Argument For Increasing Minimum Wage

When I studied the economics of minimum wage policy it was framed in the context of employment.  The classical line goes:

Raising minimum wages to help the poor ends up hurting them despite our good intentions.  As the minimum wage increases employment decreases as employers can no longer afford to maintain certain positions.

Following this logic, raising the minimum wage probably does more harm than good: some people earn more, others lose their jobs, most employers make less money or pass costs back to consumers, some employers may go out of business adversely affecting other parts of the economy, etc.  From what I have heard/remember, the empirical data on this subject is mixed – some studies find higher minimum wages reduce employment, others don’t – the jury is out.

But to me it seems like the actual relationship between minimum wage and employment is not as significant as the relationship between minimum wage and demand for public services.  I think a fairly simple theory suggests that raising the minimum wage is overall more efficient as it replaces government services with consumer choice.  Here is a sketch of the theory:

  • As the minimum wage increases the demand for public services like public housing, food stamps, and medicaid decreases, as low wage earners are more able to pay for their own goods and services.
  • This decrease in demand for public services, decreases spending for public services and associated administrative costs, which has the general effect of lowering the overall tax burden.
  • These gains in efficiency offset the losses predicted by the classical theory.

The real value added by increasing the minimum wage comes from dis-intermediating the transfer of goods and services to the working poor.  Increasing the minimum wage provides a direct transfer to lower wage earners, which both reduces the need for government administration of public services and provides lower wage earners with more choice.

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