Neumark: Better solutions than raising minimum wage

The slogans are everywhere: 'Fight for 15;' 'People Not Profits;' 'One Job Should Be Enough.' Worsening income inequality and the persistence of poverty have spurred a movement to raise the minimum wage, at both the national and state levels. Some West Coast cities have already boosted their minimum wage to $15 or more than double the federal standard. And Los Angeles and others are now considering a similarly aggressive move.

The labor market problems that these higher minimum wages are intended to fix are very real. But would a higher wage floor address the underlying problems? A large body of research shows that the answer is almost certainly no, and that there are better solutions, although these solutions are harder for policymakers to embrace.

There are several reasons why workers' wages are currently too low to provide what many view as an acceptable standard of living. One big factor is that technological changes have increased the value of higher-skilled workers and reduced the value of lower-skilled workers. Globalization, meanwhile, has brought many lower-skilled American workers into greater competition with their counterparts in other countries.

Simply requiring employers to pay $15 won't provide much ballast against these market forces. In fact, data indicate that minimum wages are ineffective at delivering benefits to poor or low-income families, and that many of the benefits flow to higher-income families. That's because minimum wages target low wages rather than low family incomes. And many minimum-wage workers are not poor or even in low-income families; nearly a quarter are teenagers who will eventually find better-paid jobs. Moreover, most poor families have no workers at all.

As a result, for every $5 in higher wages that a higher minimum wage imposes on employers, only about $1 goes to poor families, whereas roughly twice as much goes to families with incomes above the median. Higher minimum wages also reduce employment for the least-skilled workers. The most comprehensive survey of minimum wage studies, which I conducted with William Wascher of the Federal Reserve System, found that two-thirds of studies point to negative employment effects, as do more than 80 percent of the more credible studies.

Based on my research, I think it is likely that a $15 minimum wage in Los Angeles would lead some teenagers currently focused on their education to take part-time jobs at the new, higher minimum, and displace low-skilled workers from the jobs they now hold. That seems like a bad outcome.

If we really want to help low-skilled workers, we need to recognize that the solutions that actually work are expensive, difficult to achieve or both.

Guaranteeing a minimally acceptable standard of living for those who work entails redistribution of some kind. Minimum wage is one form of redistribution — although we don't always think of it as such — but it's a blunt instrument. Using the tax system is clearly better.

The Earned Income Tax Credit, for instance, targets low-income families very well. Research establishes that it provides generous government subsidies to these families' labor market earnings and it leads more people to work, which probably explains its bipartisan support. Some decry the EITC as 'corporate welfare,' because the labor market entry it encourages pushes down market wages. But that is precisely why it increases employment. If it did not lower wages, employers would not hire additional workers and those not hired would be more dependent on public programs.

Of course we could still do more. We could make the EITC more generous, including increasing it for those without children who are eligible only for minuscule payments. More radically, we might consider whether all low-income families, irrespective of employment, should receive more general income support in the form of direct cash payments.

These alternative policies would have to be financed by higher taxes, but that's a good thing. Redistribution through taxes is paid for by those with the highest incomes. In contrast, higher minimum wages are paid for by those who happen to own businesses in low-wage industries, and the consumers of the products of those industries, who are more likely to be poor.

Progressives who want to help low-income families by pushing for higher minimum wages would do better to channel their energy and enthusiasm toward methods of redistribution that do less to harm the least-skilled and more to help them, and that redistribute from those who make the most money.

David Neumark is an economics professor and director of the Center for Economics & Public Policy at UC Irvine. From the Los Angeles Times.