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Home Publications Blogs Beat the Press Greg Mankiw Battles the Minimum Wage

Greg Mankiw Battles the Minimum Wage

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Sunday, 05 January 2014 08:49

Greg Mankiw uses his column today to take on the minimum wage. He criticizes President Obama for citing studies showing that the minimum wage has little or no effect on employment and points to studies finding that a higher minimum wage will lead to modest declines in employment. (See John Schmitt's excellent paper for a quick review of the state of the research.) Mankiw says that we should think of the minimum wage as a hidden tax that hits low wage employers.

Mankiw argues that if we want to help out the working poor then the best way to do it is to have an explicit tax and use it to fund a higher Earned Income Tax Credit (EITC). He argues that the EITC is a fairer and more efficient way to help low wage workers.

Let's give this one a bit of thought. First of all, Jared Bernstein has already made the obvious point that the EITC and minimum wage should be seen as complementary policies. If we raise the minimum wage then the EITC costs us less. This should be important, especially to people like Greg Mankiw, who on other days argue for lower taxes because they create economic distortions and reduce output. Since the low tax Greg Mankiw and his allies are likely to reappear in public debates when the issue is not raising the minimum wage, we should be mindful of how much money the government spends on the EITC.

We can also think about the incidence of the burdens from a higher minimum wage versus a higher EITC. In the latter case we would presumably be looking at an increase in the income tax as the source of revenue. (Mankiw may want to cut Social Security and Medicare, but let's not make this more complicated than necessary.) Since we will probably not be getting too much more out of the one percent in the current political environment, the funding for the EITC would have to come from more middle class types.

By contrast, the money to pay a higher minimum wage comes from several sources. As John Schmitt discusses in his paper, some of the higher wage will be passed on in higher prices. That will be like a tax in its incidence, as we all will pay a bit more for fast food and other items purchased from employers with a large share of low-wage workers.

However some of this will come out of the record corporate profits that we have seen in recent years. The Walton family may see their net worth fall by 10-20 percent, perhaps even slipping below $100 billion. (Handkerchiefs are on sale in aisle three). And part of the higher cost will be made up in higher productivity as turnover drops and employers learn how to use workers more efficiently.

So Mankiw's EITC option has the middle class paying more through higher taxes, while the minimum wage route has much of the cost being met through lower corporate profits and greater efficiency. This distributional impact should be front and center on the table.

There is another part of the story that should feature in the discussion. Mankiw sees a higher minimum wage as a tax on low wage employers. However the reason that we have so many people who are willing to work for $7.25 an hour at places like Walmart and McDonalds is because they can't get better paying jobs elsewhere. And the reason they can't get better paying jobs is that we have a government policy to run budgets that are not consistent with full employment.

In other words, we could spend more and/or tax less and thereby increase demand in the economy. This would increase output and employment and give these low-paid workers more employment options. However as a matter of policy we decided to have federal budgets that led to higher rates of unemployment. Rather than seeing the minimum wage as a tax on low-wage employers, we can see the government's high unemployment policy as a subsidy to low-wage employers. (Yes, this is a sales pitch for the free book I wrote with Jared.)

The point is that we have no virgin markets where the chips just fall where they may without the heavy hand of government. The question is who does that hand favor. Mankiw wants it to help the one percent, Jared and I would rather see it work to the benefit of the rest of the population.

Comments (15)Add Comment
Effect of Minimum Wage
written by bakho, January 05, 2014 8:47
At some very high level of minimum wage increase, one could see reduction in hiring. At a lower minwage increase, the effect would be lower.

There should be a way to create an index that would aggregate minimum wage employment cost as a percent of the cost of doing business. For example, if minimum wage labor is 1 percent of business cost, then a 10 percent increase in minwage would only increase the cost of doing business by 0.1 percent. More data in this area could inform how much larger the minwage could be and still be affordable.
...
written by liberal, January 05, 2014 9:55
I haven't thought about it much, but I would assume a large chunk of an increase in minimum wage would be paid for by a decrease in the rental value of commercially zoned land. Ie, out of the pockets of landowners.
Mr., Low-rated comment [Show]
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written by Matt, January 05, 2014 11:08
"Mankiw says that we should think of the minimum wage as a hidden tax that hits low wage employers."

