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The New Minimum Wage Paper And The Minimum Wage Problem

A new paper out on the effects of the minimum wage. One that I absolutely guarantee will be misunderstood, used to justify that which it doesn’t.

Top, top, journal, very good researcher – at least one of them is – and the finding is that minimum wages don’t have much unemployment effect if any. Thus we can raise it, right?

Ah, no, that’s not what it shows:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Our thinking is that the effects come from the relationship between the minimum and median wages. If we insist that wages cannot be lower than more than we already pay half the people, then we really are going to have problems. A minimum wage of 100% of the median wage isn’t going to work, that is. That ratio is called the Kaitz Index. This paper shows us that there are few to no such bad things happening up to 0.59 on that Kaitz measure. We can have the minimum wage at 59% of the median wage and know that we’ll have the good effects and only trivial amounts, at worst, of the bad.[/perfectpullquote] [perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] You can see what’s going to happen next, can’t you? The Economic Policy Institute tells us that the median wage is about $22 this year, and 59% of that is $13. A bit of rounding and some aspiration, and why not go for a $15 minimum wage? Except there are two median wages. Part-time and seasonal wages tend to be lower than full-year and full-time ones. The Economic Policy Institute is using that higher full-time one. The one for all jobs is quite a bit lower, $18.58 per hour. Take 59% of that and you get a rather lower level of $10.95 an hour. That’s around and about what McDonald’s, Walmart, and similar establishments pay as entry-level wages, which does seem about right, doesn’t it? [/perfectpullquote]

To translate into British numbers. The median wage is some £14.31 an hour. That means £8.44 is the minimum we have now proven we can have without too much ill effect. Except that’s not right, for the median wage for full and part time work is £11.31 by one calculation. That means we can have £6.67. Or lower than we’ve already got.

Which brings us to the awful truth about a minimum wage. If it’s about the lowest that people pay, anyway, then it’s not going to do much damage. Nor much good unless we really want a backstop to what people already generally get as a minimum. As soon as we start using it to try and push up the wage, above what people do generally get paid, then here come those bad effects. Which is interesting, isn’t it? For all the theory about a minimum wage it’s just not a useful tool.

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