The Conservative Case for a Minimum Wage Hike

February 18th, 2014

Most conservatives disparage minimum-wage laws with straightforward economic reasoning, based on Econ 101 textbook theory: demand curves slope down. If you institute a price floor, raising the price of labor, you’ll get less labor demanded — less jobs. This hurts poor people, especially entry-level folks like teenagers.

At first blush, the argument’s got legs. And there’s been a fair amount of research over the decades suggesting that higher minimum wages do hurt employment. But conservative economists know that life’s more complicated than that. There’s also good research suggesting that this effect isn’t very strong in the low-wage labor market; many other economic effects are at play.

One of those other effects — also based on textbook Econ-101 reasoning — bears serious consideration by conservatives: economic incidenceIt’s often darned hard to know where the effects (the “incidence”) of a policy or system will land — who will get the benefits and bear the burdens — especially in a complex system with lots of moving parts. That’s a core conservative belief (“unintended consequences”).

On the minimum wage, it’s not crazy to suggest that minimum-wage employers — many of whose workers inevitably rely on government benefits — are the actual beneficiaries of those benefits. Those employers are able to get workers at lower wages than they would absent those benefits, so to some extent at least (depending on incidence) those businesses thrive at the expense of taxpayers. The dole goes, largely or partially, to the employer’s bottom line.

How do we suss out these incidence effects? In recent years we’ve seen some excellent new research on the employment and earnings effects of different minimum-wage laws, in particular great work by Arindrajit Dube et. al. comparing adjacent counties across state lines with different minimum wages (levels and changes).

This research has a big leg up on all the previous studies. It very cleverly exploits the implicit “control group” of an ongoing natural experiment across the whole country, over a quarter-century, to tease out cause, effect, and result. Dube and his cohort are incredibly careful, diligent, competent, and thoughtful researchers and analysts. Read their stuff. I think you’ll be hard-pressed to disagree.

Results? They find that minimum-wage laws have had little influence on employment levels, at the minimum-wage levels we’ve seen over past decades — too small to consider either statistically or truly significant. But they find significant increases in earnings from higher minimum wages. Minimum-wage laws have the rather intuitive  effect of increasing poor people’s earnings. (Some might deride this intuition as unsophisticated “folk economics,” but: 1. it’s actually much more economically sophisticated than the Econ-101 thinking, and 2. it seems to be correct.)

And here’s the key takeaway for conservatives: if higher minimum wages increase poor people’s market incomes, they reduce their reliance on government handouts, and reduce government spending. That’s not even Econ 101. It’s just arithmetic.

Conservatives oughtta love that. And they should also like the part about responsibility: require all business owners to do what most already do: make a profit while paying the actual cost of keeping their workers alive, in decent health, trained, educated, mobile, and employable, rather than irresponsibly externalizing those costs onto taxpayers and pocketing the profits.

How do workers’ livings get paid for — through government benefits or employers’ wages? Conservatives would naturally vote for private enterprise.

But here’s where it gets a lot more interesting. A new study out of the Chicago Fed (PDF) uses the same adjacent-county, natural-experiment methodology, and looks at what happens to companies in higher minimum-wage environments:

Firm entry and exit both rise.

Again, they find minor employment effects and significant earnings effects. But there’s more churn among companies. New companies emerge that thrive and profit in the higher minimum-wage environment, because their business models are more labor-efficient and they invest more in productive capital. (Not just drill presses, but human and organizational capital developed through training, retention, efficient business processes, etc.)

Companies that are less labor-efficient and more reliant on low wages (and, hence, taxpayer subsidies/handouts) are less successful in this environment. Inefficient businesses that can’t pay the full cost of their workers and still make a profit, fade away and go out of business.

Schumpeter. Creative destruction.

In the language of (neo)classical economics, higher minimum wages (again, within the ranges we’ve seen over past decades) seem to push the whole system to a new, higher equilibrium. Employees earn more. Businesses invest more in productivity. All boats rise. The pie gets bigger. We all take another step, together, up toward that shining city on the hill.

The real (inflation-adjusted) minimum wage is at a historically quite low level right now, so it’s reasonable to expect that the effects of increases that have played out over past decades will also play out over the next ten, twenty, or thirty years. We’ll all be better off in three decades if we raise the minimum wage today.

But suppose that isn’t true. Suppose we end up in the same place thirty years from now that we would without a minimum-wage hike. Over the course of those decades, tens of millions of workers and their families will have lived better, more prosperous lives — for decades on end. The promise of American opportunity, embodied. To quote the great economist Abba Lerner, “In the long run, we’re always in the short run.”

If you’re a conservative who wants to:

• Get people off the government dole

• Reduce government spending

• Encourage investment in productive capital

• Spur the process of creative destruction, and

• Demonstrate the manifest benefits of hard work and American opportunity…

You might consider throwing your full-throated support behind a minimum-wage increase.

Dozens of the country’s most prominent economists, of diverse political persuasions, agree 4:1 that an increase “would be a desirable policy.” Bill O’Reilly supports it. So do hundreds of Patriotic Millionaires and Smart Capitalists for American Prosperity

Here’s to suggest that other conservatives and business leaders might find a very comfortable seat on this bandwagon.

Cross-posted at Angry Bear.

  1. February 19th, 2014 at 14:19 | #1

    Interesting post. But I’ve got a question. Economists and indeed society as a whole believe in two almost mutually exclusive ideas. First there is your idea that making employers pay more for lowish skilled labour brings net benefits. Second, there is the idea that employers should be allowed to hire labour at no cost at all (as under the UK’s Work Experience scheme and numerous similar schemes stretching back over the decades).

    My answer to that paradox is that when someone initially becomes unemployed, the free market price for their labour is very low or near zero. That’s because they cannot find a job using whatever skills they have. It is therefore legitimate to let employers hire the unemployed at zero or near zero cost, as long as it’s for a limited period. Put another way, if a given employer keeps a heavily subsidised employee for too long, the presumption must be that that’s an example of a business that is managing to “thrive at the expense of taxpayers” to quote you. Incidentally, the employee can also benefit in that the employee gets a living wage for possibly doing some very easy going work “at the expense of the taxpayer”.

    What’s your answer to the above paradox?

  2. February 20th, 2014 at 11:02 | #2

    @Ralph Musgrave I’m sorry, Ralph, but I don’t have a cogent or straightforward response to that situation. I’ve thought about it hard (though only briefly), and I can only come up with “life and economics is really complicated.” Sorry! But I will ponder further.

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