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The Therapy Sessions
Thursday, July 24, 2003

Raising The Minimum Wage?

I have been in an ongoing debate about the merits of the minimum wage with Shared Thought. Should the minimum wage be increased, with annual increases tied to the rate of inflation?

My response to his latest post:

Shared Thought: In fact I think an increase in wage-earned income might actually be a good thing for the economy.

So did Jimmy Carter.

But the problem is that money cannot be conjured out of thin air. An large increase in wages is going to mean increases in prices and a decrease in employment. This diminishes standards of living, particularly for people living on fixed incomes.

In an inflationary environment, no one wins.

I've had enough of the Republican Party's emphasis on trickle-down economics and their favoritism of passive income over wage income (i.e., capital gains tax cuts, estate tax cuts, dividend tax cuts). How about calling an increase in the minimum wage trickle-up economics, then?

Since when is a tax cut considered “passive income?”

James Surowiecki, a much brighter fellow than I, reaches essentially the same conclusion in a Slate piece from 1998 on the minimum wage.

I read it (thanks for the link):

I’m not all that impressed. Surowiecki says nothing about tying the minimum wage increases to the inflation rate (because that is a bad idea) but he states “there's no evidence that the minimum wage destroys jobs.”

Why do jobs flee to low wage areas like Mexico, then?

Maybe it’s the climate? Unfamiliar culture? Political instability? What happened to the US textile industry? It used to be one of our largest employers!

It is stunning that the same people who love minimum wage increases also fret about jobs fleeing south.

They’re pinching themselves and complaining about the pain!

Surowiecki also says:“Even firm opponents of the minimum wage believe that every 20-percent increase in the minimum (wage) reduces the employment of young workers by just 2 percent.”

Really? Sure, the first 20% might have led to a 2% increase at one time, but it is not logically preordained that the next 20% will also lead to a 2% increase! This is a dynamic, not a static, correlation. No person who understands all the factors and risks involved would make such a dubious statement. This is an unpredictable event!

If Suroweicki is correct, why not double the minimum wage? We would (in his mind) see unemployment increase from 6.5% to 7.2%. Maybe he has a similar “rule” for how much inflation would increase! "Rules" like this are made to proved wrong.

Therapy Sessions had a particular problem with my idea of adjusting the national minimum wage to account for inflation. This is the same approach taken for Social Security benefits and Federal government wages, which have a greater overall economic effect than minimum wage income. For example, this year, nearly 47 million Americans will receive approximately $470 billion in Social Security benefits, and in 2002 Federal government wages were $199 billion.

Social Security benefits are not wages. No one views them not way (no one says “my grandma got a 2.4% COLA, but I only got a 2% raise!”), and their contribution to the economy is slight. Federal Government wages ARE tied to inflation, but in a $10 TRILLION economy, they are insignificant (less than 2% of GDP).

It is a much different thing to require all private employers to increase their wages. It will work its way up the wage ladder in the larger economy (something you admit will probably happen), and firms will be forced to increase prices or cut workers. And the more you do it, the worse inflation and unemployment will be (you admit this too).

You should answer this question: Is it possible, by changing minimum wage law, to improve lives for America’s poor?

You admit that there is a limit to this prosperity in saying that the minimum shouldn’t be increased to, say, $40,000 a year. Why not? You acknowledge that minimum wage increases are inflationary and cause unemployment, at least when they are taken too far.

I say it is unknown what “too far” actually is. You say: let’s roll the dice.

But then you go about INSURING that things will be taken too far, by linking the yearly minimum wage increases to the inflation rate (which you are already increasing, because it is determined by increasing wages and prices).

This is a bit like adjusting your thermostat to turn the heat UP whenever the house starts getting warm.

Thermostats don’t work that way.

For a reason.

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