The Robin Hood Principle and the Minimum Wage

Robin Hood stole from the rich and gave to the poor. However you feel about the ethical and efficiency implications of active income redistribution, I think most people would agree that Robin Hood was at least making transfers in the right direction. That is to say, even if you are strongly opposed to redistribution, once we have decided that we are going to redistribute, we had better be shifting income from the rich to the poor. I am open to reasonable variations on the ‘Robin Hood’ principle: from the fortunate to the unfortunate, from the privileged to the oppressed … you get the idea. If you are transferring income, at least make sure it’s going to and from the correct people.

The President supports an increase in the Federal Minimum wage from its current value of $7.25 to roughly $10.00 per hour. Now, you might think a policy like this might be a bad idea for an economy that is still pretty weak. Going from 7 dollars an hour to 10 seems like a pretty steep increase in labor costs and I wouldn’t be surprised if it ultimately cost quite a few jobs at the low end of the pay scale. Nevertheless, the bulk of the empirical evidence on the minimum wage seems to point to only modest job losses for minimum wage workers (where am I getting this “bulk of the evidence” thing you ask? – I asked the labor economists in Lorch Hall of course …). That said, I don’t support an increase in the minimum wage and I don’t think any economist should endorse the idea.

The minimum wage is simply bad policy. The main reason that it is poor policy is that (in addition to the fact that it distorts the labor market a bit) it violates the Robin Hood principle. Here are the best reasons to support an increase in the minimum wage:

1. It will probably transfer some income to low-wage workers and there are some wealthy people who will implicitly pay for this transfer.
2. It probably won’t have huge effects on employment for low-wage workers or a huge effect on business profits for firms that hire low-wage workers.
3. It is politically popular.

This last point, that the minimum wage is politically popular, might be the best reason to support it. Minimum wage laws are easy to understand. They can be sold by people who claim (truthfully I believe) to care about the poor. Also, the costs of the policy are hidden – the policy is discussed without candidly disclosing who actually pays for the policy. Among all policies that actually help low-income families, the minimum wage might be the one most likely to be passed into law.

It’s still bad policy though.

Let’s assume, in the best case scenario, that there will be no effect on the employment of low-wage workers. Minimum wage workers will simply get more money. Where is this money coming from? There are several possible sources.

The most obvious answer is that the transfer will come from the profits of businesses that hire lots of low wage workers. This might already strike you as a bit odd – Goldman Sachs doesn’t employ many (any?) workers at the minimum wage and as a result it doesn’t have to make any transfers to minimum wage workers. In contrast, businesses like McDonalds employ thousands of low wage workers and their reward for doing so will be that they get to pay a penalty called the minimum wage. OK, who has a claim on these profits? It depends on the business of course. If we are talking about profits of some huge publicly traded firm then the people who pay for the minimum wage will be shareholders so think of the typical owner of a mutual fund – perhaps a retiree or an upper income saver. If the business is a small family owned grocery then it will be the family members who own the business. These people are probably members of the middle class or perhaps upper middle class.

There are of course other people who will pay to fund the minimum wage. To the extent that businesses raise prices in response, the minimum wage will be financed by customers of these firms. OK, who buys goods from Walmart? From McDonalds? If you think these customers are particularly affluent, think again.

What about the people who get the transfer? While there are many people earning the minimum wage who are truly low-income, there are many who are not. A single mother who works a minimum wage job to make ends meet is very different from a teenager who works for minimum wage to get cash for the weekend. Unfortunately, the minimum wage is a blunt instrument – it can’t distinguish between these two people.

The truth is that, the reason that the minimum wage is politically popular is exactly the same reason that we should be opposed to it. In the best case scenario, while there are no jobs lost, it is not clear that we are transferring from the rich to the poor. It is certain that some low-income households will lose money because of the minimum wage. It is equally certain that some upper-income people will benefit.

This is not to say that we should not push for more aggressive income redistribution. The disparity in income inequality has been rising for quite some time and it is completely correct for people to desire a more equitable distribution of income. There are better policies that could be considered however. Expansion of the EITC is often offered as an example of an effective redistributive tool where we have control over who pays and who receives. A negative income tax bracket could transfer income to families in need, and encourage employment of low income workers.

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13 thoughts on “The Robin Hood Principle and the Minimum Wage

  1. I don’t doubt that it would cause price increases at places that employ workers affected by the minimum wage rise, but I’m not sure those would outweigh the benefits of having the extra income. Most of the businesses and consumer goods that would be affected make up a relatively small proportion of your average poor household’s spending anyways, which is usually dominated by housing, gas, (sometimes) health care, and food. Less eating out, more eating stuff bought from the store.

