Minimum wage policies and redistribution
Matthew Martin 12/09/2013 01:45:00 PM
There are a lot of good and bad ideas here, but here are some things that should be uncontroversial:
- Australia's actual minimum wage is nowhere near $15 USD per hour.The $15 figure is, first of all, in australian dollars adjusted for neither the exchange rate nor purchasing power parity, and second of all, an exception rather than the rule. See, Australia's labor market regulations are extremely heavy-handed compared to the US. The government has tables upon tables detailing exactly what minimum wages and benefits and working conditions workers are entitled to, which depend on lots of factors including firm size, workers' ages, industry, right down to the specific job being performed. Australia micro-manages it's labor markets. The $15 per hour figure is a catch-all for any jobs and positions that through some freak accident aren't included in the tables. Oh, by the way, I waded through these tables for you--turns out that a 16 year old McDonalds worker in Sydney, Australia, can legally be paid as little as $4.92 USD, way less than he would be entitled to in the USA.
- At some point, raising the minimum wage will substantially reduce employment. I mentioned earlier that the evidence on this has so far been mixed, but that is only because the minimum wages of the past have been extremely low, affecting fairly few workers. We can debate where that threshold is, but my guess is when we start talking about minimum wages above $10 an hour, I think we will start seeing consistent, statistically significant effects where a minimum wage hike lowers aggregate employment.
- A minimum wage cannot achieve substantial amounts of redistribution. I say this because I think it is fairly uncontroversial that minimum wage workers are low-productivity workers. Theory says that no matter what minimum wage you impose, you will not induce firms to pay more than a worker's marginal product. Hence, there is an upperbound to the kind of redistribution that can be done with minimum wage policies, and it is quite low. What we can do is use minimum wage laws to make sure that workers are not being paid less than their marginal products--which happens in monopsonistic labor markets. The extent of monopsony, of course, is industry and locale-specific, so strictly speaking there should not be a minimum wage, but a bunch of job-dependent minimum wages, rather like what Australia tries to do.
- The income tax code is the best way to redistribute. As the Mirrleesian optimal tax literature says, we want to our redistributionary policy to be as close to lump-sum as possible, to minimize deadweight losses. However, we cannot directly observe worker productivity types so lump-sum transfers are impossible. That's ok because the government can observe something that is very highly correlated with worker types, namely their incomes. Hence, the best way to redistribute is through income taxation, with negative income taxes for the poor and very high tax rates on the very rich. A GBI that phases out gradually as income rises, and which is financed by progressive taxation on incomes above that, is very close to optimal tax policy.
- Unless you plan to implement state-contingent minimum wages (like Ashok Rao's proposal), aggregate demand considerations are irrelevant. I see a lot of left-wing commentary about how a higher minimum wage would improve the economy by giving people more money to spend. That would be great right now, while demand is too low, but in the long-run, prices will equilibrate demand with supply. Thus, while demand-side policies can be welfare-improving in the short periods where the economy is operating away from the long-run equilibrium, if made permanent they would become net-welfare-reducing by actually reducing long-run aggregate supply.