From the Economist Magazine (Economist.com), two brief opinions on why the minimum wage is the wrong solution to the question: “What’s the best way to raise wages?”. Raising the minimum wage is actually harmful to the poor unskilled worker.
1. To Raise Low Wages, Reduce the Relative Supply of Low-Skilled Workers (http://www.economist.com/economics/by-invitation/guest-contributions/raise-low-wages-reduce-relative-supply-low-skilled-workers)
by Gilles Saint-Paul, Programme Director of the Centre for Economic Policy Research in the area of Labour Economics, Paris
These issues have been much discussed by economists. Traditional income support schemes subject to resource conditions typically create bad incentives for taking up work. Minimum wages also destroy jobs by reducing the incentives to hire. For those reasons, governments have tried to implement systems by which they would supplement labour income for low wage earners. But these subsidies have to be phased out as the individual’s earnings go up, otherwise they could not be financed. Therefore the inevitable price to be paid is higher marginal tax rates for those workers that find themselves in the region of the distribution of income where the subsidy is being phased out. And of course the issue is compounded by the fact that to finance the income support, the tax burden has to be increased on other categories of workers. The risk is to replace an unemployment trap with a low income trap, with little incentives for workers to acquire extra skills, and for firms to promote their workers or giving them raises. Indeed, in France, for example, a large number of workers are “stuck” at wage levels at or slightly above the minimum wage.
In the long run, the best strategy to increase the earnings of low skilled workers is to have fewer of them. This would mean favouring skilled rather than unskilled immigration, improving the educational system, and redesigning family benefits so as to eliminate negative income biases in fertility decisions. This would increase unskilled wage by making them scarcer. It is true that this would be partly offset by the possibility to import goods intensive in unskilled labour from developing countries, but this effect would remain partial as long as many unskilled workers are employed in non-tradable services.
by Angel Uribe, Director of Global Economics for the D. E. Shaw group and Non-Resident Senior Fellow at the Peterson Institute for International Economics
Increasing the real disposable income of poorer workers is a useful policy goal, as reducing inequality is a desirable policy. To increase real disposable income one can operate on the real wages, on the wealth, and on the taxes. Minimum wages have not been very successful in raising real incomes, as they end up affecting employment, at least at the margin, negatively. However, policies to reduce the penalty from working—such as earned income tax credits—have been quite successful to increase incentives to work at the bottom end of the skill and income distribution. After all, the key to increase income is to improve the productivity of the workers, and the best way to improve their productivity, in addition to endowing them with more capital, is to ensure that they remain employed.
Long spells of unemployment are very detrimental for future employability, and have many times a permanent downward impact on future income. Facilitating the access to credit for the poorer workers is another avenue to increase their income, especially for the self employed, as this may allow them to benefit from asset-price-generated wealth. Increasing the education and skill levels of the poorer workers will certainly contribute to increasing their income. Finally, ensuring a stable and low level of inflation is critical: inflation, after all, is a very regressive tax that affects mostly the poorer cohorts of the income distribution.