The new hot idea among Congressional Republicans is a reduction in the minimum wage. Yes, I’m serious. It was first offered up by Charles Lane of WaPo the other day and quickly pounced upon by the GOP. It is meant as a way to spur job growth. This is absurd on so many levels, but a few of particular note follow.
There are a couple of flawed assumptions implicit in the idea that a minimum wage reduction would create jobs. First, one has to assume that a not insignificant number of the unemployed are former minimum or low wage workers. That may be somewhat reasonable, but the vastness of the jobs problem would seem to indicate that middle income earners make up a larger share of the currently unemployed. Also, one would have to believe that the real problem with our economy is that McDonald’s is forced to pay its employees $7.25 per hour and that there are some people who, but for the minimum wage floor, would be willing to work there for less.
But reducing the minimum wage would affect not only those workers who currently earn that wage, but workers in low wage bands close to the minimum wage. There is an ample academic literature showing that increases in the minimum wage also have wage effects in the bands closest to minimum wage. Thus, increases in the minimum wage exert upward pressure on other wage rates. It is impossible to believe that a reduction would not exert a negative force on those wages closest to minimum.
Despite what some of the commentariat on right would lead you to believe, the minimum wage does not seem to have a negative effect on employment. Card and Krueger exploded this notion years ago with their research in New Jersey and Pennsylvania. So, what the minimum wage cutters are pushing is an overly simplistic notion of markets that rests on a failure to grasp economics beyond Intro to Micro. They have their handy little charts with upward sloping supply curves and downward sloping demand curves and posit that the minimum wage is artificially above the market clearing wage. But there is no empirical evidence to suggest that the minimum wage is actually above the market clearing wage rate.
A further complication that arises, even if we assume the preceding objections were without merit, is just how such a decrease would help the economy. Those at the lower end of the income distribution have the highest marginal propensity to consume (MPC). Given that reality, how would lowering their disposable income spur economic recovery? Even if we assume that decreasing the minimum wage would create some jobs, those potential consumption and revenue gains would likely be more than offset by reductions in consumption caused by the overall depressing of wages.
It’s amazing that we may even have this conversation. If we assume that the reducing the cost of employment for employers is an important factor in spurring job growth and recovery, then there is a simple way to do it. Enact a payroll tax holiday. It would lower employer costs as well as increase take home pay for a wide swath of American workers. More importantly, it would not kneecap low wage workers.