes perverse, way to redistribute income in the desired direction. While part of the cost of a higher minimum would come out of the profits of the owners of capital, part would come out of the pockets of low-income households that pay higher prices for their chili cheese burritos at Taco Bell and their Nikes at Wal-mart. According to the CBO, only $17 billion of the aforementioned $31 billion in wage increases would come at the expense of the truly affluent aEUR" families with six times or more the poverty-threshold income.

So whataEUR(TM)s the alternative? Policy wonks can come up with a dozen better targeted approaches, ranging from a beefed up Earned Income Tax Credit to a federal takeover of Medicaid funding so the scrooges in Texas, Florida and 23 other states couldnaEUR(TM)t stand in the way of an expansion. But America, alas, is in the thrall of a furious minority (many of them righteously enjoying the heavily subsidized benefits of Social Security and Medicare) who see poverty as a moral failing. What a sad state of affairs.