Why is his opinion important?  Because he is the author of one of the most influential studies touted by those promoting an increase in the minimum wage.

Together with David Card of the University of California–Berkeley, Krueger analyzed the impact of an increase in the minimum wage on employment in fast-food restaurants. In 1992 New Jersey raised its minimum wage from $4.25 to $5.05 while Pennsylvania did not.  Their analysis found that fast-food restaurant employment growth in New Jersey was not adversely affected by the change.  This isolated case study from several decades ago has become, even though it is much criticized, the go-to piece of research touted by minimum wage advocates ever since. 

A proponent of raising the minimum wage, even Krueger recognizes that increasing it to $15 would likely do more damage to workers than good.  Especially to those workers at the low end of the pay scale.  Especially to those workers who live in a city like St. Louis, which is not a high-wage/high-cost city.  Increasing the minimum wage to $15 in St. Louis, as some have proposed, would devastate low-income workers in two ways.  First, some businesses would decamp to surrounding areas with lower minimum wages. And of the businesses that stayed in Saint Louis city, many would cut employees or reduce hours in order to control their labor costs. The trade-off for increasing the minimum wage to $15 is just too great to be sensible.

Krueger recognizes that there is a viable alternative to a minimum wage hike: the earned-income tax credit.  This tonic to the plight of the low-income family has been recommended by those on the left and the right as a better solution to the poverty problem than the use of a blunt tool like the minimum wage.  Christina Romer, another University of California–Berkeley professor and one-time chair of president Obama’s Council of Economic Advisors wrote in The New York Times in 2013 that the earned-income income tax credit “is very well targeted—the subsidy goes only to poor families—and could easily be made more generous.”

Krueger warns that the possibility of negatively affecting employment for low-income workers by raising the minimum wage to $15 “is likely to become more severe, and the risk greater.”  If proponents will not listen to the warnings of free-market economists, will they at least consider Krueger’s counsel before acting rashly?

The post Even Krueger Agrees: $15 Minimum Wage Too High appeared first on Show-Me Institute.

                Economists across the political spectrum have been recommending this for years. The Congressional Budget Office, David Neumark, and even Christina Romer  find the EITC is a better policy option than the minimum wage for helping low-income households.

                There a couple of reasons why the EITC is a better policy option than the minimum wage. First, it is specifically targeted to help low-income households. The minimum wage isn’t as well targeted. For example, a teen flipping burgers and making the minimum wage would benefit from a higher minimum wage even if both of her parents are surgeons. The EITC only goes to households making below a certain amount. Secondly, the EITC doesn’t increase labor costs. Increasing the minimum wage means employers will have to pay their employees more per hour. The EITC is a direct government benefit, so businesses won’t have those increased costs.

                The EITC is not a perfect program. It makes a lot of improper payments , costing taxpayers billions. Also, its complicated nature makes it necessary for many people to hire professional tax preparers so that they can receive the credit.

                Despite these drawbacks, the EITC is still a superior alternative to the minimum wage    

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Scholars and analysts at the Show-Me Institute have written extensively on this topic, arguing that raising the minimum wage is not good policy. That is still the case, since the fundamentals of economic theory have not changed.

Instead of reading another installment from me, I’ll defer to Christina Romer, former chair of President Obama’s Council of Economic Advisers. Here is what she wrote in the New York Times about her former boss’s proposal to raise the federal minimum wage back in early 2013.

There is a belief that the lack of competition fosters a lower wage. Romer writes, “I suspect that few people, including economists, find this argument compelling today. Company towns are a thing of the past.” In the end, “Robust competition is a powerful force to ensure that workers are paid what they contribute to their employer’s bottom line.”

Some see using the minimum wage as an anti-poverty tool. “Most arguments for instituting or raising a minimum wage are based on fairness and redistribution,” she notes. But contrary to this view she rightly observes that “It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families.” Instead, like anyone else committed to really helping the poor, Romer advocates using the existing tax system. The earned-income tax credit “is very well targeted—the subsidy goes only to poor families—and could easily be made more generous.”

“So where does all this leave us?” she asks. Her reply is that “the economics of the minimum wage are complicated and it is far from obvious what an increase would accomplish.”

What Romer believed in 2013 is still true today, and it applies whether one is talking about federal or city minimum wages. Imposing minimum wages is just bad economics and misguided policy that does not help the most needy.