    All that said, I agree that it’s not the best way to go about doing this type of redistribution. I’d be happier with a larger, less exclusive EITC, or some type of Negative Income Tax/Basic Income Stipend type of arrangement (the latter seems like it would be more difficult to pass but much more likely to endure once it’s law).

  2. This is a thoughtful post. But a few questions came to mind while I read this:

    1) What percentage of shareholders of companies that employ many minimum-wage workers are people saving for retirement, and what percentage are hedge funds and other financial firms? And for the people saving for retirement, on average what percentage of their retirement wealth consists of shares in these companies? If redistributing from shareholders largely means redistributing from hedge funds, then that may not be such a bad thing.

    2) What percentage of these companies’ after-tax profits goes toward executive pay, and what percentage of their profits is given back to shareholders? If the percentage going toward executive pay is excessive, then some of that could be redistributed toward minimum-wage workers. And it’s possible that a higher minimum wage would reduce turnover and help make workers more efficient and enthusiastic about their jobs (since they’d feel like their employer is treating them more fairly), which could boost profits and make money for shareholders over the long term. It may not offset the cost of a higher minimum wage, but it’s something to keep in mind.

    The answers to these questions could help answer whether or not raising the minimum wage would be a redistribution from the rich to the poor.

  3. Nobody who thinks about doubling the minimum wage ever seems to consider whether raising the wages of 45% of the workforce could actually raise demand (sounds sensible somehow) – for the very goods and services they produce. But, before the 45% of the workforce — who would get a wage hike to $15 an hour — raise demand for their own products, that money has to come from somebody else, first – the 55%.

    The 45% can actually get more money to spend if demand for their products drop — because they will get a bigger cut of the price tag. It will be sort of like a leveraged buyout or buying stocks on margin. Or (the comparison I like) as if there were “shadow” price/demand curves hidden on what I call the “classic minimum wage 101 chart” wherein what I call “financial demand” for labor is much more inelastic than the visible curve (which is probably not very elastic as we will consider).

    The 45% will likely spend more than average of their expanded new cash on the kind of products they produce – wheels within wheels of multiplier effect. Let’s look at the real world.

    Products produced by low-wage labor tend to be staples whose demand is inelastic. Demand for food is inelastic – probably even fast food. If your family visit to McDonald’s goes from $24-$30, are you really going to eat at home on Saturday (the kiddies haven’t forgotten the fundamental theorem of economics: money grows on trees :-]). And fast food is by far the most worrisome example: lowest wages; even so, highest labor costs, 25%.

    Wal-Mart is the lowest price raising example (surprise) with 7% labor costs. Jump Wal-Mart pay 50% and prices go up 3.5%.

    If labor costs average 15% and wages increase an average of 50%, that amounts to an average 7.5% increase in prices. Even if demand drops just enough for the increase in prices to result in the same gross receipts, then, labor income comes out far ahead.

    http://www.nytimes.com/2014/01/12/business/the-vicious-circle-of-income-inequality.html?src=me&_r=0
    “… higher incomes of top earners have been shifting consumer demand in favor of goods whose value stems from the talents of other top earners. … as the rich get richer, the talented people they patronize get richer, too. Their spending, in turn, increases the incomes of other elite practitioners, and so on.” (My emphasis.)

    The multiplier effect – works at both ends of the spectrum and probably in the middle. A minimum wage raise to $15 an hour is not going to send most low-wage earners in pursuit of better model autos, an extra bedroom or gold seal medical plans. Wal-Mart and Mickey D’s OTH should do spectacularly – which in turn could keep Wal-Mart and Mickey D’s doing even more spectacularly.

  4. The first economic number everyone looks at every quarter (for their own good) is the rate of GDP growth. The last number anyone seems to look up when comparing today’s wages to yesterday’s wages (particularly gauging the minimum wage) is the exact same economic growth — as if the last 180 mostly growth quarters (since 1968) never happened.

    In 1968, the federal minimum wage under president Lyndon Johnson was almost $11 an hour. Indexed for both inflation and per capita income growth, by 1978, it would have reached $14+.
    *********
    A $15 an hour minimum wage would not have been “feasible” in 1956 – when economic output per American was only 40% of what it is today – when (Senate Majority Leader) LBJ’s minimum wage was $8.50 an hour. $100 an hour minimum wage should actually, literally be “feasible” (:”feasible” is the operative word for this whole essay), in something like 100 years – if productivity goes on doubling every 40 or 50 years.

