Wednesday, January 18, 2006

The Living Dead Wage

One of the most asinine ideas about how to bring the Democrats back from the dead is trumpeting the idea of the "living wage." While this is a vague term, it's obviously meant to be something much higher than current minimum wages, and wants to insure some basic level of affluence and quality of life. This is an honorable goal. However, the instrument of the Living Wage is so profoundly flawed that it's likely to run roughshod over labor markets and cause disasters unheard of. And, yes, I'm linking to a Hack Central Station article for the second time this week. If I'm an "uptight conservative" as someone labeled me yesterday, I just can't help it. Tim Worstall assembles a damning pile of evidence against it.

One of the more interesting pieces he cites has to do with the UK effort to implement a living wage. The NYT article that inspired this TCS rant cites approvingly the Card and Krueger research that tries to prove minimum wage increases are a-okay. Problem is, they use relatively small, or "modest" changes which usually don't do much. The counterexample, the UK's effort, which matches many of the living wage proposals currently on the table, says otherwise. The report on it from the UK's Low Pay Commission, provided this damning piece of information (check pg. 250 and 251 of the report for it):

37% overall of firms cut workers (4% increased)
31% cut basic hours of employees (3% increased)
28% cut overtime hours (3% increased)
63% increased prices (3% decreased)

In other words, the impact of the law has been a complete trainwreck, resulting in people losing their jobs, having their hours cut back, and the price of goods and services has risen. To anyone who knows basic economics, this should come as no surprise. Labor markets have an equilibrium, and artificially raising the price of labor to businesses will 1) make them less efficient, and 2) reduce their demand for labor. Or worse, in a country like the U.S., it could increase their demand for illegal/undocumented immigrant labor (or cash on the spot off the books labor).

Worstall discusses a recent Florida ballot initiative to increase the minimum wage, and how those who passed it celebrated it as a huge Democratic political victory. Well, that's all it is. A political victory that is more like a pyrrhic one as it is unlikely to help those worst off. Some workers will benefit from the increased wages, but many will have their hours cut, negating the effect completely, or may be laid off because of it. The lesson? Worstall tells it like it is:

We have a worthy goal, improving the incomes of the poor (and yes, I do think it’s a worthy goal). There are a number of ways we could do this, the above rises in minimum wage and expansion in the EITC being just two of them. The latter would be more efficient, produce greater gain for less pain. The former would, at the level being argued for, cause real and sustained pain to those very low income groups that we intend to help.

If Democrats continue to push the living wage for political gain, they do it at the peril of those they would help, instead of promoting the sounder policy of the EITC. The EITC accomplishes all of the minimum wages goals, with much less of the abuse of labor markets, so why not push that? Obviously because then government would have to pay for it, instead of shouldering all the costs on businesses and workers hurt by it. And because it's not as sexy to make a change like this via tax policy instead of ramming government regulations down the entire private sector's throats. But, what can you do. Superficial stuff like this is what continues to keep the Democrats stuck in the 70s when it comes to economic policy, and going deeper into it every day.