As opposed to, say, the amount we spend on SNAP and Medicare benefits for those employers' employees which is a hidden tax on EVERYBODY for the benefit of the companies.

Alternative plan: make the tax explicit, where Walmart etc will get a bill for every employee we're supporting.
.. ..
written by djb, January 05, 2014 11:44

Agree with Matt


If they lay them off they have to pay part of unemployment..... a non living wage is like always being partially unemployed

So charge the employers
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written by PeonInChief, January 05, 2014 12:02
But why shouldn't low wage employers be taxed? They're paying wages that don't meet the cost of reproduction of labor power. And so they dump the cost of supporting the workers on the rest of us.
If Minimum Wages Increase Prices, Then So Does Minimum Income and Wealth for the 1%
written by Last Mover, January 05, 2014 12:47

Rather than increase the minimum wage or EITC, why not just reduce the minimum level of income and wealth already guaranteed to the 1% in the form of a "minimum wage" for not producing any added value whatsoever - just pure monopoly economic rent.

Talk about a kickstart to the economy and employment. Suddenly the 1% have to work for a living via added value through productivity gains that actually reduce prices and expand consumption demand, or forego the earnings as economic rent taxed away to pay down the debt monster they parade around as the cause of slow growth in the first place.

Seriously, it's win-win, not to mention a return to equality of opportunity. Why should the 1% get to keep its "minimum wage" when low-wage earners do not have one at all, in the sense that market wages are usually higher than the ancient nominal value of the current minimum wage anyway ... even in the great recession ... but still nowhere near high enough to make a living.

You can't have it both ways. You can't say raising the minimum wage reduces employment, but increasing the minimum income and wealth earned by the 1% through specific government programs designed to guarantee that outcome don't have the same effect through increased prices.

They do. And those who smugly declare that a minimum wage raises prices to distort markets and reduce employment without pointing a finger at the other end of the economic spectrum controlled by the 1%, have planted their foot squarely in their mouth which speaks only economic incoherence.
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written by watermelonpunch, January 05, 2014 4:33
The Walton family may see their net worth fall by 10-20 percent, perhaps even slipping below $100 billion. (Handkerchiefs are on sale in aisle three).

Luckily, they don't need to be very absorbent in this case. ;o)

There is another part of the story that should feature in the discussion. Mankiw sees a higher minimum wage as a tax on low wage employers. However the reason that we have so many people who are willing to work for $7.25 an hour at places like Walmart and McDonalds is because they can't get better paying jobs elsewhere.


Another reason they're willing to work for minimum wage without riots is because as Matt said above in a previous comment, they're getting subsidies to buy necessary survival items like food, heating fuel, etc.

If people working these minimum wage & just above jobs, didn't get help with food & shelter, how long do you think it would take for there to be uprisings?

Matt is right - THAT is the hidden tax of keeping the minimum wage so low. In order to preserve order in society, we have to pay through the nose just to keep these people toiling for next to nothing just to eat & keep a roof over their heads so they don't start busting things up to demand the right to survive.
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written by JDM, January 05, 2014 8:18
Using the EITC alone instead of a higher minimum wage does have one major advantage: it allows conservatives to continue to denigrate low income workers as lazy moochers. If those workers made a living wage, say a wage that is the equivalent to the minimum wage I got when I first started working in the late sixties, low income workers would have to be seen as fully deserving the money they had.

Also, the more you use the EITC, the easier it is to simply take workers' money away at any time. This helps keep the "serfs" in line, which is another option of great value to Mankiw and the people who employ him.
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written by watermelonpunch, January 06, 2014 5:16
written by JDM, January 05, 2014 9:18
Using the EITC alone instead of a higher minimum wage does have one major advantage: it allows conservatives to continue to denigrate low income workers as lazy moochers. If those workers made a living wage, say a wage that is the equivalent to the minimum wage I got when I first started working in the late sixties, low income workers would have to be seen as fully deserving the money they had.

