Sunday, May 5, 2013

Solving Unemployment By Making Markets Work

Status of minimum wage in 2006 in United State...
Status of minimum wage in 2006 in United States and territories (Photo credit: Wikipedia)

Sometimes I think it would be cheaper to eliminate the minimum wage and have the government directly hand the working poor a subsidy for every hour worked than to have the Fed and the government continue destroy the functioning of the marketplace in a vain effort to make unemployment go away.

I don't like the government doing either thing, but destroying the functioning of markets is far, far worse than a handout based on how much you work, even considering the fraud that might produce. Especially considering the amount of fraud the activities of the Fed enable.

If we gave every worker earning less $12 an hour a subsidy of 50 cents for each dollar they earned below $12 an hour, those whose labor is only worth $6 an hour would take home $9. Those worth $8 would take home $10, Those worth $10 would take home $11. 

The earned income tax credit may work like this, but I doubt its adjustment is as steep. And workers must wait until the end of the year to qualify.

No doubt a similar thing could be accomplished by eliminating taxes for the working poor. The payroll tax cut is tiny and not targeted at low wage workers.

If prices of the lowest price labor were allowed to fall to where employers could afford to hire them, their skills would start to grow again and eventually the subsidy would shrink.

Republicans won't go for doing something like this because all new spending for the poor is evil. Democrats won't go for it because it disposes of their precious minimum wage, something Republicans don't view as damaging as the actual spending of money.

The minimum wage has other bad effects too.  By placing a floor on what you can earn instead of an escalator, the working poor don't get immediately rewarding for becoming more productive.  Earning minimum wage at one job is as rewarding as earning the same wage at another job.  Improving one's productivity is only rewarded when your value as an employee rises above the threshold of the minimum wage.

Which means that those who earn the least get the least positive feedback for their efforts.  That's a terrible side effect.