Q&A: Limits of Minimum Wage Policy

- People appreciate the benefits, but not the cost. You know, when the minimum wage goes up, what do I see afterwards? Well, the people working have higher wages and they're happier. I may not see who lost their job.

- Hi, thank you so much for the great presentation. So, hi, I am Brian. I'm from South Korea, and I don't know if you know this, but South Korea, the minimum wage has almost doubled within the 10 years. And what happens is the everyday living prices are also sort of going up because of that

- Everyday prices, did you say?

- Yes. And also because of what's happening in the Korean economy, a big majority of Korean citizens are also wanting the minimum wage to Right. Raise, be raised more. And I was wondering why a big majority of like the Korean citizens are trend not really understanding why, why the cycles keep happening.

- I mean, that's not, I didn't, I didn't know it had doubled in Korea. I'd love to go back and study it more. I, I went to Korea a couple years ago and had a blast and lecture of minimum wages, but they obviously didn't listen. But that's okay. Not the first time or the last, you know, I I, I mentioned the point that if you look at public opinion polling, both Democrats and Republicans, majority's favor, minimum wage increases more Democrats than Republicans. You know, it's not surprising that voters aren't just making choices based on what economic research tells 'em. We voted for a president who's opposing tariffs left and right. I would say economists views on tariffs are more unanimous than they are in minimum wages. I, I, I, I don't, I don't know, there's a credible economist who says this is a good idea, right? Some say, yeah, we should raise the minimum wage. I disagree with 'em, but, you know, I think people, I think there's two possibilities. One is ignorance. People don't know. The other is they, people appreciate the benefits but not the cost. You know, when the minimum wage goes up. And then I, I look around, say I'm a young person, so I, I associate people who this is relevant, right? Not, you know, people making a lot more money. What do I see afterwards? Well, the people working have higher wages and they're happier. I may not see who lost their job, right? They, they may not be as visible to me. It's something we see in the data and we work very hard to, to see if we can detect, but people may just not see it. But it may just be that it's, you know, people have an overly simplified view and they do kind of think it's a free lunch. Sometimes I think with economic policies, less with the minimum wage, the winners might prefer a po some people may gain from a policy. So it's not, the tariffs are bad for every single work in the economy. If I'm an auto worker, I mean, the auto unions seem to, you know, seem to seem to like it. 'cause maybe it's good for auto workers. So in some places, in some locations, and as we know, elections in the US are very regional, you know, that may be part of it, that the, the, the, the gains are concentrated for some and the losses are, are sort of very diffuse. For others, the minimum wages don't work that way. I think it's the opposite, but it's a puzzle. I think I, I have this conjecture that I have not yet figured out how to do a convincing research project on that part of the appeal of really high minimum wages, which as I said is a fairly new thing, is that it makes the government kind of responsible for how much you get paid. Right now everybody votes, they say the political science say economic of a pocketbook issues as they say, right? But you know what the government chooses for the tax rate on, you know, God knows what, I don't really directly relate that to how much is in my wallet, but if minimum wages up to $30 an hour, there's gonna be a lot of people for whom that exact policy has a lot to do with how much is in their wallet. And that may be something that, that, you know, is a very powerful political tool, but I haven't been able to figure out how to really test that conjecture empirically. So it remains a conjecture, oh, am I supposed to call on you? Oh, here, I think you had, there was a hand up here. Oh, you guys just whoever you want.

- Do you think there are any other areas than minimum wage that it would be better to address family income rather than individual wages?

