Christina Romer: The Business of the Minimum Wage

Christina Romer on the minimum wage (the article explains her arguemts in more detail):

The Business of the Minimum Wage, by Christina Romer, Commentary, NY Times: Raising the minimum wage, as President Obama proposed in his State of the Union address, tends to be more popular with the general public than with economists.

I don’t believe that’s because economists care less about the plight of the poor... Rather, economic analysis raises questions about whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty. ...

[M]ost arguments for instituting or raising a minimum wage are based on fairness and redistribution. Even if workers are getting a competitive wage, many of us are deeply disturbed that some hard-working families still have very little. ...

It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families. For example, the ... earned-income tax credit... This approach is very well targeted — the subsidy goes only to poor families — and could easily be made more generous. ...

So where does all of this leave us? The economics of the minimum wage are complicated, and it’s far from obvious what an increase would accomplish. If a higher minimum wage were the only anti-poverty initiative available, I would support it. ...

But we could do so much better if we were willing to spend some money. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time. And pre-kindergarten education, which the president proposes to make universal, has been shown in rigorous studies to strengthen families and reduce poverty and crime. Why settle for half-measures when such truly first-rate policies are well understood and ready to go?

The point of the argument that the minimum wage and EITC are complements rather than substitutes (i.e. they fill different needs and hence work together) is to avoid setting one against the other in a political fight. The minimum wage costs the federal government nothing, while an expansion of the EITC would requite an increase in federal spending. My fear is that opponents of the minimum wage on the right will team up with well-meaning Democrats to say yes, we agree, the EITC is much, much better way to help the poor -- that's what we should do -- and use it as an excuse to block minimum wage legislation. Then, when it comes time to fund the EITC, we'll here that it's a good idea, but with the budget the way it is, we just can't afford it right now.

There was a time when I would have joined the "let's use the EITC rather than the minimum wage to attack this problem," but I've been convinced the minimum wage and the EITC really are complementary, and the political reality right now is that if we are going to help the poor at all in an environment where the right has whipped up so much fear of the government debt as a way of reducing support for social programs, the best bet is the minimum wage.