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Poverty politics

Posted By Russ Roberts On July 21, 2006 @ 5:07 pm In Politics,Standard of Living | Comments Disabled

I recently stumbled across this excellent essay [1] by John Cogan and Tom Macurdy on the minimum wage. Though written in 1996, it makes the timeless point that workers earning the minimum wage don’t have to try and get by on $5.15 an hour. They are eligible for food stamps, the earned income tax credit (EITC) and so on. So when measuring the working poor’s standard of living, you should include other benefits beyond wages.

They go on to point out that if after making that calculation, you still want to increase the standard of living of the working poor, it is much better to raise the EITC. The latter is funded by taxpayers. Increases in the minumum wage are paid, in part by the poor themselves who lose their jobs as businesses seek to avoid the burden of higher wages.

Cogan and Macurdy end their argument there. But it raises the question as to why any politician supports an increase in the minimum wage rather an increase in the EITC. One answer is that raising the minimum wage is a hidden tax while funding an increase in the earned income tax credit is a visible tax. The minumum wage looks like a free lunch—the citizenry assumes the burden is paid by businesses. Politicians exploit this ignorance and keep taxpayer’s funds to give away to other groups.

The world would be a better place if more people understood the seen and the unseen. [2]

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[1] this excellent essay: http://www.hooverdigest.org/962/cogan_macurdy.html

[2] the seen and the unseen.: http://www.econlib.org/library/Bastiat/basEss1.html

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