Krugman says raise the minimum wage to reverse growing income inequality

Krugman says ($):

Can anything be done to spread the benefits of a growing economy more widely? Of course. A good start would be to increase the minimum wage, which in real terms is at its lowest level in half a century.

Huh? As the dancing carpenter says, this will primarily help teenagers.

Comments

[M1EK]

Actually, I always figured it would hurt teenagers - whose labor quality is generally poor. It might, instead, pull in some more adult labor that's either employed elsewhere or willingly unemployed (since the marginal benefit of their labor is comparatively low).

[the dancing carpenter]

An oldie but a goodie on the influence of minimum wage on the labor market:

Brown Charles. "Minimum Wage Laws: Are They Overrated?" Journal of Economic Perspectives 2, no. 3 (1988): 133-45.

My summary: A minimum wage doesn't distort labor markets much. Not many people earn minimum wages and demand for unskilled minimum wage labor is relatively inelastic. So critics overstate their case.

Yet it doesn't help people in poverty much either. It is to blunt a policy instrument. Minimum wage workers on average tend to be young teenagers. Individuals in poverty either do not have access to jobs with enough hours so the slight gain in wages doesn't mean much or they make slightly more than minimum wage anyway. So proponents overstate their case.

My take: Why use a market policy instrument to solve an equity issue? We do not want to change incentives in the market. And wasn't that what lump sum transfers were for in my welfare class?

[mark]

The BLS says only about 25 percent of minimum wage earners are teenagers: http://www.bls.gov/cps/minwage2005.htm

[John Whitehead]

Data shmata!

[Pete]

About half of workers earning $5.15 or less were under age 25, and about one-fourth of workers earning at or below the minimum wage were age 16-19.

Okay I stand corrected. I should have said it helps the youth cohort and will increase the price of fast food:)

[M1EK]

Pete,

Your conclusion still doesn't follow. If teenager labor is really only worth the pittance it's paid now, than an increase in the minimum wage might well result in shifts in employment (more adults holding these positions) rather than simply increasing teenage wages.

[the dancing carpenter]

Inealstic demand for minimum wage labor is the reason for my conclusion. Charles Brown and many others find that unskilled labor is inelastic. (At least in the short run.) It might be that a cost increase can be past on as a price increase or there are not many substitutes for unskilled labor. What ever the reason IF the demand for labor is inelastic then total wages paid to the remaining workers earning minimum wages will rise. Half are young thus my conclusion.

The new fact that surprised me was the percentage of over 65 year olds earning minimum wage. If these workers are substitutes for teen labor and if their supply is relatively elastic then the youth cohort could loose as a whole.

Interesting research question:)

[M1EK]

I'd argue there's a ton of elasticity in low-end labor supply - think about stay-at-home moms who judge how much they make versus how much child care will cost. Or, as you noted, senior citizens who might want to work a bit, but only if it's worth their while. Etc.

[Mark C. Foley]

I wonder about the secondary effects of min wages, namely, does an increase in the min wage lead to (after say a year) a change in the raises for those just above the min wage? I don't have the inclination to look at EconLit for the answer right now. But if so, then a focus on simply those who would be *directly* affected by a higher min wage ("youth"/"teens") is incomplete.

p.s. Where do I pick up a Freakonomics t-shirt?

[John Whitehead]

Mark,

If you'll attend the faculty discussion leader workshop for me then you can have my shirt!

John