No, Let's Not Slash the Minimum Wage

| Wed Jul. 6, 2011 1:11 PM EDT

Karl Smith agrees with Casey Mulligan that reducing the minimum wage would boost the job market:

I understand that there are sophisticated studies showing a limited impact of the minimum wage on employment. My judgment is impacted by those studies. Nonetheless, they are climbing a steep hill against intuition and a supply and demand paradigm that has proved incredibly powerful in the past.

It may not be the case that the minimum wage cut employment by 800K but I have a hard time swallowing that it does not impede recovery and exacerbate long term unemployment.

I can’t imagine that there are no workers at all in America whom it is profitable to hire at $4.75 an hour but unprofitable to hire at $7.25.

This kind of stuff bothers me on a bunch of different levels. Let's count the ways:

  • You either believe empirical studies or you don't. If you have reason not to believe them, then let's hear it.
  • Intuition about supply and demand just flatly won't work in this case. We're talking about a market with (probably) low elasticities and a huge number of confounding factors that could push it in multiple directions. It's easy to see that a small increase in the minimum wage could be overwhelmed by other factors and lead to either a very small or zero impact on employment levels.
  • Are there jobs where it's profitable to hire at $4.75 but not at $7.25? Well, there must be some, but we're talking about such low skill levels here that there very well might not be many. That's why empirical studies are so important. The effects are just too small to intuit.
  • Is this really what we've come to? That we should provide a (probably very small) boost to the job market by allowing businesses to hire people for $9,500 per year instead of $14,500? Seriously? I mean, this is the ultimate safety net program, aimed squarely at working people at the very bottom of the income ladder. If we're willing to throw them under the bus, who aren't we willing to throw under the bus?

There are, obviously, nuances here. Maybe you think we should do away with the minimum wage and instead beef up the EITC or something similar. Or maybe we should directly subsidize higher wages instead of making businesses pay them directly. For a variety of non-economic reasons I don't think that's a good idea, but reasonable people can differ. But what it's hard to differ about is that this is pie in the sky. If we reduce the minimum wage, nothing is going to take its place and we all know it. It would increase corporate profits and dramatically reduce the wages of the poorest workers, and that's about it. Employment would probably be affected only marginally, and nothing would take the place of that lost income. Welcome to America.