Check Your Subsidies

Of the arguments for the minimum wage, none is quite as sophisticated as Arindrajit Dube’s defense, which he provides in an interview with Mike Konczal at TAP. It is a two-part defense, with the first being:

There are some opponents of minimum wages who point to the EITC as a better alternative. But here’s the thing. Research by Berkeley economist Jesse Rothstein shows that roughly 27 cents on the dollar from the EITC is passed on to employers. So there’s some leakage there. And for some people, the presence of EITC acts as a multiplier for a hike in the minimum wage.

So as a result, when thinking in terms of efficacy, these two policies may complement each other. They may go together.

I am one of those opponents. The idea here is that the EITC acts as a subsidy to employers by increasing labor supply, and pushing wages down. In order to combat this feature of the EITC, it is theorized that providing a wage floor acts as a compliment by transferring some of that subsidy back to labor in the form of higher-than equilibrium wages.

The second part of the defense is as follows:

To the extent that the minimum wage makes the lowest paid jobs better, it tends to reduce turnover and reduce vacancies. So an increase in the minimum wage may not kill jobs but kill vacancies in a low-end labor market. This is consistent with the more realistic models of the labor market. Our new work shows this for the U.S., but there is evidence from other countries as well. So minimum-wage laws may make jobs more stable while raising wage.

This second portion of the argument is what I used to argue for unequitable shifts along the intensive margin. Dube argues that the cost of these shifts are outweighed by the benefits, but I’m not so sure.

According to the BLS statistics on the characteristics of minimum wage workers they are overwhelmingly young and part-time restaurant and food service workers. The demographic, and nature of the work lends itself to a high turnover rate — especially part-time workers. At the margin, this is a tax on employers. It is certainly not a high tax (as these jobs require relatively little training), but the existence of this tax is ignored by Dube (and Lee and Saez, I believe). So there is still an open question about whether the “minimum wage as subsidy” idea is a net benefit. Another questionable assumption is that, ceterus paribus, a more stable labor market in low wage work is desirable.

Why would this not be desirable? From a search-theoretic perspective, a low turnover rate increases the marginal cost of matching skills to jobs. Generally, this stability affords people some security and bargaining power. However, not so in a market absent skills premium. In such a market, this just shifts employment to those most likely to keep jobs. That creates a situation where those least likely to add marginal value in any position (and thus least likely to seek advancement) find themselves chronically employed. This might sound great, but we aren’t looking to subsidize inefficiency (at least I’m not). The goal of our policies surrounding low wage work shouldn’t be to guarantee someone a low-wage job at the margin. This is to say nothing of the application of labor-saving technologies in the light of higher minimum wages.

However, intuition tells me that none of these effects are especially large, and that the consensus of a slight cost (Figure 1) of minimum wage legislation is not worth the benefits in the light of other income support policies. The complementarity of minimum wage and EITC is an interesting argument, but I think it fails to take into consideration implicit taxes, and assumes benefits of a low turnover rate.

I don’t actually think that a minimum wage of $9/hr would have much of an effect on employment (or inequality), though like Greg Mankiw (and Adam Ozimek), I’d like to see honest leftist-liberals put a number on where adverse employment effects start. I continue to believe that support for minimum wage is the result of mood affiliation.


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