Yes, it's almost like some people want there to be a clear cut way of distinguishing the lower class in society. The food stamp card, for example, has become the American way of pointing out who's at the bottom.
Greg's Minimum Wage
written by Benedict@Large, January 06, 2014 8:18
Greg Mankiw has always supported increasing the minimum wage. Just only the one that applies to himself, whom he frequently says is underpaid.
E.I.T.C. v. "moderate" minimum wage = too little v. too late
written by Denis Drew, January 06, 2014 10:31
According to big (biggest?) minimum wage critic David Neumark, $55 billion is transferred to poor working families every year by the E.I.T.C. — and that ironically says it all. That much money represents a third of one-percent of our $16 trillion economy.

That much equates to a federal minimum wage raise from $8 to $9 an hour (if it were $8 already) which would shift about $40 billion to the bottom 20% of workers — who take home all of 2% of American income. That would represent one-quarter of one percent of our $16 trillion economy — talk about trickling down the trickle down.

Qualitatively both the E.I.T.C. and a federal minimum wage hike from $8 to $9 sound may sound mighty good (maybe even impressive) but quantitatively neither do much to reverse our income inequality nightmare (more like wonk daydreams?).

A $15 an hour minimum wage OTH would shift about $560 billion — 3.5% of a $16 trillion economy — from the 55% of earners who now take 90% of income to the left behind 45% of American workers who currently take only 10%. Can anyone foresee the 55% responding in the market by telling the 45%: Stay home; we don’t need your output anymore?

The car notes of the 55% wont go up, nor their mortgage payments or medical premiums. Nordstrom might lose a bit of its market share; Target might gain; fast food should do fine after half the workforce gets an average $8000 raise.
http://ontodayspagelinks.blogspot.com/2008/08/income-share.html
The first economic number everyone looks at ...
written by Denis Drew, January 06, 2014 10:41
What endlessly strikes me in minimum wage pieces done these days is the missing sense of proportion: whether the piece is pro, anti or down the middle. I can see the same articles being written by the same authors whether it was back in 1968 when the wage was $10.75 an hour (adjusted) or in 2013 if the wage were either $5.15 or $20.

The first economic number everyone looks at every quarter (for their own good) is the rate of GDP growth. The last number anyone seems to look up when comparing today’s wages to yesterday’s wages (particularly gauging the minimum wage) is the exact same economic growth — as if the last 180 mostly growth quarters (since 1968) never happened.

In 1968, the federal minimum wage under president Lyndon Johnson was almost $11 an hour. Indexed for both inflation and per capita income growth, by 1978, it would have reached $14+.

The minimum wage is not about charity -- not directly -- but about extracting the maximum price that labor can (fairly) extract from the labor market.
http://ontodayspagelinks.blogspot.com/2013/06/my-minimum-wage-worksheet-would-have.html
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written by chris mahoney, January 06, 2014 1:41
The best way to reduce the demand for unskilled labor is exactly what Obama is doing: (1) add a tax on top of wages; (2) add the cost of healthcare on top of wages; and (3) raise wages by statute. This has already been tried quite successfully in Europe, which is why McDonalds is automating its restaurants there. Youth unemployment is approaching 50% in some countries.
The Free Pony Policy
written by Kaleberg, January 06, 2014 10:04
If you are running a business that requires having a pony on hand, you will find yourself encumbered by various pony related expenses. For example, you have to feed the pony, you have to shelter the pony, you have to call the vet now and then for the pony, you have to train the pony and so on.

If you are running a business that requires having a person on hand you have a similar problem. When the minimum wage does not pay enough to feed, shelter, provide medical care, educate and so on, then you do not have a viable business model. Yes, I could sell a lot of gasoline at a dollar a gallon, but that would require someone else subsidize my business model. Right now, the minimum wage results in salaries so low that the government has to provide all sorts of subsidies to keep what are basically non-viable businesses operating. It's time the government stopped. It is not in the business of providing free ponies.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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