Paul Krugman on the Minimum Wage

This is from 1998 and there’s been new research then, plus various other things have changed in the past 15 years. But Paul Krugman’s review of The Living Wage: Building a Fair Economy took the old-fashioned neoliberal view that the way to help people is to give them money:

Consider, for example, the effects of “Plan Y” (never mind) on the hypothetical head of a household, currently making $5.43 an hour. According to their estimates, as long as he or she remained fully employed, the living-wage law would raise earned income from $10,860 to $14,500–and also mandate $2,500 in health coverage. (This is, incidentally, a 57 percent increase in the cost to employers; you have to have a lot of faith in Card-Krueger not to worry that some jobs might be lost.) According to their numbers, that family would currently pay less than $900 in taxes while receiving some $9,700 in benefits such as food stamps, Earned Income Tax Credit, and health care. Their calculations also show that most of the gains from the living wage proposal would be offset by reductions in these other redistributive programs. Indeed, only about one-fifth of the mandated increase in wages and benefits actually gets manifested in disposable income; the rest is taken away as benefits decline.

Now to me, at least, the obvious question is, why take this route? Why increase the cost of labor to employers so sharply, which–Card/Krueger notwithstanding–must pose a significant risk of pricing some workers out of the market, in order to give those workers so little extra income? Why not give them the money directly, say, via an increase in the tax credit?

One answer is political: What a shift from income supports to living wage legislation does is to move the costs of income redistribution off-budget. And this may be a smart move if you believe that America should do more for its working poor, but that if it comes down to spending money on-budget it won’t. Indeed, this is a popular view among economists who favor national minimum-wage increases: They will admit to their colleagues that such increases are not the best way to help the poor, but argue that it is the only politically feasible option.

But I suspect there is another, deeper issue here–namely, that even without political constraints, advocates of a living wage would not be satisfied with any plan that relies on after-market redistribution. They don’t want people to “have” a decent income, they want them to “earn” it, not be dependent on demeaning handouts. Indeed, Pollin and Luce proudly display their estimates of the increase in the share of disposable income that is earned, not granted.

The reality is that I think a lot of the people, particularly politicians, who you’ll see touting higher minimum wages this week actually agree with Krugman but simply are taking the “politically feasible option” point more seriously than he did 15 years ago. That’s to say that if in his State of the Union response Marco Rubio had said “higher minimum wages are poorly targeted and potential job-killers, lets bring back the Making Work Pay Tax Credit and make it permanent” that the Obama administration would have been thrilled. But what actually happened is that Obama put a temporary Making Work Pay Tax Credit in the stimulus, then when it was expiring Republicans wouldn’t extend it so he did a payroll tax holiday, then when that expired Republicans wouldn’t extend that either. So having exhausted Krugman’s approach they’re now trying the other way, which almost certainly won’t happen either but at least gives the administration something new to talk about to advance their goal of helping poor people.