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Wage war

As the debate about the US minimum wage flares up yet again, a dose of context about current state of the economy is sorely needed.

This is a quick post this evening stemming from Harvard professor Gregory Mankiw’s article in the New York Times this weekend on the current debate around raising the US minimum wage. Professor Mankiw contends that while some method for alleviating the current income inequality in the US is required, raising the minimum wage is the exact wrong way to do so. By his estimation, increasing the wage is nothing more than a tax on businesses employing low wage workers – incentivizing them to hire fewer workers and invest in technologies to automate certain processes. Instead, we should look at expanding the role of the Earned Income Tax Credit (EITC) or longer-term solutions around increasing graduation rates instead.

As many commentators have noted, minimum wage theory is an incredibly tricky subject with no shortage of disagreement amongst economists. Naturally, a 900 word article like professor Mankiw’s will simply be forced to skip some nuance. Regardless though, through in my reading of the piece several flaws in his argument still stuck out:

1. Automation in lieu of hiring – this point strikes me as more viable in an era where the majority of minimum wage workers were in farming or manufacturing where automation was (and still is) a very real alternative to physical labour. In the modern US economy, this simply isn’t the case as only 20% of minimum wage jobs come from these fields. Instead, nearly 50% come from fields such as retail, leisure / hospitality and education / health services – fields where the ability of machines to replace human workers is far less certain.

2. Education as a solution to low incomes – for similar reasons, I disagree with professor Mankiw’s view that on its own improving the educational attainment of the US workforce would improve the fates of minimum wage workers. This point is true on a micro-level: as an individual, I am far more likely to earn a decent wage if I complete highschool and college than if I do not. But on a macro-level, it appears somewhat nonsensical. Fast food joints, shopping malls and other unskilled labour positions don’t cease to exist as education levels increases – someone still needs to fill these roles. It’s true that increasing education attainment would attract more of the high-skilled jobs that politicians crave to the US from foreign rivals and for a time give individuals more career alternatives and bid wages up throughout the economy (i.e. MacDonald’s would have to pay much more than the current $7.25 to attract workers if the alternative was a desk job). But like any market, the labour market would ultimately correct, likely through the immigration of more unskilled labour. To some extent, this process is already underway with Latino workers filling the gap and grossly over-indexing on minimum wage jobs as a result.

3. Sharing the burden – in principle, I agree with professor Mankiw here: if we as a society want to eliminate large inequalities, everyone needs to contribute. But through progressive taxation schemes, shared social services and mechanisms like EITC, we as citizens already do. Far from unfairly tilting the playing field, increasing the minimum wage would merely undo the great subsidies that the companies paying these wages already receive. As painfully illustrated by McDonalds’ various PR gaffes last year, many minimum wage employees wouldn’t be able to take such low paying jobs without significant government assistance. Effectively, the government allows these companies to pay a below market-clearing rate (i.e. the market couldn’t possibly clear at a wage where workers couldn’t survive). As the most spectacular example, for McDonalds, this subsidy is as much as $1.2BN per year.

Now, I don’t doubt that there are issues with a minimum wage hike that proponents and presidents are refusing to address. As well, after an hour or so of further reading, I’m as confused as ever about what the most appropriate method is for actually determining what right minimum wage should be. Still, I think putting the wage debate in the context of the modern US economy dispels many of the “classic” arguments used against such a move.

Hopefully I’ll have some time to read into this topic later this week but if not, I’m sure our dear friend professor Mankiw can expect a more thorough retort from a certain other NYT economist very soon.