Subsidize business for pay raises

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Article Highlights

  • Policymakers need to be careful in attempts to boost minimum wages so they don’t price workers out of the labor market.

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  • Have government make up the $2.75 an hour increase with an expansion & broadening of the Earned Income Tax Credit.

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  • Let’s make sure good intentions don’t make the lives of low-wage Americans worse.

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Editor's Note: This article originally appeared in The New York Times' Room For Debate in response to the question: What can be done to improve the living standards of workers at the bottom of the pay scale?

IPads replacing your fast-casual waitress? That’s just the start. And autonomous octocopters replacing your FedEx guy won't be the end. Smart machines are invading the U.S. service sector. Any job that can be disassembled into discrete rules or actions is at risk. Policymakers need to be careful that in their attempt to boost wages of the working poor, they don’t price those carbon-based lifeforms out of the labor market.

Raising the minimum wage is one option. The supporting data, however, are equivocal. A survey of economists earlier this year found 34 percent believed that raising the federal minimum wage to $9 an hour from the current $7.25 “would make it “noticeably harder for low-skilled workers to find employment,” while 32 percent disagreed.

Now that same survey also found a plurality in favor of doing it anyway, agreeing the cost would be “sufficiently small compared with the benefits.” And that might well be true in an economy that wasn’t on the verge of an accelerating wave of automation. Yet there is a more elegant, less economically distorting option that may have won the day had it been offered: wage subsidies.

If Americans think the 1.6 million workers making the federal minimum need a raise to, say, $10 an hour, have government make up the $2.75 gap. It would basically be a de facto expansion and broadening of the Earned Income Tax Credit, an anti-poverty fighting tool with bipartisan support.

Indeed, a possible Washington compromise would be to a.) boost the federal minimum wage to $8.50 an hour, b.) index the wage to inflation, and c.) top it off with a $1.50 wage subsidy, also inflation indexed.

And for the long-term unemployed, maybe even lower the minimum wage for some period of time with a federal subsidy offset. Of course, it doesn’t have to be a federal fix. The economist Noah Smith suggests local governments subsidizing wages would be better in tune with local needs and cost of living. And the subsidy could be paid for through a land-value levy that taxes property but not the buildings on it.

It is great that the plight of low-wage Americans has finally grabbed the public’s attention. Let’s make sure good intentions don’t make their lives worse.

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About the Author

 

James
Pethokoukis
  • James Pethokoukis is a columnist and blogger at the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews, the opinion and commentary wing of Thomson Reuters.

    Pethokoukis was the business editor and economics columnist for U.S. News & World Report from 1997 to 2008. He has written for many publications, including The New York Times, The Weekly Standard, Commentary, National Review, The Washington Examiner, USA Today and Investor's Business Daily.

    Pethokoukis is an official CNBC contributor. In addition, he has appeared numerous times on MSNBC, Fox News Channel, Fox Business Network, The McLaughlin Group, CNN and Nightly Business Report on PBS. A graduate of Northwestern University and the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! Champion.


     


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  • Email: James.Pethokoukis@aei.org

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