Coyote Blog

In part 1, we discussed different ways of measuring income mobility and income growth for the poor, and discovered that many traditional measurement approaches are overly pessimistic -- when one focuses on actual individuals, instead of income quintiles, income for the poor has improved substantially.

Unlike some libertarians, I don't have a problem with intelligently structured income transfer and safety net programs to help the very poor. In fact, I believe that such income transfer programs can be far less distortive and economically inefficient that many other anti-poverty programs.  One of the latter I will focus on in this article is the minimum wage.

Each year, Mark Perry puts together an awesome demographic snapshot of how various income quintiles differ from each other.  Here is his latest:

I want to first call your attention to the figures at the top for mean number of earners per household and household income per earner.  Much of anti-poverty policy seems to be based on the assumption that poor people, because they lack bargaining power, get hosed on wages and other work rules.  Public policy thus tends to focus on minimum wage and overtime rules and a myriad of other workplace interventions.

But in fact, if we compare the lowest quintile with the middle quintile in the chart above, we see something very different.  What we see is the main difference is hours worked, not the relative wage rates.  Let's consider two scenarios

1. We keep the amount of work done the same, but raise the wage rates of the poorest quintile to the middle quintile.  In this case, their average income would go up by about 50% from $12,319 to $18,654  (calculated as 0.41 mean earners times middle income per earner of $45,497).
2. We keep wage rates the same but raise the amount of work done in the poorest quintile household to that of the middle quintile. In this case, their average income more than triples from $12,319 to $41,163 (calculated as 1.37 middle income earners times poor income per earner of $30,046)

So in this example, increasing the poor's wage rates to middle class levels yields $6,335 a year while increasing the poor's amount of work done to middle class levels yields $28,844 a year.  Public policy that focuses on increasing work hours for the poor has 4.5 times the effect of public policy focused on wage rates.  A corollary to this is that any public intervention on wage rates for the poor that has negative employment effects is likely to have little net effect on poverty.  

But in fact this understates the relative benefits of approach #2. Look at the education levels in the poorest quintile vs. the middle.  The poorest quintile has 2.5 times as many people without even a high school degree as in the middle.   For these folks to progress, the only way they can develop skills is on a job and they can't do this without a job.  Or said another way, another advantage of approach #2 and getting them more hours of work is that they gain more skills to overcome their starting disadvantage in education.

I wrote about this in the summer issue of Regulation magazine, in a article entitled "How Labor Regulation Harms Unskilled Labor."  I argued that while likely intended to help the very poor, most labor regulation may be harming the poor, particularly those without skills or much experience, by making it harder and harder for them to find work.  This not only impoverishes them, but makes it harder for them to progress to better jobs and higher income levels.

In my business,which staffs and operates public campgrounds, I employ about 350 people in unskilled labor positions, most at wages close to the minimum wage. I had perhaps 40 job openings last year and over 25,000 applications for those jobs. I am flooded with people begging to work and I have many people asking for our services. But I have turned away customers and cut back on operations in certain states like California. Why? Because labor regulation is making it almost impossible to run a profitable, innovative business based on unskilled labor.

Why is this important? Why can’t everyone just go to college and be a programmer at Google? Higher education has indeed been one path by which people gain skills and opportunity, but until recently it has never been the most common. Most skilled workers started as unskilled workers and gained their skills through work. But this work-based learning and advancement path is broken without that initial unskilled job. For people unwilling, unable, or unsuited to college, the loss of unskilled work removes the only route to prosperity.

...the mass of government labor regulation is making it harder and harder to create profitable business models that employ unskilled labor. For those without the interest or ability to get a college degree, the avoidance of the unskilled by employers is undermining those workers’ bridge to future success, both in this generation and the next.

Public policy could best help the poor by lowering the regulatory barriers to hiring unskilled labor and promoting economic growth that will help keep us close to full employment.

Part 1 of this series was here.

Postscript:  This update on the Seattle minimum wage study is interesting.  Note that this study is occuring near peak employment, a time when one would expect the minimum employment impact from a minimum wage increase.  However, I do think the findings are roughly consistent with the discussion above:

In their latest paper, which has not been formally peer reviewed, Mr. Vigdor and his colleagues considered how the minimum-wage increases affected three broad groups: People in low-wage jobs who worked the most during the nine months leading up to and including the quarter in which the increase took effect (more than about 600 or 700 hours, depending on the year); people who worked less during that nine-month period (fewer than 600 or 700 hours); and people who didn’t work at all and hadn’t during several previous years, but might later work. The latter were potential “new entrants” to the ranks of the employed, in the authors’ words.

The workers who worked the most ahead of the minimum-wage increase appeared to do the best. They saw a significant increase in their wages and only a small percentage decrease in their hours, leading to a healthy bump in overall pay — an average of $84 a month for the nine months that followed the 2016 minimum-wage increase.

The workers who worked less in the months before the minimum-wage increase saw almost no improvement in overall pay — $4 a month on average over the same period, although the result was not statistically significant. While their hourly wage increased, their hours fell substantially. (That doesn’t mean they were no better off, however. Earning roughly the same wage while working fewer hours is a trade most workers would accept.)

It’s the final group of workers — the potential new entrants who were not employed at the time of the first minimum-wage increase — that Mr. Vigdor and his colleagues believe fared the worst. They note that, at the time of the first increase, the growth rate in new workers in Seattle making less than $15 an hour flattened out and was lagging behind the growth rate in new workers making less than $15 outside Seattle’s county. This suggests that the minimum wage had priced some workers out of the labor market, according to the authors.

“For folks trying to get a job with no prior experience, it might have been worth hiring and training them when the going rate for them was $10 an hour,” Mr. Vigdor speculated, but perhaps not at $13 an hour.

I would add as an aside that I think the NYT is being a bit arrogant an narrowly focused on money (vs. other benefits of employment) when they added the parenthetical phrase at the end of the third paragraph.