Reflections on minimum wage.

Every couple of years, this drama plays out. There is a call for a hike to the minimum wage, the democrat talking heads posture it as helping the poor, the republicans paint it as a burden on the business. Lost among all the shouting is a serious analysis on what it does. I was on the fence on this, as something that did not make sense, but did not have significantly destructive effects.

Now a report from the CBO makes me reconsider. The current hike is expected to cost the economy half a million jobs through 2016. If the analysis is correct (and it seems to be), then we are at a stage where we should no longer support this nonsensical drama.

From a pure demand/supply point of view, the minimal wage did not made sense and would never be implemented in pure market economies . The government is setting the price for labor, and what that does is push a certain class of jobs out of the economy. If there is a retiree who is willing to work as a librarian for $5/hour, or an out of work individual willing to work in a new field where he would not be productive for $7/hour - these folks would not be allowed to work even if there was an opportunity and they were willing. So those kinds of jobs are lost.

On the benefit side, those that have jobs that pay the minimum wage - everyone across the board gets a raise, regardless of whether they are adding value or not. And if they are not, presumably the business owners would cut those positions as well. Those that get to keep their jobs get a higher salary - and they are net better off, but it is not without a cost to those that are lower on the ladder. The report mentions that a third of the benefits would go to families that earn three time the poverty levels, and only 19% goes to the families that are below the threshold.

This is a perfect example of a blunt instrument - something that is implemented across the board, with uneven benefits and costs,  and leaves the system worse than before. The reason it gets repeated every couple years, is that (1) politicians can point to it and claim that they are helping the poor and (2) it is easy to implement. Another victim of the news cycle that is based on talking points rather than nuanced analysis.