Thursday, June 22, 2006

Minimum Wages

Mark Thoma reproduces a Paul Krugman piece on the living wage which both effectively summarizes the debate over living/minimum wages while also discussing one of the core elements of many economic debates -- the amorality of markets. An excerpt (but interested parties should really read the whole thing):

Economics textbooks enthuse about the virtues of a price system.


And yet there is a problem with markets: They are absolutely and relentlessly amoral. Labor, in a market system, is just another commodity; the wage a man or woman can command has nothing to do with how much he or she needs to make to support a family or to feel part of the broader society. Some conservatives have managed to convince themselves that this poses no moral dilemma, that whatever is, is just. And one supposes that there are still unrepentant socialists who believe that one can do away with market determination of incomes altogether.


Now to me, at least, the obvious question is, why take this route [imposing a living wage]? Why increase the cost of labor to employers so sharply, which-Card/Krueger notwithstanding--must pose a significant risk of pricing some workers out of the market, in order to give those workers so little extra income? Why not give them the money directly, say, via an increase in the tax credit?

One answer is political: What a shift from income supports to living wage legislation does is to move the costs of income redistribution off-budget. And this may be a smart move if you believe that America should do more for its working poor, but that if it comes down to spending money on-budget it won't. Indeed, this is a popular view among economists who favor national minimum-wage increases: They will admit to their colleagues that such increases are not the best way to help the poor, but argue that it is the only politically feasible option.

But I suspect there is another, deeper issue here--namely, that even without political constraints, advocates of a living wage would not be satisfied with any plan that relies on after-market redistribution. They don't want people to "have" a decent income, they want them to "earn" it, not be dependent on demeaning handouts. Indeed, Pollin and Luce proudly display their estimates of the increase in the share of disposable income that is earned, not granted.

In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price--determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.

Most debates over economic policy are unproductive because people try and mix elements and assumptions from all of these points together at once or because one person will argue about morality while another will be arguing about the politics. We would be much better off if we could remain focused on one question at a time. Many economic policy debates (like those over wages, trade, the environment, ...) essentially involve 3 questions:

1) How unfair or immoral is the market outcome?
2) Can "after-market" interventions produce a fair or moral outcome? (And if not, would some other intervention work?)
2a) Is it politically feasible to achieve an "appropriate" amount of redistribution (e.g., can society get the market winners to surrender enough of their gains to fairly compensate the market losers)?
2b) Can any set of "after-market" interventions actually compensate those adversely affected by market outcomes (e.g., can any government program really compensate someone who got hosed over by the market)?
3) Is the "after-market" intervention worth it? That is, does the attempt to rectify the problem only create more problems so that in the end the benefits don't justify the costs?

When discussing economic policy one ideally would be able to articulate a clear and coherent answer on each of these questions. Unfortunately, that's easier said then done, but hopefully one would have at least have a keen awareness of the key assumptions of their own and their opponents arguments (and any empirical support for them).

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