Thursday, May 21, 2015

Why minimum wage laws are phased in over time...

Phase-In: A Demagogic Theory of the Minimum Wage
Bryan Caplan

Increases in the minimum wage are usually "phased-in." Instead of raising the minimum wage overnight, the law usually specifies a series of steps. The Fair Minimum Wage Act of 2007 increased the prior $5.15 minimum wage in three steps: $5.85 per hour 60 days after enactment (2007-07-24), to $6.55 per hour 12 months after that (2008-07-24), and finally to $7.25 per hour 12 months after that (2009-07-24)...

Ron Unz's proposed increase, similarly, has two steps. In his own words:

The initiative is targeted for the November 2014 ballot. If it passed early in 2015, the minimum wage in California will go up to $10 an hour; early in 2016 it would be raised to $12 an hour. In other words, the initiative in a couple of stages would raise the minimum wage of all California workers to $12 an hour.

What's the point of these byzantine time tables? Why not just immediately impose the minimum wage you actually want? On the surface, the steps seem like an implicit admission that sharply and suddenly raising the minimum wage would have the negative disemployment effects emphasized by its critics. The point of the steps, then, is to turn a dangerously sharp and sudden hike into a harmlessly slow and gradual hike.

On reflection, though, this argument makes very little sense. Giving people more time to adjust to incentives normally leads to larger adjustments, not smaller. If you suddenly raise the gas tax, for example, there is very little effect on gas consumption. But if people expect the gas tax to go up years before the higher tax kicks in, many will buy more fuel-efficient cars, leading to a large behavioral response. Minimum wage hikes should work the same way: Employers' long-run response should exceed their short-run response. If minimum wage advocates want to minimize the disemployment effect, they should remember the old adage about ripping off a Band-Aid: One sudden pull and you're done.

On reflection, though, there is another major difference between employers' response to sharp-and-sudden versus slow-and-gradual minimum wage hikes: visibility.

If the minimum wage unexpectedly jumped to $12 today, the effect on employment, though relatively small, would be blatant. Employers would wake up with a bunch of unprofitable workers on their hands. Over the next month or two, we would blame virtually all low-skilled lay-offs on the minimum wage hike - and we'd probably be right to do so.

If everyone knew the minimum wage was going to be $12 in 2015, however, even a large effect on employment could be virtually invisible. Employers wouldn't need to lay any workers off. They could get to their new optimum via reduced hiring and attrition. When the law finally kicked in, you might find zero extra layoffs, because employers saw the writing on the wall and quietly downsize their workforce in advance.

If you sincerely cared about workers' well-being, of course, it wouldn't make any difference whether the negative side effects of the minimum wage were blatant or subtle. You'd certainly prefer small but blatant job losses to large but subtle job losses.

But what if you're a ruthless demagogue, pandering to the public's economic illiteracy in a quest for power? Then you have a clear reason to prefer the subtle to the blatant. If you raise the minimum wage to $12 today and low-skilled unemployment doubles overnight, even the benighted masses might connect the dots. A gradual phase-in is a great insurance policy against a public relations disaster. As long as the minimum wage takes years to kick in, any half-competent demagogue can find dozens of appealing scapegoats for unemployment of low-skilled workers.

Most non-economists never even consider the possibility that the minimum wage could reduce employment. Before I studied economics, I was one of these oblivious non-economists. But if minimum wage activists were as clueless as the typical non-economist, they wouldn't bother with phase-in. They'd go full speed ahead. The fact that activists' proposals include phase-in provisions therefore suggests that for all their bluster, they know that negative effects on employment are a serious possibility. If they really cared about low-skilled workers, they'd struggle to figure out the magnitude of the effect. Instead, they cleverly make the disemployment effect of the minimum wage too gradual to detect.


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