    It was “feasible” to raise the federal minimum wage from $8.50 an hour in 1956 to almost $11 an hour in 1968 because overall productivity – not the minimum wage workers’ productivity – grew 25%. Barbers get paid more in France than barbers get paid in Poland because France has a lot more money to pay barbers with.

    A $15 an hour federal minimum wage need not be sold on humanitarian – nor least of all welfare – grounds. It can be sold on the simple premise that the free market is ready and willing to bear it – on the simple basis that it is “feasible.”
    *********
    According to minimum wage critic David Neumark, $55 billion is transferred yearly to poor families by the E.I.T.C. — and that says it all. That represents about a third of one-percent of our $16 trillion economy.

    That closely equates a minimum wage raise of $1 an hour — which would shift about $40 billion out of our $16 trillion — or about a quarter of one percent of overall income — from the 85-90% who earn more than $8.25 an hour to the 10-15% below (I don’t have exact figures here).

    The bottom 20% of incomes now take 2% of overall income (not an exact correlation to the bottom 20% of earners but we get the idea) — big help. Neither path offers much hope of lifting working families out of poverty. The E.I.T.C. does not even pretend to help the single worker.

    A $15 an hour minimum wage OTH would shift about $560 billion from the 55% who now take 90% of overall income to the 45% of Americans who take only 10% — or about 4%. I don’t foresee the 55% tellling the 45%: Stay home; we don’t need your output anymore, over a 4% overall price increase.

  5. you should read the EPI study that politicians are waving around.
    http://www.epi.org/publication/raising-federal-minimum-wage-to-1010/

    In particular, the detail tables. About a third of those EPI assumes are affected are indirectly affected because employers adjust pay ladders. So, if you make 10.11, you will get a raise, according to them. haha, no dice – that’s just not how firms behave.

    Take a close look at those they assume are affected. About half nationally are in households that earn over $40k. Less than 25% under 20k. That is, they are the second earners. Also, most are under 29.

    I would not say this is well directed to the poor at all. Moreover, how will firms actually respond? When I was a manager, here’s what we did: total labor costs could only go up at the rate of revenues (a few percent). If wages go up, that means hours get cut and people work harder. Good survey here:
    http://www.cepr.net/documents/publications/min-wage-2013-02.pdf

    The money quote:
    “Hirsch, Kaufman, and Zelenska’s study of the impact of the federal minimum-wage increase on 81 fast-food restaurants in Georgia and Alabama, however, asked fast-food managers specifically about scope for efficiency improvements in response to the minimum-wage rise. About 90 percent of managers indicated that they planned to respond to the minimum-wage increase with increased performance standards such as “requiring a better attendance and on-time record, faster and more proficient performance of job duties, taking on additional tasks, and faster termination of poor performers.”68 Roughly the same share of managers said that they sought to “boost morale” by presenting the minimum-wage increase as a “challenge to the store” and using this as a way “to energize employees to improve productivity”

    The stats say, fully 64% min wage workers are unmarried, or married no kids. When I cut hours and make people work harder, whose hours do you think will get cut – the 29 year old unmarried worker with no life/kid commitments, who can move really fast, or the 41 year old with 2 kids whose always calling out because they are sick, and who cannot pick up extra shifts?

    If you think about the demographic – under 29, no kids, in households making more than 35k, it strikes me this benefits middle and upper class families (with kids in college or who have not moved out yet), at the *expense* of poor families with kids – because the latter are the ones least likely to have the flexibility to work harder and step up to the higher performance standards that will inevitably be mandated.

  6. The minimum wage seems to be the one and only — as in unique — price in economics about which economists see nothing but dark prospects about raising. But it is a price that has to be test against demand just like any other. The total lack of ability to test it for better since LBJ suggests there may be lots of room there — especially since per capita income (that can pay other workers more) has about doubled sine the wage hit its peak in 1968. Maybe if economist depended on the minimum wage they would suddenly wake up to the reasonably good prospects of raising it.

    My minimum wage worksheet — the easily could-have-been minimum wage dbl indexed for inflation and per capita income growth:

    yr..per capita…real…nominal…dbl-index…%-of

    68…15,473….10.74..(1.60)……10.74……100%
    69-70-71-72-73
    74…18,284…..9.43…(2.00)……12.61
    75…18,313…..9.08…(2.10)……12.61
    76…18,945…..9.40…(2.30)……13.04……..72%
    77
    78…20,422…..9.45…(2.65)……14.11
    79…20,696…..9.29…(2.90)……14.32
    80…20,236…..8.75…(3.10)……14.00
    81…20,112…..8.57…(3.35)……13.89……..62%
    82-83-84-85-86-87-88-89
    90…24,000…..6.76…(3.80)……16.56
    91…23,540…..7.26…(4.25)……16.24……..44%
    92-93-94-95
    96…25,887…..7.04…(4.75)……17.85
    97…26,884…..7.46…(5.15)……19.02……..39%
    98-99-00-01-02-03-04-05-06
    07…29,075…..6.56…(5.85)……20.09
    08…28,166…..7.07…(6.55)……19.45
    09…27,819…..7.86…(7.25)……19.42……..40%
    10-11-12
    13…29,209…..7.25…(7.25)……20.20?……36%?