- So, well, I mean, I I think in general we should be focusing on family income, not individual wages. Because at the end of the day, that's what we care about. There's a growing body of research, not unanimous, but a lot of research that says kids growing up in poor, it's not a surprise, right? Kids growing up in poor families have a lot of disadvantages and that's the problem we should be worried about. I would also argue this is kind of polemical not really an empirical argument, but we certainly argue in this country for good reason about whether if we give money to adults, they will work less. And maybe that then is offsetting what we actually expect to happen. And this is, this comes out of standard models, right? Of, of incentives. And, and if you ask sort of Americans versus Europeans why people are poor Americans are more prone to say it's a choice and less a European's more prone to say bad luck. And it's the truth, it's probably, you know, part of both. So we worry about the incentives for adults, but no, no kid is choosing to be poor, right? I don't worry about, you know, labor, labor supply incentives for a 5-year-old. I worry about whether they're seeing the doctor and getting enough to eat and, you know, have a warm house if live in a cold climate and stuff like that. So that's, I think, the problem we should be addressing. I'm not saying the ITC is the only way to address it. We do a lot of other things, but that's always the problem we should be focusing on. And in fact, I mean if you look at, you know, the federal budget where money that goes to lower income families, because we, we do spend a lot of money on these different programs. It's, it's a bit of a cl of programs that have come up at different times for different historical reasons that could probably be structured a lot more sensibly. But, but we are doing that to, to a very large extent. I just think the minimum wage focus, at least in so far as you're saying, it's to reduce poverty is quite misdirected.

- Hi. What do you think about indexing the minimum wage to inflation where an increase in inflation would increase the minimum wage each year?

- Right. So, so that's a, it's a great question. So first of all, some states and localities have done that. I think it's around a dozen or so now. So I will say the, the sort of the sort of glib comment is as a labor economist who studies minimum wages, I love the fact that we don't index and that minimum wage increases happen for all sorts of weird reasons at different times. 'cause that's great for research. I want the variation to be close to random, right? If I said, what is the smart way to set this policy? I'd say let's figure out what minimum wage we're gonna set, maybe at some percentile of the wage distribution. I don't know, let's agree on that. Let's have that fight and then let's index it to make things more predictable for businesses, right? So predictability is really important. I mean, part of the wrap on, on the tariffs is not just the, their existence, but their, they're a hundred percent one day and 15% the next day. And how do I invest? How do I decide what to do? Un no, no business likes unpredictability. The potential downside is less important. Now when in, well, except for a few years ago, you know, inflation past couple decades, most of your lives has been, except for a couple years, been very, very low. But when, when inflation runs higher, when the minimum wage goes up, it kind of erodes fairly quickly. So businesses may not respond to it as strongly. They may say, you know, we'll just sort of ride it out for a year. And then it'll slowly kind of in real terms, come back down. Indexing sort of takes that away. So Isaac Sorkin has work on, at least in theory, how index wages are kind of a more permanent increase in the relative price of low skilled labor and as a result might have more adverse effects. But I, so I don't have a great, I don't have a great evidence weighing those arguments, but I think the, as a, if I was setting policy, not worrying about my research career, and I should really focus more on the first and the second, some, some kind of, whether indexing or something to make it more predictable is clearly, I think preferable, conditional on how high it's gonna be. Right? Better to go up 5% a year than do nothing and something go 50% a year to catch up.

- Good afternoon over here.

- Yeah.

- Hi. We heard in an earlier session that sometimes some entitlement programs create perverse incentives where a, an employee may not prefer an increase, say from 16 to $18 because they lose out on, you know, post tax income. How does EITC avoid the same trap?

- Well, that's a, that's a great question. So I, I don't, it is true that a higher minimum wage and you know, more, more income earned in the labor market, which if you keep your job an hour and a higher wage will, depending on the program, reduce some benefits. And sometimes that happens in what, you know, we would call pretty silly ways. Like when there's sort of a cliff, your benefits were there and then they're gone completely as opposed to phasing out. So we, you know, we've gotten a little better at fixing those things with, with welfare reform, at least in that dimension. The EITC helps a bit because it's a, i i actually, this may or may not help, but there she is again. Okay. So that upward slope on the left hand side, what you can see is as your income goes up, so up to, I, I can't, it's kind of at a weird angle here. I'll look here up to around a little over 20,000 is, that's your earnings, your income on the bottom and the, the vertical is how much you get. So it's a fixed percentage. So it actually increases with earnings for a while. So it actually doesn't offset. Then you hit the flat part that's called the plateau and we have to eventually stop going up or we'd all get the ITC, right? So there's a flat part where it doesn't go up or down, and then eventually it phases out. And you may not be able to tell here, but it phases out at about half the rate of the phase in. So I mean, you always, you have to do the, there's no way to have an entitlement program that doesn't create some disincentives. And as a result we sort of phase them out. Sometimes we do it more sensibly than others. I always have this discussion with my students when I talk about these kind of policies, I sort of go through this and I say, okay, so we have a budget constraint and there's a kink in it. And that means, as you say, some people will work less or maybe not work at all. But I then I caution them. I say, you know, that in and of itself doesn't mean it's a bad policy. We have to ask how many people are getting the benefits, who are they and how many people are having this adverse effect and how, how big and how serious a problem. It's 'cause you, you can't do one and avoid the other unless everyone gets the benefit, which, you know, for the most part we don't wanna do. So that's a, a very policy specific question.

