Robin Hood stole from the rich and gave to the poor. However you feel about the ethical and efficiency implications of active income redistribution, I think most people would agree that Robin Hood was at least making transfers in the right direction. That is to say, even if you are strongly opposed to redistribution, once we have decided that we are going to redistribute, we had better be shifting income from the rich to the poor. I am open to reasonable variations on the ‘Robin Hood’ principle: from the fortunate to the unfortunate, from the privileged to the oppressed … you get the idea. If you are transferring income, at least make sure it’s going to and from the correct people.
The President supports an increase in the Federal Minimum wage from its current value of $7.25 to roughly $10.00 per hour. Now, you might think a policy like this might be a bad idea for an economy that is still pretty weak. Going from 7 dollars an hour to 10 seems like a pretty steep increase in labor costs and I wouldn’t be surprised if it ultimately cost quite a few jobs at the low end of the pay scale. Nevertheless, the bulk of the empirical evidence on the minimum wage seems to point to only modest job losses for minimum wage workers (where am I getting this “bulk of the evidence” thing you ask? – I asked the labor economists in Lorch Hall of course …). That said, I don’t support an increase in the minimum wage and I don’t think any economist should endorse the idea.
The minimum wage is simply bad policy. The main reason that it is poor policy is that (in addition to the fact that it distorts the labor market a bit) it violates the Robin Hood principle. Here are the best reasons to support an increase in the minimum wage:
1. It will probably transfer some income to low-wage workers and there are some wealthy people who will implicitly pay for this transfer.
2. It probably won’t have huge effects on employment for low-wage workers or a huge effect on business profits for firms that hire low-wage workers.
3. It is politically popular.
This last point, that the minimum wage is politically popular, might be the best reason to support it. Minimum wage laws are easy to understand. They can be sold by people who claim (truthfully I believe) to care about the poor. Also, the costs of the policy are hidden – the policy is discussed without candidly disclosing who actually pays for the policy. Among all policies that actually help low-income families, the minimum wage might be the one most likely to be passed into law.
It’s still bad policy though.
Let’s assume, in the best case scenario, that there will be no effect on the employment of low-wage workers. Minimum wage workers will simply get more money. Where is this money coming from? There are several possible sources.
The most obvious answer is that the transfer will come from the profits of businesses that hire lots of low wage workers. This might already strike you as a bit odd – Goldman Sachs doesn’t employ many (any?) workers at the minimum wage and as a result it doesn’t have to make any transfers to minimum wage workers. In contrast, businesses like McDonalds employ thousands of low wage workers and their reward for doing so will be that they get to pay a penalty called the minimum wage. OK, who has a claim on these profits? It depends on the business of course. If we are talking about profits of some huge publicly traded firm then the people who pay for the minimum wage will be shareholders so think of the typical owner of a mutual fund – perhaps a retiree or an upper income saver. If the business is a small family owned grocery then it will be the family members who own the business. These people are probably members of the middle class or perhaps upper middle class.
There are of course other people who will pay to fund the minimum wage. To the extent that businesses raise prices in response, the minimum wage will be financed by customers of these firms. OK, who buys goods from Walmart? From McDonalds? If you think these customers are particularly affluent, think again.
What about the people who get the transfer? While there are many people earning the minimum wage who are truly low-income, there are many who are not. A single mother who works a minimum wage job to make ends meet is very different from a teenager who works for minimum wage to get cash for the weekend. Unfortunately, the minimum wage is a blunt instrument – it can’t distinguish between these two people.
The truth is that, the reason that the minimum wage is politically popular is exactly the same reason that we should be opposed to it. In the best case scenario, while there are no jobs lost, it is not clear that we are transferring from the rich to the poor. It is certain that some low-income households will lose money because of the minimum wage. It is equally certain that some upper-income people will benefit.
This is not to say that we should not push for more aggressive income redistribution. The disparity in income inequality has been rising for quite some time and it is completely correct for people to desire a more equitable distribution of income. There are better policies that could be considered however. Expansion of the EITC is often offered as an example of an effective redistributive tool where we have control over who pays and who receives. A negative income tax bracket could transfer income to families in need, and encourage employment of low income workers.