  7. The reasons given to support a minimum wage are not the best ones.

    A minimum wage is not politically unpopular because:

    1. The transfer only goes people who work. Hence it doesn’t “undermine” willingness to work.
    2. It’s essentially fraud-proof. The “undeserving poor” can’t game the system.

    Since conservatives don’t want to appear to want the poor to die, they use instances of fraud and laziness (i.e., immorality) as reasons to cut off assistance to all poor people. And since the minimum wage is one of the few anti-poverty measures for which these arguments don’t work. It’s one of the few tools available.

    Just as government stimulus has been infeasible,,quantitative easing has been a less than ideal tool against recession, but the only one available.

    The reason to support raising the minimum wage is that it’s the only anti-poverty tool for which there’s a chance of it getting through Congress

  8. Minimum wage is a distraction, allowing us to think we are doing the right thing when we are far short.

    Any job requiring an adult (who should have expectations of full participation in our society) should pay at least half a family living wage. Thus two such earners in marriage can fully participate in life.

  9. Oppose the minimum wage increase alleging any pretext, is nothing more than oppose the minimum wage because is could affect the profits of entrepreneurs … the rest are just words.

  10. Sometimes one has nothing to say except to point to something someone else said. To this point, beowulf, a blogger and commenter (and republican) much respected in MMT and Modern Monetary realism (MMR) circles, added a number of lively comments about the desirability of raising the minimum wage that I think are worth blogging here. He said:

    “Minimum wage laws are like hummingbird wings. In theory they shouldn’t work at all, in the real world they work pretty well.
    Australia’s minimum wage was just bumped to A$15.96 an hour, US$16.84.hr at today’s exchange rate. Unemployment rate is 5.2%.
    Think about that, their U3 rate is three points lower AND their minimum wage is more than double ours. Either the Coriolis effect makes neoclassical economics work backwards in the Southern hemisphere, or mainstream economists are a bunch of astrologers who think they’re Carl Sagan.
    $16.84/hr is high enough that a full time worker making that here would be means-tested out of food stamps, section 8 and other income security programs.
    So what’s going on is ***Australia puts the cost of a living wage for the working poor on their employers instead of taxpayers***, enabling govt spending to be focused on other needs– like universal Medicare and a Social Security system so broad it would impress even Rodger Mitchell.”

    *** (mine)

    Then later on he added:

    “One other thing, this John Stossel post last month may be the most mendacious thing I’ve read all year.

    —-“Statists say that Australia is proof that minimum wage laws help workers. They point to Australia’s 5.1% unemployment rate… But statists ignore the details.
    “Most people who earn minimum wage are young, unskilled workers. How are they doing in Australia? In June, Australia’s unemployment rate for workers age 15 to 19 was 16.5%.”—–

    “That’s digging pretty deep for an unemployment stat. Curious that Stossel neglected to mention the comparable US stat (for workers 16 to 19). In June, their unemployment rate was…26.6%.
    That Coriolis effect is CRAZY.”

    And then he added a bit more:

    ”OK, this is really the last one…
    “According to the Heritage Foundation/WSJ “2011 Index of Economic Freedom”, Australia’s “government spending as a percentage of gross domestic product (GDP)” is less than that of the United States; 34.3% vs 38.9%.
    “Stop and think about that… universal Medicare (with dental!), a jumbo size Social Security system, a defense policy of jumping into the same wars we do (including Vietnam and Iraq) and Australia still spends less on government than we do. At risk of sounding hyperbolic, I”d say that Coriolis effect is strong enough to move hurricanes (and cyclones). :o)”

    I can add nothing to that comment…… maybe greatest internet comment of all time!

  11. Why do you ask the labor economists about the real world job impacts of changes in the min wage only to rely on lazy guesses about the demographics of who earns the wage and what they spend it on? Being part of the reality-based community requires consist use of facts over lazy guesses. It’s what separates us from animals… er, David Brooks.

  12. Pingback: Needed: Meaningful Progress on Income Inequality | Orderstatistic

  13. Pingback: Warren Buffet: Fighting Income Inequality with the EITC | Orderstatistic

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