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The Economist’s Third Rail – Minimum Wage

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Discussing the minimum wage is one of those so called “third rails” in economics since, regardless of position, about half of the readers will disagree with the conclusions. I will try to approach the discussion of minimum wage increases from the perspective of an economist, a policy analyst, and a human being. No, sometimes these are not the same thing.

As an economist I am concerned about dramatic increases in the minimum wage and the dynamic impacts on the economy. It is indeed true that major jumps in the wage floor will cause economic distortions. Opponents of the wage hike are correct that more automation will occur and jobs will be lost. Businesses that employ lower skilled labor, like restaurants and bars, will be disproportionately impacted. It also isn’t a right or wrong concept; it’s a matter of scale. Raising the minimum wage to $15/hr will cause more economic problems than raising it to $12/hr, etc. The closer the artificial wage floor is to the prevailing market wage, the less chance there is for economic harm. From solely the economic theory perspective, I would not raise the minimum wage.

The discussion is a little different from a policy analyst’s perspective. The argument has been made that a family cannot survive on McDonald’s wages. This is true. However, a family should not be trying to survive on the minimum wage. I would rather explore realistic ways to better use the education system and job training programs to provide the minimum wage employee with a ladder to the next skill set and income level. Some form of financial aid to these individuals that is tied to continuing education will be less costly than a minimum wage proposal. When wearing my policy consultant’s hat, I would conclude that the problem should be fixed with more thought and the minimum wage proposition came a year or two early. If the “ladder” effort fails, then maybe we need to raise the wage, but identifying the right level should include some detailed analysis.

Now for the more human element. Workforce training and education system reform will not happen overnight, nor will a societal change in the way people view education and training throughout their lives rather than just learning new skills when they are young. The family living on minimum wage does currently exist, is struggling, and that will not change in the immediate future even with the above recommendations. Something needs to be done, but the question is what?

From my perspective as an economist, policy analyst, and hopefully as a human being, addressing the problem of families living on minimum wage should have been analyzed more thoroughly in Arizona years ago. There is a systemic problem that needs to be addressed on multiple fronts and begin as early as middle school. Raising the minimum wage is just patching a bigger underlying problem. I always prefer fixing the underlying problem and I have not been a supporter of significant minimum wage increases in the past. But, I also will not be harshly criticizing the minimum wage advocates; I get your concern. If a person or group doesn’t like the current proposal, then offer a better plan.

Author’s note: If there is a particular economic or policy issue you would like covered in a later publication feel free to send your ideas and/or comments to info@roundsconsulting.com.

JimRounds

Post by: Jim Rounds

 

 

 

 

 

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  • Anonymous - October 12, 2016 reply

    Jim,
    I would add that the minimum wage is mostly a transitional wage. Studies show the vast majority of minimum wage earners do not remain as such. I started with minimum wage work as many people do, and was highly motivated to gain an education to not remain a minimum wage earner.

    Secondly, to your point about the need for a minimum “living wage”, U. S. Senator Patrick Moynihan had the right policy idea nearly 50 years ago when he proposed a sliding scale refundable income tax credit so a minimum living wage could be achieved without a disincentive to work for the employee and without the economic disruption and negative externalities for employers. The difference would be made up by the federal government. The earned income tax credit is a less artful attempt to do this.

    Moving from $8 an hour to $12 in 2020 will lead to higher unemployment for many young, semiskilled people at a time we need to be improving their employment opportunities. It is a vexing problem that, as you correctly stated, deserves a deeper and more balanced policy debate. When leaders don’t lead, Arizona’s easy initiative process leads to less thoughtful and unbalanced proposals that often become law.

    Ted Ferris

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