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Despite intentions, increases to the minimum wage do not necessarily help the poor. Even Christina Romer, who led President Obama’s Council of Economic Advisors, openly conceded there were questions about “whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty.”

The reasons why are simple. First, most minimum wage earners don’t actually live in poverty. Two-thirds come from households making at or above 150 percent of the poverty line; 44 percent live in households whose income is three times the poverty level. From the viewpoint of earners, raising the minimum wage is a clumsy tool and is more likely to benefit the non-poor than the poor.

Second, the number of people paid the minimum is not especially high. Today, less than 5 percent of hourly workers are paid minimum wage. Among all U.S. workers, minimum wage employees constitute just 3 percent of the American workforce. Not only are relatively few people being paid the minimum technically living in poverty, but relatively few people are being paid the minimum at all. Targeting low-wage workers is not the same as helping low-income families.

Third, and most important, there is a wealth of economic analysis that shows minimum wage laws punish the very people they are supposed to help—making it harder for people with few skills or work experience to find entry-level jobs. The Congressional Budget Office estimated that a national minimum wage increase to $10 per hour would reduce available jobs by 500,000. Doubling the minimum wage in Kansas City from $7.50 to $15 would have even more dramatic results here. The reason for this is simple: As labor costs rise, employers may turn to cheaper technological substitutes, cut employees, or have employees work fewer hours. This trend is already occurring in grocery stores and restaurants.

As workers have to compete for fewer entry-level jobs, those with the fewest skills are left behind. A study by the University of California, San Diego found that increasing the minimum wage reduced the earnings potential of low-skilled workers whom the higher minimum wage was meant to help by limiting job opportunities. These workers need entry-level jobs that enable them to develop skills and gain experience.

As a compassionate people, we are eager to promote policies that help alleviate poverty. We do not succeed by making jobs more scarce, which is what would happen if Kansas City enacted a “living wage.”

The post Minimum Wage Increases Not Effective at Fighting Poverty appeared first on Show-Me Institute.

The study linked to above talks about average productivity. Average workers do not earn the minimum wage. This study does not track changes in the productivity of workers who make at or below the minimum wage. Isn’t it possible that the largest increases in productivity have been among more skilled employees who already earn above the minimum wage?

Also, if workers do not feel that they are being fairly compensated, they are free to look for employment elsewhere.  In non-monopolies, employers have to compete for workers and thus offer a competitive wage in order to attract and keep talent. Christina Romer, President Barack Obama’s former chair of economic advisers, made this point in her analysis of increasing the minimum wage: “Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers’ bottom lines.”

Minimum wage laws simply amount to “compulsory unemployment,” as they make it illegal to hire a worker below the prescribed minimum. At an hourly minimum of $22, an employer loses money if he or she hires anybody who produces less than $22 of value an hour. One Missouri small business owner stated that he “would fire one employee, maybe two” if the minimum wage increases to $22. That is quite a lot, given that he only employs three people. Politicians understand all of this, which is why they typically propose only modest increases. After all, if the forgoing economic critique is flawed, why not raise it to $100 an hour?

Raising the minimum wage is an attractive idea to many voters (at least on the surface). Yet, it really is not an effective way to help poor families. According to David Neumark, in his 2012 study for the Show-Me Institute, “. . . minimum wages may do little or nothing to help poor and low-income families.” People from both sides of the ideological spectrum have issues with raising the minimum wage, and increasing it all the way to $22 an hour would just be silly. Let’s focus on ways to truly help the poor.

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Lara Granich, of Missouri Jobs with Justice, supports raising the minimum wage in Missouri and presumably throughout the country. Granich contends that in Missouri, “the modestly higher wages received by low-paid workers in Missouri this year will go right back into the economy, generating economic growth as these workers put food on their tables and raise their families.” On the contrary, Romer contends that “. . . economic analysis raises questions about whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty.”

That is the same conclusion that David Neumark reached in his 2012 study for the Show-Me Institute examining whether Missouri should raise its minimum wage. Neumark stated in his study that “. . . research fails to establish that higher minimum wages help poor or low-income families.” Neumark also stated that “there is simply no evidence” to conclude that raising the minimum wage will stimulate the economy.

Raising the minimum wage is an appealing idea to many voters. However, that is not the case with many economists. There are better ways to help alleviate poverty; increasing the minimum wage is not one of them.

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