How to make the poor poorer

February 7, 2007

Free Market Foundation

The strong bipartisan support for increasing the federal minimum wage to $7.25 an hour from the current $5.15 a 40 percent increase is a sad example of how interest-group politics and the public’s ignorance of economics can combine to give us laws that manage to be both inefficient and inegalitarian, say Gary S. Becker, the 1992 Nobel economics laureate, and Richard A. Posner, a federal circuit judge.

Although some workers benefit those who were paid the old minimum wage but are worth the new one to the employers others are pushed into unemployment, the underground economy or crime:

The losers are therefore likely to lose more than the gainers gain; they are also likely to be poorer people.

And poor families are disproportionately hurt by the rise in the price of fast foods and other goods produced with low-skilled labour because these families spend a relatively large fraction of their incomes on such goods.

Because most increases in the minimum wage have been slight, their effects are difficult to disentangle from other factors that affect employment:

But a 40 per cent increase would be too large to have no employment effect; about a tenth of the work force makes less than $7.25 an hour.

Even defenders of minimum-wage laws must believe that beyond some point a higher minimum would cause unemployment, otherwise why don’t they propose $10, or $15, or an even higher figure?

As a means of raising people from poverty or near poverty, the minimum wage is inferior to the Earned Income Tax Credit, which compensates for low wages without interfering with the labour market or conferring windfalls on the non-poor, say Becker and Posner.

Source: Gary S. Becker and Richard A. Posner, How to Make the Poor Poorer, Wall Street Journal, January 26, 2007.

For text: http://online.wsj.com/article/SB116978492591488718.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 30 January 2007