Sunday, October 04, 2015

When Work Is Punished: An Analysis Of Increased Minimum Wage And The Welfare Cliff

Wage growth - or a persistent lack thereof - has become something of a hot topic in America. 
Thanks to the nationwide push for a higher pay floor (personified by mobs of angry fry cooks demanding $15/hour and Democrats on Capitol Hill who are pushing hard for "$12 by ‘20") and wage growth’s role as an input in Janet Yellen’s mental "liftoff" model, everyone from Main Street to Wall Street feels compelled to weigh in. 
The standard criticism of hiking the minimum wage is that forcing employers to pay more will simply result in layoffs and/or a reduced propensity to hire, but as we saw with Dan Price and Gravity Payments, there are a whole lot of other things that can go wrong. For instance, higher paid employees may not understand why everyone under them in the corporate structure suddenly makes more money and if people who are higher up on the corporate ladder don’t receive raises that keep the hierarchy proportional they may simply quit. 
But while politicians, pundits, and economists run in circles perpetuating a debate that’s better suited for an undergrad introductory economics course than it is for the national stage (it’s really quite simple, as New York Burger King franchisee David Sutz made clear when he told CBS that "businesses are not going to pay $15 dollars an hour [because] the economics don't work in this industry [given that] there is a limit to what you're going to pay for a hamburger"), there’s a far more troubling situation unfolding behind the scenes and it harkens back to an issue we discussed at length almost three years ago. 
In short, the welfare system punishes work and incentivizes dependency. More concretely, the structure is such that rational actors will eschew hard work, because the more they earn, the poorer they will effectively be in terms of total resources (calculated as welfare benefits plus earnings). 
In the simplest possible terms: for many Americans, wage growth is a very, very bad thing.


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