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August 28, 2003

Why Job Losses from Min Wage Don't Matter

When the minimum wage is discussed, conservatives suddenly discover an overwhelming compassion for the poorest Americans who they see victimized by the minimum wage.

I might suspect more than crocodile tears if those same conservatives weren't usually the same ones advocating cutting aid for the poor who don't have jobs.

What such conservatives don't want people to recognize is that a good welfare system means that under a high minimum wage all workers will win, no matter the employment effects of the minimum wage.

As noted, the empirical evidence and broader theoretical models challenges the conventional conservative view that the minimum wage costs jobs. But for the sake of argument, this post will show how easy, with the right political will, it is to deal with any consequences of potential lost jobs from a higher minimum wage.

Running the Numbers: Here's the bottom line-- an $8 per hour minimum wage will increase the collective income of the poorest 20% of wage-earners. Even the most anti-minimum wage studies don't argue otherwise, even if they obscure that key fact below their rhetoric. So if job losses are a worry, you could theoretically tax other low-wage workers to fund welfare for the unemployed and all those workers would still come out ahead.

Here's an example-- imagine 1000 workers initially employed and making $5.15 per hour, 40 hours a week, 52 weeks per year. They all make $10,712 per year or collectively, $10.7 million.

The minimum wage is raised to $8 per hour and, for arguments sake, 10% lost their jobs and are now unemployed. (Note that this is a far more drastic result than even the worst case scenario of opponents- see this conservative study where a $10.25 per hour minimum wage was project to cost 7% of jobs for all effected workers).

The economic result is that 900 are employed, each making $16,640 per year, or collectively $15 million per year. The other 100 are unemployed and have lost collectively $1.1 million.

However, since the 900 have increased their collective income by $5.3 million (($16,640-$10712)*900), a tax and tranfer of just 20% of that increase to fund unemployment/welfare for the other 100 will mean that no one loses economically from the increase in the minimum wage.

Applied to the Real Economy: About 20% of the working population of 130 million people would get a raise with an $8 per hour minimum wage; that's 26 million workers with a media wage of $6.69. So an increase to $8 per hour will be an average increase of about 20% in wages for all affected workers. This population generally works less than the overall norm of 39 hours per week, so let's make an estimate of 35 hours each week. (Note that hours don't matter too much here since its proportionate to both income gained and the costs to make up for unemployment.)

So let's first do the numbers for the hypothetical unemployment caused by the increase? Well, the favorite rule of thumb of the Employment Policies Institute (see here, page 4) is that every 10% increase in wages costs 2.2% of jobs, so this works out to a supposed loss of 4.4% of those 26 million people, or 1.14 million unemployed. (Remember, I don't buy these numbers as they are based on simplistic models, but let's go with it).

So this means each worker is initially making on average $12,175 per year or collectively $316 billion for the 26 million who will be effected by the increase. 24.86 million will then receive $8 per hour, or $14,560 per year, or collectively $362 billion per year-- a $46 billion increase in wages collectively.

The supposed newly unemployed lose out on something like $13.9 billion ($6.69*52*35*1.14 million) of lost income-- far less than the collective gain of $46 billion so even after welfare/unemployment transfers, everyone comes out far ahead from the rise in the minimum wage rate.

How Taxes Increase Income: This looks like a tough increased tax burden on the working poor, but they are all coming out ahead economically. In this sense, taxes to pay for welfare becomes collective insurance to make sure everyone benefits from the rise in the minimum wage no matter what. (We might look into taxing the wealthy to fund the unemployed, but of course, that would be naughty class warfare, so we'll put that aside for the moment).

Of course, at this point conservatives will take off their sob-sister hat wringing their hands about the poor not getting a job and start inciting resentment against the unemployed as lazy degenerates who workers should resent paying taxes to support. It's a nice cynical game-- bash welfare recipients and taxes to the point that every worker is deathly afraid of losing their job since there is no safety net, then campaign against the minimum wage based on those created fears. Progressives need to more loudly call the right on this hypocrisy.

Funding Education and Jobs Programs: A last objection people might make is that while everyone may be economically better off, getting a job is useful not just for income but as a stepping-stone to future, better-paying work. Which is a good argument for the government using the funds from the minimum wage increase (and other funds hopefully) to provide not just income but jobs-- hopefully for services in poor communities that are woefully underfunded today. But the reality is that it will be a heck of a lot easier to do that with more money in those poor communities due to the minimum wage than before its passage.

Posted by Nathan at August 28, 2003 05:46 PM