In his most recent Sunday New York Times column, Harvard economist Greg Mankiw outlined two ways to help boost the incomes of the working poor:
PLAN A The government subsidizes the incomes of low-wage workers. These subsidies are financed by increasing taxes on middle- and upper-income Americans.
PLAN B The government again subsidizes the incomes of low-wage workers. But under this plan, the subsidies are financed by taxing those companies that hire low-wage workers.
Plan A, Mankiw shows, is superior to Plan B across the board.
Plan A is fairer: It levies the costs of subsidies broadly rather than shifting them onto employers of low-wage workers, who are not responsible for the low skills of their employees and, indeed, offer them jobs and the opportunity to improve their skills.
2. Plan A is better for low-wage workers: It does not generate incentives for employers of low-wage workers to substitute machines for employees, and it does not increase the cost of goods produced by low-wage workers relative to other goods. Plan B does both those things, and can hurt low-wage workers as a result.
Mankiw intends his comparison to show the superiority of the Earned Income Tax Credit (which is Plan A) over raising the minimum wage (Plan B). And it does. Moreover, it’s really not a tough argument to understand, and Mankiw isn’t the first one to make it.
But that raises the question: Why do progressives put so much focus on raising the minimum wage when it’s so clearly a second-best solution to helping the working poor? It’s not as if President Obama’s economic advisers don’t understand Mankiw’s points. Yet the president’s policy focus in his recent speech on economic inequality was raising the minimum wage.
I have three answers, which are based less on what liberal policy wonks think than on the political interests and gut instincts of the progressive mass movement.
Politics: Raising the minimum wage is a nice wedge issue, in that it’s popular with the public (who haven’t been exposed to Mankiw’s arguments) but unpopular with small businesses, who are a core Republican constituency. It simply puts conservatives in a tight spot politically and allows progressives to score points.
Economics: As I recently wrote over at Real Clear Markets, many progressives believe that programs like the EITC programs allow employers like McDonalds to pay lower wages than they otherwise would. In this story, while the EITC is technically paid to low-wage workers, in effect it’s a multi-billion dollar subsidy to their employers. This isn’t implausible on its face. For instance, while half of payroll taxes and a certain share of health-insurance costs are nominally paid by employers, they result in lower wages for employees. But the research I’ve seen concludes that the EITC doesn’t work this way. The EITC draws more low-skilled individuals into the labor force, which through supply-and-demand will slightly lower wages paid to low-skilled workers. But employers aren’t targeting EITC recipients for pay cuts. And in any case, EITC payments more than make up for the fall in wages, so low-paid workers still come out ahead. So while liberal front groups like the National Employment Law Project make these kinds of arguments, you don’t see them very much from more respected liberal analysts.
Emotion: This is probably the most important point. I don’t believe I’m overstating things much in saying that when the progressive man-on-the-street sees something bad happen to one person – say, low wages – he believes it’s very likely someone else’s fault. Progressives’ job, in this mindset, is to find that person-at-fault and make him pay. In this case, progressives blame the employers of low-wage workers, who they assume could easily afford to pay more but choose not to.
Now, progressives could make their emotional impulses consistent with economic reality by placing the blame on, say, liberal social policies that encourage single-parent families, the negative effects of which – including on children’s future earnings – are almost too numerous to mention. Or progressives might think twice about the Democratic party’s excessive deference to teachers’ unions. If we did nothing other than fire the worst 5 percent of public-school teachers and re-allocate their students to other classrooms, the average lifetime earnings of their students would rise by around $250,000. Sad to say, well-intentioned but nevertheless misguided progressive social and educational policies contribute to the low skills of the working poor that, in the labor market, will result in low wages.
But if progressives did make this connection and point the finger at the true villains behind low wage, they wouldn’t be progressives anymore: They’d be neo-conservatives.
— Andrew Biggs is a resident scholar at the American Enterprise Institute.