Soccer Dad: A dollar short

January 19, 2006

A dollar short

Yesterday the Washington Post reported:

Maryland's overwhelmingly Democratic legislature voted to override Governor Robert Ehrlich's veto of a bill that would raise Maryland's minimum wage by one dollar an hour.

Democrats, correctly expecting that a pliant media would hail their efforts to help "the little guy" while portraying Gov. Ehrlich as beholden to business interests, were ecstatic about their success.

Well, no, that wasn't what the Washington Post reported in "Minimum wage in Maryland raised over veto." This was:

Democrats billed the passage of the wage bill, coupled with legislation approved last week requiring Wal-Mart to spend more on employee health benefits, as a way to plant their party firmly on the side of working-class voters. The governor, by contrast, wants to show his party's unyielding commitment to the business community.

"These two votes have become two more reasons for businesses not to come to Maryland," said Ron Wineholt, vice president for government affairs for the Maryland Chamber of Commerce, who said the symbolic effect of both bills extends well beyond the people they will directly affect.

Democrats countered that both measures were narrowly targeted to help some of the most vulnerable of the state's nearly 3 million workers.

By overriding the Wal-Mart bill and the minimum wage bill, Maryland Democrats have arguable made it more difficult for lesser skilled workers to find employment.

As with most liberal economic analysis, Maryland Democrats (if they indeed thought about and not just blindly followed the dictates of the unions) view economics statically. A tax cut will necessarily mean lower tax revenues by this way of thinking. This is not so. Tax cuts applied properly may actually increase tax revenues by targeting inefficiencies in the tax code encouraging more investment instead of tax shelters.

Here, too, there's an assumption that raising the benefits (requiring Wal-Mart to spend a certain percentage of its payroll on health care) or wages (raising the minimum wage) will only affect the worker and that that effect will be beneficial.

But as with most economic principles, there's a trade-off here. The two overrides will make it more expensive for employers in Maryland to hire unskilled or low skilled employees. The possible consequences of that are that employers may do less hiring or actually fire some employees, that businesses will either choose not to come to Maryland or may leave Maryland or that some businesses will choose not to hire employees formally, preferring instead to pay them under the table to escape the new minimum wage.

The other problem with the Democratic view of the minimum wage bill is that it assumes that minimum wage employees stay minimum wage employees. In fact minimum wage employees are usually starting out and are likely to move up into higher paying jobs once they've gained experience.

An important paragraph in the article state:

Nationally, minimum-wage workers are concentrated in the leisure and hospitality industries. About one-quarter of minimum-wage earners are younger than 20, accordingly to legislative analysts, and slightly more than half are younger than 25.

This suggests that most minimum wage employees are, indeed, starting out. Unfortunately, the Post in the next paragraph doesn't follow through with the implication of this, but rather yields the floor to demagoguery:

"There's a growing disparity between the working class and the wealthy in Maryland," Busch said, adding that the average salary of a corporate chief executive rose 12 percent last year. "We're just looking for some fairness for the little guy here."

During debate on the measure in the House, Del. Maggie L. McIntosh (D-Baltimore) said it was "shameful" that the wage has not been increased in nine years. "Anybody recall what a gas-electric bill was in 1997?" asked McIntosh, who then held up her home heating bill, which had nearly doubled.

The Post skews the article in another way. Against the bill it cites the opposition of the Maryland Chamber of Commerce. But supporting the bill it cites the academic sounding Economic Policy Institute. Unfortunately, despite its claim of being a "...nonpartisan think tank..." it appears that most, if not all, of EPI's economic analysis is of a leftist (or perhaps, more correctly, pro-labor) orientation.

There has been much debate in the past decade about the effects of raising the minimum wage. A much cited study supporting raising the minimum wage was carried out by Princeton economists David Card and Allan Krueger. However not everyone feels that their findings were accurate.

A competing study by David Neumark and William Wascher according to this report concludes that:

Overall the tradeoffs created by minimum wage increases, more closely resemble income redistribution among low-income families than income redistribution from high-to-low-income families. Earnings in the low-skilled labor market increase, reducing the likelihood of re-entering welfare.

(This also contradicts an assertion by Democrats - unchallenged by the Washington Post - that raising the minimum wage, would, in turn raise wages for higher salaried employees too. Even if this were true, this clearly would be inflationary, something I'm not sure the Democrats would want to brag about.)

Figure 1. in this report shows that a raise in minimum wage would indeed hurt employment of low skilled workers. The problem is that there's no source for it other than the Bureau of Labor Statistics.

One of my frustrations in researching this article is the lack of studies showing the effect of raising the minimum wage. I would have thought that with the raises in the national minimum wage over the past decade there would be plenty of data to draw conclusions. This suggests that the effect of raising the minimum wage might in fact be minimal or, at least, nearly impossible to isolate from among many other factors affecting business's ability to hire.
It clearly does not have an obviously large positive effect and may even have a small negative effect.

For politicians to take an action and proclaim it compassionate is perfectly normal. For a newspaper to take that proclamation at face value and write a brief for the upcoming campaign is outrageous.

Government could never build a highway without first submitting to an environmental impact statement. Perhaps we need an economic impact statement before passing any sort of business related legislation. And we need reporters to learn about basic economics before reporting on such legislation.

via memeorandum other discussions of this are at the Democracy Project, Cafe Hayek and Below the Beltway.

Technorati Tags: Governor Ehrlich, minimum wage,
Maryland General Assembly.