Not surprisingly, the nonpartisan analysts at the U.S. Congressional Budget Office have found that President Barack Obama’s proposal to raise the minimum wage would have costs as well as benefits. Increasing the minimum from its current level, $7.25 an hour, to $10.10 by the second half of 2016, as the president advocates, would lift 900,000 individuals out of poverty — while reducing total employment by about 500,000 workers. This finding is perfectly consistent with both economic theory and the empirical literature.
Equally unsurprisingly, Democrats and Republicans immediately turned the CBO report into more fodder for their long-running dispute over increasing the minimum wage — which the former tout as a panacea for economic inequality and the latter demonize as a job-killer. The prospect of an election-year legislative compromise on this issue, never bright, now seems fainter than ever.
That’s doubly unfortunate, since the CBO report is best read as a gentle argument in favour of a middle path on the minimum wage. Of course, the necessary precondition for seeing it in those terms is the ability to recognize that both sides in the age-old minimum-wage debate have valid points: A decent society would neither price entry-level workers out of jobs nor leave them completely without leverage in the labour market. The real issue is not so much whether to have a minimum wage, or even how much it should be, but how best to set it.
Our current procedure goes something like this: At irregular intervals, Washington politicians, and their allied lobbyists, stage a huge battle over arbitrarily selected numbers.
A much better procedure would consist of three steps: First, link the minimum wage to an appropriate benchmark. We have suggested a minimum wage high enough to pay a full-time worker an average income equal to two-thirds of the poverty line for a family of four, or roughly the average level of the past 55 years. At present that would be $8 an hour — a 75-cent raise over the minimum.
Second, provide for automatic, modest annual increases, based on an appropriate inflation factor.
Third, augment the earned-income tax credit, a cash supplement to wages that works like a negative income tax. It has been gradually replacing the federal minimum wage as a poverty-fighter in recent years but remains too small for certain workers, such as childless single adults.
Our proposal has all the poverty-fighting advantages that proponents of a $10.10 minimum claim for their idea — with the sole exception that it raises the minimum less rapidly than they would like. It also has additional, compensating advantages: It would remove future minimum wage increases from political contention and it would have less dampening effect on employment. We’d say it’s more politically feasible, too, if we had any confidence that either Republicans or Democrats were actually interested in a practical solution.