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Wednesday, December 4, 2013

Please, there is a better way to help workers than the minimum wage, and everybody knows it -- By James Pethokoukis, AEI

CT Senate Democrats (Flickr) (CC by 2.0)
Both BloombergBusinessweek (reporters Peter Coy and Susan Berfield) and the Financial Times (columnist Edward Luce) are out with pieces supportive of raising the minimum wage. While I understand the desire to give low-wage workers a raise, selecting the minimum wage as instrument of choice is a curious. While critics can be apocalyptic about the economic impact of raising the minimum wage, basic economics suggests doing so will make it more expensive for businesses to hire young and low-skill workers.

For instance, a 2013 literature review by David Neumark, J.M. Ian Salas, and William Wascher concludes “that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.”

And a study in September from Texas A&M economists Jonathan Meer and Jeremy West finds while raising minimum wage “may not cause an immediate shock to employment, as is often feared,” it does discourage firms over the longer-term from hiring.

What’s more, a 2010 study “Will a $9.50 Federal Minimum Wage Really Help the Working Poor?” by researchers Joseph Sabia and Richard Burkhauser found that a federal minimum wage increase from $7.25 to $9.50 per hour — higher than the $9 that President Obama has proposed — would raise incomes of only 11% of workers who live in poor households. Even Coy and Berfield acknowledge some of the policy’s imperfections, writing that “a higher wage floor would undoubtedly price some marginal workers out of the market.”

These studies aren’t some secret. So why do so many smart people keep advocating for a higher minimum wage? The best answer I can come up with is that they think it is more politically likely than the better economic answer: wage subsidies.

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