This takes a look at one of the ideas of the “Netroots Policy Platform” that James pointed too. Specifically the idea of raising the minimum wage and indexing it to the CPI.
There are at least two problems with this policy. The first is that it is a bad way to help young workers. The minimum wage is also known in economics as a price floor. For those who don’t know a price floor is a price that a given good (in this case unskilled labor) can’t go below. The idea behind the minimum wage is that raising it will help those who are unskilled earn a decent wage. Nice sentiments, but bad policy. As with a price ceiling, this can cause distortions in the market. If the market clearing wage is say $5/hour and the minimum wage is $6/hour then we’ll have what is called excess supply. That is more people looking for those $6/hour jobs than there are $6/hour jobs.
Further, the minimum wage is basically a tax on the employer and the consumer. Often the consumer are the very same people that the minimum wage is trying to help. Not exactly good policy when you stick it to those you are trying to help. A better way to do this would be to expand the earned income tax credit. This works by giving low income individuals (households/families really) tax credits, but at the same time structures the credits so that there is always an incentive to work. For example, suppose a household is earning $5,000/year and gets a tax credit of $5,000/year. Now, if a member of that household gets a better paying job, say it pays $8,000/year instead of reducing the tax credit to $2,000 it is cut to say $3,500 which means that the households income is $11,500 vs. $10,000. It pays to take the better paying job.
Now obviously the tax credit would have to be financed via a tax, but it could be a tax on incomes above a certain level (i.e., there isn’t a direct tax on the people to pay for the program the program is trying to help). While such a tax could eventually have indirect negative impacts on those who receive the tax credits it isn’t as direct nor likely as large as raising the minimum wage. Further, there wouldn’t be the problem of excess supply which means that more people would have jobs. Granted the wage would be lower, but this would be offset by the earned income tax credit.
Another problem is a bit more technical. The CPI is known to be upwardly biased. That is, the way the CPI is calculated makes it somewhat higher than the actual change in the cost-of-living. There have been some improvements to minimize this, but last I checked (and admittedly it was awhile ago) some of the problems were difficult to quantify. For example, how do you take into account bulk discount buying. Suppose there is a sale on tuna fish and one goes out and buys up a good amount of it, and when the sale is over one draws down over time the stock of tuna that was purchased at a discount? Yeah, it is a rather arcane point, but it is still a valid problem none-the-less. So indexing the minimum wage to the CPI wouldn’t merely assure us that the minimum wage was keeping pace with the cost-of-living, but was actually growing faster than it.
Duncan “Atrios” Black is an economist and he likely knows about all these objections. But this kind of simpleton policy is bad policy and shouldn’t be part of the platform. It is the kind of thing that makes me wonder whether people like Black, who is probably quite well off, actually wants to help those who are that lower end of the economic spectrum.
