Opinion and Economic Analysis

Hicks: Public policies muddle minimum wage debate

March 1, 2014

Late last month, a Congressional Budget Office study on a proposed minimum-wage hike concluded that raising the minimum wage 39 percent, from $7.25 to $10.10, would reduce employment by roughly 500,000 jobs.

In 2010, I published a study that concluded the 41-percent increase in the minimum wage after 2007 cost the U.S. economy some 550,000 jobs.

The CBO study looked at all the peer-reviewed economic research on the minimum wage and combined it with labor force data to craft a simulation model. I built a historical model of changes in employment, controlling for the recession, trends, seasonal dynamics and demographics. We came up with the same answer to roughly the same question.

This is not too surprising. All economists know there is no free lunch. While an increase in the minimum wage would boost earnings for many workers (a believable 16.5 million according to the CBO), it also would cost jobs.

Still, regardless of how you feel about the minimum wage, public policies toward low-wage work muddle the debate enormously, and it is not really clear what the final effect has been.

The 1996 welfare reform extended Medicaid to the working poor and expanded Earned Income Tax Credit. The Medicaid expansion was designed to remove the biggest disincentive to work poor families faced—the loss of health care benefits. The second was designed to extend the progressive tax system into the ranks of the poor and so motivate work.

Both of these policies worked, but there were side effects to government intervention in markets (as indeed, there always are). The greater availability of lower-wage workers meant that many firms crafted new business models designed around low-wage, low-skilled workers of which there was now abundance. For example, restaurant employment increased 18 percent from 1996 through 2001.

As an aside, this is an example where moralizing is unhelpful. Both the decisions not to work in order to preserve family health care and the adjustment by businesses to a profusion of low-skilled workers are privately optimal. We should expect no more or less from our economic decisions.

So, the minimum wage debate has to be framed against the backdrop of Medicaid and EITC. If we raise the minimum wage to $10.10, the better-paid households will need fewer benefits, while the newly unemployed will need more.

We will have resurrected a barrier to work among folks who need fewer barriers to obtaining skills at a time fewer employers have strong training programs.

This is a fairly complex issue, but I feel certain the public debate will not be.•

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Hicks is director of the Center for Business and Economic Research and a professor of economics at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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