Tuesday, January 28, 2014

The minimum wage and poverty reduction: What if we're wrong?

Assume that we have decided that we ought to institute a policy to increase the disposable income of the least well off. Here are a few options from the real world:

  1. We can try to improve the business climate to increase overall employment,
  2. We can pay money directly to the poor, or
  3. We can increase the minimum wage.

For the sake of this exercise, accept that economists agree that raising the minimum wage will have negligible effects on employment among unskilled workers (in the real world that's not obvious), and that a better business environment or direct subsidies would also make the poor better off.

But let's make a crazy assumption: that economists are sometimes wrong when they make predictions.

So. What if they're wrong? Who pays for the mistake?

If an improved business climate fails to lead to a better lot for the poor, any cost will be spread fairly evenly. One could argue that those at the top benefit disproportionately from a better business climate, but if that's a problem it's one that can be dealt with through progressive taxation and redistribution or program spending.

If a program designed to pay money to the poor directly (or through a working income tax benefit) doesn't increase their incomes, they will not be hurt if the program is scaled back or reformed. The cost will fall on taxpayers in proportion to what they pay, so in Canada, disproportionately on the rich.

If economists are wrong in the case of the minimum wage, the cost will fall on the most vulnerable unskilled workers with the least income mobility. Those from well-to-do households can build experience through volunteering and unpaid internships. The working poor can't afford to work for free.

A minimum wage's costs are also relatively higher for small and start-up businesses. Large, established businesses can absorb the cost of higher compensation, while small businesses feel the sting. Businesses who don't hire unskilled workers pay nothing at all.

The bottom line: If we're wrong about some poverty-reduction policies, the burden of our mistake lies fairly equally. But if we're wrong about the minimum wage, it's the most vulnerable who pay the price. Tossing around grand ideas on poverty reduction means less than nothing if we're not willing to bear the cost.

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