Adventures in Indignation
April 10, 2015 Economic Illiteracy

The minimum wage is an awful anti-poverty measure. This is not shocking. The latest research from Tom MaCurdy at Stanford illustrates pretty vividly what any Intro Econ student from my classes has understood for a long time. Even if you grant the point that increases in the minimum wage do not have much of an impact on unemployment (and even very basic economics suggests that it shouldn’t at current margins), we know that the incidence of minimum wage increases manifests itself in higher prices for goods that make up a larger portion of the budgets of the poor than the rich, AND to the extent that people earn higher minimum wages (net of payroll taxes of course), most of those gains go to people who are not poor. MaCurdy found that less than 40% of wage increases went to people earning less than twice the poverty line, and among that group, about third of them are trying to raise a family on the minimum wage. In other words, something like 1 in 8 people who do receive the minimum wage (and ignoring any potential adverse effects of it), are actually in what you might call the “targeted” group. 7 out of 8 people who receive minimum wage increases fall outside the targeted group.

So, the minimum wage actually promotes a type of regressive taxation on the consumption of goods and is ultimately not paid to very many people that we want to receive it. How many people is this? Well, generously speaking there are 4 million people who earn the minimum wage. If the wage increases that we care about only go to 1 in 8 of them, we’re talking 500,000 people who seem to maybe, somehow benefit from the wage increase. And remember this, for every dollar of wage increase they get, they really only keep 85 cents due to the payroll tax, and then they go pay higher prices for the goods they wish to buy with that remaining 85 cents.

Why is this so important?

Well, first, there are something like 45-50 million people living in poverty in America. If we assume the 500,000 beneficiaries (sort of) of minimum wage increases are in family sizes of 4, then we are still saying that we have helped at best 4% of the population of poor people.


Then what’s next? It would be worth understanding the answer to the question for those folks who are such staunch advocates of minimum wage increases: if you know this to be the case, then (1) what do you propose we do next? and (2) why do you nonetheless throw so much support behind such a policy? Of course we can guess what the answers, honest answers, to those would be.

As for me, you can put it on record, since I am a fundamentally mean person who hates humanity (look back to one of my first posts for the reference) then I certainly have seen the light. Despite my classical-liberally inclinations, I am now a firm supporter of the minimum wage.

Why do I support raising the minimum wage?

(1) I continue to need something to teach about in my pricing classes.

(2) It won’t impact me as a consumer.

(3) It won’t impact me as a worker and in fact it may even help me as comparatively I am now cheaper than other workers.

(4) I do not currently operate a small business and I gave up on that idea long ago.

(5) The folks who support it should finally get their way. I am tired of reading thousands or articles and posts every few years about it – it is a huge waste of time. So, let’s just ask the folks who are generally indignant, “how high do you wish to see the minimum wage go?” and then just set it there. We would want to follow up that event with, “since you believe so strongly that higher minimum wages make us more productive and solve poverty, are you happy?” In other words, can we not ever ask the question, “when would you be satisfied?” I know I can answer it, can the indignant?

"1" Comment
  1. “And remember this, for every dollar of wage increase they get, they really only keep 85 cents due to the payroll tax”

    When you factor in the benefits lost as one’s income increases (child care subsidies, health care subsidies, etc.) the increase in disposable income for an increase in wages is ~ 10%. There is very little financial incentive for a person to work to get themselves out of poverty.

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