A $15 min. wage is good, but a wage subsidy is better

A protest sign is pictured during a rally to raise the hourly minimum wage to $15 for fast-food workers at City Hall in Seattle

An edited version of this article was originally published in the Capitol Hill Times.

Thanks to mass protests by fast food workers and the activism of recently-elected socialist city councilor Kshama Sawant, a $15 minimum wage is coming to Seattle. The increase has been embraced by the mayor and virtually all city councilors. Sawant has sworn to push the minimum wage increase through via public referendum this November, if the council doesn’t mandate it first.

There’s little question that a $15 minimum wage, by supporting workers and increasing consumption, would be preferable to the current state of affairs. But while we need to redistribute (or, as Marxists have it, return) wealth to the working poor, there is a more elegant method than the comparatively clunky minimum wage: a wage subsidy. It’s essentially a negative income tax administered via wages rather than via tax forms. According to Nobel laureate Edmund Phelps, wage subsidies “bid up the wages of low-wage people, and that same bidding for more low-wage people in the labor market would pull up their employment too.” Coupled with increased tax revenues from employers, it would accomplish the same goal as a minimum wage, but more effectively.

The negative income tax was developed by Nobel prize-winning economist and conservative patriarch Milton Friedman as an alternative to traditional welfare. Rather than delivering welfare assistance piecemeal by bureaucracies, Friedman advocated a simple cash subsidy to the poor, on the theory that they know best how to spend it. A version of the negative income tax already exists in the form of the federal Earned Income Tax Credit (E.I.T.C.), which is widely endorsed by economists of all stripes. A wage subsidy would improve on the E.I.T.C. by replacing the red tape of tax forms with automatic distribution via wages. Just as the federal government removes a fraction from each paycheck for Social Security, the Seattle government could add a fraction to each paycheck as a wage subsidy, requiring no additional paperwork for employees.

A wage subsidy would also circumvent one of the strongest (logical, if not empirical) arguments against a minimum wage: that it will discourage firms from taking on more employees. This is why, in 2010, Nobel laureate Joseph Stiglitz and several other influential economists urged Congressional leaders to implement a “hiring tax credit” similar to a wage subsidy, calling it “a cost effective way to create jobs.” While there’s not much evidence that a higher minimum wage actually discourages employment in the messy real world–where there are dynamics other than elasticity of demand for labor–it’s true that, other things equal, a business that pays $15 per hour per worker will buy fewer hours of labor than a business that only pays $10. A wage subsidy would eliminate this theoretical disincentive because businesses would pay extra taxes to fund the subsidy regardless of whether they hired more employees; there wouldn’t be a direct causal relationship between number of employees and extra cost of employees. Indeed, we could limit the tax base which funds the subsidy to apply only to employers, so that as with minimum wage, money would be redistributed from businesses to workers, but without discouraging employment.

Another advantage a wage subsidy has over minimum wage is, as the influential economist Noah Smith puts it, that “minimum wage doesn’t necessarily raise wages for people who are slightly higher up the wage distribution but still poor. Wage subsidies can push up wages for all of the working poor.” Just as a regular income tax takes some ratio from workers’ incomes instead of demanding a set amount from everyone, a wage subsidy would help poor workers who already earn more than $15 per hour. Many of $15 minimum wage’s loudest critics (on internet forums, at least) are themselves low-wage earners who make slightly more than $15 and who feel affronted that less-skilled workers will be earning the same amount as they are. This may be an ugly, self-centered attitude, but it’s also a dangerous split in the ranks of the working poor. Moral rebukes to these whiners won’t change their minds; a wage subsidy will, because it will assuage their envy and appeal to their self-interest.

One possible objection to a wage subsidy is that it will allow employers to lower their own wages and let the government pick up the slack. This can be avoided by just keeping a low minimum wage in place (e.g. the current one). Setting that minimum wage creates a price floor below which employers cannot go; competition between employers for higher-skilled workers will push up wages for higher-skilled jobs. In this way, the feedback-loop of the market will still react to consumer preferences (such as raising the wages of bilingual workers when there’s greater demand for them) while keeping all wages high enough to live on.

A $15 minimum wage would be better than what we have now. It just wouldn’t be as good as a wage subsidy. A wage subsidy is superior because while it redistributes the same amount of money from businesses to workers as a minimum wage, it more elegantly integrates into existing market mechanisms, doesn’t even theoretically discourage employment, and raises wages for all poor workers, not just the poorest.

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