Monday, January 29, 2007

Another Reason To Not Raise Minimum Wage, Continued

I recently posted about one of the less reported consequences from increasing minimum wage, outsourcing. I am taking Macroeconomics this semester, taught by Dr. Steven Isbell The class got into a discussion about the minimum wage, and its affects on the economy. During the discussion I asked the professor if he felt that outsourcing would increase if the minimum wage were raised. He said he didn't feel that it would increase it much, but it was a possibility.

The discussion sparked my interest, and after the class I asked if he would be willing to be interviewed. He agreed to an e-mail interview (which I was content to since my voice recorder vanished a week or two after I got to speak with Phil Valentine). The questions varied from the minimum wage to Social Security and taxes. I didn't discuss Iraq or foreign policy since it did not pertain to the economics discussion. Here's what I asked.

First, I asked him how many people in the united states make minimum wage. He replied that only about 2% of people make the current minimum wage, a statistic that can be verified directly from the Bureau of Labor Statistics.

I followed up asking how many people currently make at or below the higher minimum wage of $7.25. I was amazed to hear, "Currently, approximately 10% of the labor force earns $7.25 or less (again, statistics from the BLS). If, as proposed, the minimum wage is increased to $7.25, I expect that the proportion of the workforce making minimum wage to be slightly less than 10%."

I asked what his thoughts would be on the affects for people making $6 per hour, and also the people who would be making just over minimum wage. He feels that there could be a slight increase in unemployment for the people making less than the proposed minimum wage, and the people making slightly over minimum wage would hardly feel a change, but "The biggest economic effects will be market distortions that are not immediately recognized as being caused by the increase in the minimum wage. For example, the biggest impact will be on firms employing a large number of low-skill workers. These employers will adjust to this government-imposed increase in the cost of low-skill labor by raising prices and substituting capital inputs (machines) and/or high-skilled labor for low-skill workers."

I then mentioned that some people feel the wage increase is justified by the fact that CEO's make an average of 400 times the average employee. He said, "This not only a moot point, it is silly. If the minimum wage is increased to $7.25 per hour, the average wage for all workers will not change much at all. So CEOs will still be making 400 times average."

I will admit that there are some ethical benefits to people making below the poverty line, so I asked what other benefits/consequences there would be to the increase. He replied, "There will be lots of unintended consequences. They are too numerous to list; indeed, we do not even know what they all will be."

In class he had mentioned that he felt the unemployment rate would be adversely affected by the rate increase, so I asked him what he felt it would do in the short term, and if that trend would continue into a long term affect. He said, "Unemployment rates will be higher for low-skilled workers than they would be otherwise, plus the misallocative effects mentioned above."

I asked, if the wage passed, if he felt companies should get tax breaks in an attempt to offset the wage increases. He responded, "No. Trying to somehow compensate firms affected by the minimum wage will introduce other market distortions. This is the inevitable (albeit unintended) consequence of any government intervention in markets."

I then asked what he felt the affects would be on the Nominal (monetary) GDP and Real (Production) GDP. He said he feels that both will be below what they could potentially be, but will not be decreased by a disastrous amount. I was actually a bit surprised, thinking that Nominal would go up slightly with the increase in lower end wages, but Real GDP would reduce with reduction in the work force, leading to higher inflation.

I have long thought that minimum wage increases are more a tool for political pandering, and I asked him if he felt the same way. He replied "I do not pretend to understand politics, nor do I really like to impugn the motives of others. However, it does seem odd that if you really believed the minimum wage to be a beneficial institution, then you should support a bill to index the minimum wage to a price index. This way, the minimum wage increases with inflation, and there is never a need to bother with legislation mandating another minimum wage increase. I am not aware of anyone in Congress making such a proposal."

Then the big question. If he were in Washington, would he pass the wage increase and why or why not? He stated, "No. My choice would be to abolish the minimum wage. Minimum wage increases are very ineffective ways of alleviating poverty. If you wish to increase the incomes of poor households, then do something that directly increases those incomes (currently, the most logical choice would be to increase the Earned Income Tax Credit). Attempting to somehow manage labor markets to achieve some preconceived desirable outcome will never work (or will work poorly)."

After those questions I asked him about Social Security, government pork and the tax system. Here was the discussion. The first thing I asked was his opinion of government pork. His reply was simple and to the point saying, "The problem is determining what is “excess”. Or what is “pork”. I think the major problem is that the government is simply too big. Start reducing the size of government, and the pork and other excesses will be taken care of in short order."

I then asked his opinion on Social Security. Again he was quick and to the point saying, "Social Security, MediCare, and MedicAid are the three worst things that the Federal government has ever enacted."

During class he pointed out that in his youth, there was one worker for every 2 people on social security, and that when my generation begins to reach our 30's or so, each of us will be supporting 4 people on Social Security. Hearing that, I asked if he felt that the Social Security system was reaching a critical point. He said, "A decision concerning changes should be made very soon (in the next 3-4 years). The longer we put off a change, the worse the problem will become."

I asked if he felt Social Security reform in the way of government "Personalized Savings Accounts" would be a good solution to the growing problem. He said that it depends on what you view as the problem. He explained, "If you consider the problem as one of restricting individual freedoms (as I do), then abolish the program(s). If you merely want to continue the program with no undue burden on future workers, then there are some modest changes that will work. I would recommend that the program(s) be abolished. Issue a bond, to each individual under age 60 (or some other suitable age), valued at twice the amount of what that individual has “contributed” to Social Security (what the individual has contributed, and what the employer has contributed). Then declare the Social Security program to be over.
Of course, that will be politically unacceptable. To reduce the burden on future workers, and to keep the program(s) viable, I would (1) raise the age at which benefits can be claimed, (2) index benefit increases to the overall price index, not the wage index. When Social Security was introduced in the 1930s, a worker retiring at age 65 could expect to receive benefits for 10 years or so. Now, a worker retiring at age 65 can expect benefits for 25 years or more. I don’t think it is too much to ask for an increase in the retirement age to 70 or so (and I’ve seen actuarial studies showing this would “fix” Social Security). Also, benefit increases currently rise faster than inflation (since overall wages rise faster than inflation). I think it only fair that a retiree accept benefit increases adjusted for inflation."

The last subject was something everyone hates, but is as certain as the fact that you cannot live forever, Taxes. I noted that the top 5% of income earners in the country pay 54% of the government's tax revenue. I asked if he felt that the upper class is being disproportionally taxed, and he stated, "Not necessarily. It is much better than it was in the 1970s when the top marginal tax rate was over 70%. This is not an issue so much of allocative inefficiencies (like the minimum wage, or “capping” salaries of CEOs). At least, I believe this is not a problem at current tax rates."

The last question was about the "Fair Tax" concept that Neal Boortz has suggested. A tax system that would essentially get rid of the IRS. It is a 23% sales tax which includes everyone, but low income families would either be exempt, or would receive reimbursement for the taxes they payed. He said, "This tax proposal is better than the current tax system, but I don’t think it is ideal. I am very much in favor of new ideas, and I think that debating/arguing over them is extremely healthy."

I am looking forward to the rest of the semester, and the class discussions that will result from it. One thought that I felt amusing, when the minimum wage discussion began, I would estimate about 50-60% of the class felt that a wage increase would be a great benefit, and would be an easy way to increase the GDP of the country. After the discussion, and learning the adverse affects, I would be surprised if more than 10% of the class still believes that a wage increase is a good idea.

*Just as a side note, the ideas expressed by Dr. Isbell are not necessarily the opinions of TTU, and it's faculty as a whole*

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