- I, hi, thank you for your talk. In the UK there's some evidence that rising minimum wages have caused wage suppression, where the increase in the minimum wage has narrowed the pay gap between low paid jobs and midair jobs. Has there been the same pattern in the United States? And what impact does it have on the labor market?

- Okay, so let me, let me leave off the last question for the minute about what does, has the impact has in the labor market for sure. Higher minimum wages will reduce wage gaps, right? Wage gaps, that's, I'm talking the hourly measure, the thing that the minimum wage regulates between lower wage and somewhat higher wage people. That's why when I started out way back when with the 50 20 gap or whatever it was, people say, let's raise them minimum wage. Try to narrow that. It will do that. It it, you know, people talk about it also in the context of gender gaps or race or ethnic gaps, right? Because more minimum wage workers are female and minority than are white male and proportionally. So, so those things will happen. The impact on the labor market is, you know, it is what about employment at our right, it's not, it's not just about wages. So when people do these papers, I, you know, I keep seeing them get published and I always scratch my head and say, telling me, you know, why is it interesting to tell me that that minimum wages raise wages of low wage workers, right? Okay, I I, what I care about is everybody, not just the workers. 'cause the first thing has to happen. So that's, I think the point of this, that, that the, that evidence, it's not irrelevant. You might, we might just have a preference for less inequality, fine, but we should include the zeros right in when we're measuring income inequality. And as this research says, I think there's more of them when you raise the minimum wage. So that's the trade off. You can't avoid. Take one

- Last question. Hi, thank you so much for, for the talk. So my question is, when thinking about minimum wage in EITC, do you think of them as complimentary tool that can be used together or should government only fund one of them and 'cause like there's only much resources and Right. One of them is significantly better than the other and one, right.

- Well let, let's be clear, the government only does only fund one of them, right? 'cause the government doesn't pay for the minimum wage except for the workers they hire, right? But government doesn't hire many low wage workers. So there are, there are arguments about complementarity and I, I actually have some work that says there are some complementarities and they're really complicated. So think about a, I talk about single mothers being dis highly disproportionately represented among the poor, right? You only think about a single mother's problem. She, she can work and earn a wage. If she's a single mother, she's probably less, not always, but less educated. Her, her wage options aren't that high. And she also has kids. So then if they're not in school yet, you got a childcare problem. So you can imagine that for them, the, the sort of bump up to your wage, which is affected what the EITC does, plus the minimum wage could actually induce more of your to work, right? And there's some evidence that happens, but then the people who get hammered right, are the ones who don't get much from the EITC, right? Because, because now you, so if you look at the data, single mothers actually enter the workforce a little bit more when the minimum wage goes up and the minimum wage is up, sorry, together with the EITC. But female teenagers who may compete with 'em for jobs get clobbered. So again, you may say that's a good thing. I care more about the income of single mothers than the income of teenagers because those single mothers have children. Right. And that's a fair point. So there, there can be some complementarities as a, as a, as an economist thinking about efficiency, it poses a, a, a tough challenge because whose time with, at home, at home broadly speaking is valuable. Single mothers. 'cause they have kids whose time at home is worthless, you know, teenagers playing video games day long, right? So in some sense I might prefer the single mother stay home and the teenagers work, but you know, then, then we have the resource problem. So, you know, it, it's always an on the one hand on the other. And it's not to be cautious, but it's because that's the reality.