Administering the Minimum Wage

Revision of the minimum wage in the US was first in the order of business during the legislative term following the elections in November 2006. The working poor in America found support in the passage of bills by both houses of the legislature to raise the minimum wages. Apart from the standard arguments about the effects of a minimum wage on overall employment and the possibility that it may displace the workers who are most at risk of losing employment, there was less prominence accorded to the most effective way of ensuring that the proposed measures result in increases in the real wages of the working poor. Instead, the legislative houses sought to solve the question of raising the costs of labor to business by subsidizing corporations that hired lower wage workers.

Sarah Hamersma reminds readers in this New York Times opinion piece (subscription required) that this approach was far from efficient because the historical record shows that eligible firms hardly ever claim the credit. More importantly, she argues that there is no evidence that employers expanded their pay rolls in response to this measure. This latter effect is not inconsistent with the expectations of the legislators who passed the bill because it was ostensibly intended to protect those low income workers.

While the tenor of the author’s argument is that the idea of raising the minimum wage has little positive effect for the low income earner, to my mind the salient effect is the design problem which ensures that the subsidy goes through the firm when it could have been directly transferred to the worker. The merits of he minimum wage enhancement policy notwithstanding, the mechanism for channeling it is incredibly circuitous and does not subsidize the worker directly.