Thursday, January 11, 2007

Let the minimum wage go

Assuming that it passes the Senate, I do not believe that President Bush should veto the minimum wage increase passed by the House. This is just not a very significant piece of legislation. In 2005, only about 1% of the population actually earned the minimum wage and most were young part-timers. Of course raising the minimum wage from $5.15 to $7.25 would affect more than just these folks. The liberal Economic Policy Institute thinks it is around six million (which gets us up near 5%) (although in Wisconsin it would apparently affect relatively few), but it is not clear that they adjust for tip income for restaurant workers which has a huge impact on the numbers.

The key is that very few wages are fixed to the minimum. Very few people are paid what they are paid because it is the least the government will allow. The interplay of supply and demand in the labor market almost always results in a wage above the federal minimum. This suggests that we are not in a situation where there is a dramatic oversupply of low skill workers resulting in employers being able to pay much less than the value added by these workers.

Much of the discussion around the minimum wage suggests that it will result in more money for low wage workers and, for some, it will. But it is highly unlikely that every - or even most - people who work for somewhere between $5.15 and $7.25 an hour are actually worth more than that to their employer. It is inevitable that, as some see wage increases, others will lose their jobs or see a reduction in hours. Whether or not the net result is more money for poor workers is far from clear. The fact that wages are not determined by the minimum also casts doubt on whether there will be a large "spillover" effect (i.e., increases for people currently above the minimum) that proponents of an increase presume. It may turn out that a minimum wage increase is not very compassionate at all.

But the impact is likely to be small and there is just no way that Bush can win by trying to explain a veto. This may be bad policy but its not worth the fight.

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