End the Minimum Wage?

Noah Smith submits an abbreviated case for wage subsidies as opposed to the minimum wage.  He somewhat cursorily covers  the Econ 101 case against the minimum wage, which is that its a supply restriction on labor.  A price floor on labor leads to unemployment for those who have a marginal product of labor less than the government-fixed price of labor.  The earned-income tax credit (EITC), negative income taxes for those beneath a certain threshold, works much better and doesn’t seem in practice to disincentivize work.  On the other hand, wage subsidies are subsidies paid directly from the government to firms to go into wages.

The upside of wage subsidies as an issue of political economy seems fairly clear.  The minimum wage is a big pain in the butt for firms, since it forces them to choose between taking losses on labor or on doing more with less.  On the other hand, wage subsidies allows them to purchase more labor for less.  Since the government is directly providing the subsidy, it doesn’t cost the firm anything and actually allows firms to hire more skilled/competent workers for the same price to the firm.  It’s hard to see what firms wouldn’t prefer about this situation.

The political economy of the wage subsidy model seems much stronger than the minimum wage, even if the policy itself is less familiar and harder to explain.  It’s just a pity that nobody seems to have adopted it as an issue.


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