Economically Illiterate: Demanding a “Living Wage”

Don Walker of the Journal-Sentinel, who wrote an absurdly biased story about attempts in the state legislature to rein in some of the excesses of Milwaukee government, has followed it up with an equally biased story about a demonstration by local union activists demanding a “living wage” at local fast-food restaurants.

It’s basically a puff piece, quoting only activists and people sympathetic to the activists, and giving no indication that anybody but an evil greedy capitalist might oppose the notion.

But in fact, anybody who is serious about public policy will oppose the notion.

Typical of what liberals who know some economics think is this column by Christina Romer, who was chairwoman of President Obama’s Council of Economic Advisers. Dealing with President Obama’s proposal to raise the minimum wage to $9.00 per hour (far less radical than the $15 that the activists want), she goes through the evidence on various related issues. Being a liberal, she bends over backwards to find good in the policy, but still comes out against it.

. . . businesses pass along some of the cost of a higher minimum wage to consumers through higher prices. Often, the customers paying those prices — including some of the diners at McDonald’s and the shoppers at Walmart — have very low family incomes. Thus this price effect may harm the very people whom a minimum wage is supposed to help.

It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families. For example, the current tax system already subsidizes work by the poor via an earned-income tax credit. A low-income family with earned income gets a payment from the government that supplements its wages. This approach is very well targeted — the subsidy goes only to poor families — and could easily be made more generous.

Just how generous the welfare state is for low income workers in Wisconsin can be seen by going to the website access.wi.gov.

There, one can enter a hypothetical person or family, and see what sort of aid they would get if they worked for the current minimum wage.

Suppose, for example, we posit a family with a single mom and two children.  She is working 30 hours per week (it’s easier to get a part-time job than a full-time job) at the current Federal minimum wage ($7.25 per hour).  Her children  are both school age (8 and 11).  She pays $500 a month for an apartment, and has to pay a heating bill.

What does she get, according to the official state website?

• Her earnings are $935 per month
• She can get a minimum of $430 a month in food stamps

This works out to $16,380 per year.  In addition she can get yearly:

• A minimum of $5,236 Federal Earned Income Tax Credit
• Wisconsin Earned Income Tax Credit of $575
• At heating benefit of at least $210
• A benefit toward her electric bill of at least $166

Thus her actual income (if you count food stamps as “good as cash”) is $22,567. (Given the complication of some of these programs, this is actually an approximation, but it’s most likely on the low side.)

In addition to these benefits, her family can get:

• BadgerCarePlus Standard plan
• Help paying for child care
• Free school lunches for the children
• Summer meals for the children

Note that her cash income ($22,567) is well above the $19,530 that is the Federal Poverty Level for Wisconsin for a family of three.

A Rational Welfare State

What we have here is a rational welfare state. It’s not perfect, and it’s probably a bit too generous, but what it does is help workers with little human capital (and thus little earning ability) without distorting labor markets.

Then why are the labor and left activists such yahoos about the issue?

They would not admit it (perhaps not even to themselves), but they want labor markets distorted. When a high minimum wage causes unemployment, that is an excuse for more stimulus spending. When income inequality increases because poor people are put out of jobs, that’s an excuse for more redistribution. When poor people have trouble affording food because prices have been driven up, that’s a reason to spend more on food stamps.

Of course, an extremely high minimum age reduces the incentive for employers to resist unionization. That goes to the fundamental agenda behind the whole “living wage” movement. It’s not really about low-wage workers at all. It’s about unionizing the workforce, since unions are the key organizational backbone behind the Democratic Party. This isn’t humanitarian politics at all. It’s about giving more power to leftist elites.