Minimum Wage Tied to the Poverty Line

[Expat]

What happens if you tie the minimum wage in the US to the poverty line? Say the minimum wage has to break down to Poverty Line + 5% for a full-time worker.

This really represents two changes (that I can see) and we can take them separately:

1) Obviously it means the minimum wage is going to be affected in real dollar terms.

2) It means the minimum wage is changed on a regular basis, every time the poverty line is announced. This is something not currently done.

So what would be the economic consequences of this action? Inflation? epidemic under-the-table payrolls? What are your thoughts?

 

[carlton_bach]

I rather suspect it would shift politicaöl battlegrounds from setting the minimum wage to defining the poverty line. You couldn't use the current definition (X% of the median income) because that, linked to minimum wage, would create a self-reinforcing mechanism.

If Europe's experience is anything to go by, probably a growth of part-time jobs that somehow turn out to require full-time effort.

 

[Arachnid]

Higher illegal employment, sub-contracting individuals etc. meaning lower income from state and federal payroll tax plus higher unemployment, in other words most European countries.

A high minimum wage changes company behaviour, for example:

Company A (10 employees) needs to make 10% more widgets, it can either higher a new man a $20,000 a year or spend $100,000 to buy superior widget making equipment for its existing employees. With no minimum wage and minimal labour costs (payroll taxes, insurance contributions etc.) it makes sense for it to higher the extra man (meaning lower unemployment but no productivity growth).
With higher labour costs (direct or indirect), say $40,000 it makes more sense to buy the machinery. Thus higher productivity but also higher unemployment.

Obviously this is a massively simplified version but you get the idea. A high minimum wage sounds good in principle but actually it benefits those already employed as companies increase productivity, which leads to leading to wage increases. It hurts the unemployed as companies hire less, that's one reason (major reason is difficulty of firing people) why unemployment stayed high in most central European countries during the boom.

Like most economics there are positives and negatives and if you are trying to win an election pleasing the voting white collar working class at the expense of the non-voting underclass makes sense, otherwise...

 

[Expat]

Thanks for (what seems to me) a great answer! I feel I understand it from the employer's point of view now.

So would this scheme not increase the amount of currency flowing to the "masses?"

 

[Arachnid]

Yes and no. Minimum wages per se are not necessarily bad ideas. It depends where you are coming from, is it better to have and additional 3% of the population unemployed and the bottom 12% of the labour force earning a bit more or less unemployment but with slightly less well paying jobs.
If I was a politician I might well support a minimum wage, it's a vote winner and will make a significant number of people's lives better, but as with most political issues someone gets hurt, in this case the unemployed.

 

[vitemajoren]

This minimum wage are rather interesting, here in Sverige
we do not even have the concept let alone the fact, we went
another way.

 

[Dave Howery]

it all comes down to where you set that poverty line at... I suspect it's higher over on the east coast than here in the west (higher costs of living and all that). The affects of a higher minimum wage are difficult to say... it really depends on the local economy. Raising minimum wages in a bad economy is disastrous on employment (as I can personally verify from my time in OR). In a booming economy, minimum wages tend to go up anyway, as businesses compete for workers (judging from my experiences here in WY).

On average, raising minimum wages can result in employers doing several things: cutting crew, automating wherever possible, or cutting business hours. Again, if the local economy is good, they might not do anything... if it's bad, they might do all three...