A potentially great improvement to minimum wage laws to handle both economic efficiency as well as poverty concerns

VijayKrishnan

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A potentially great improvement to minimum wage laws to handle both economic efficiency as well as poverty concerns

by VijayKrishnan

26th Jul 2011

2 min read

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Minimum wage has the side effect of leaving unemployed, the people who do not possess the requisite skill to command the minimum wage in the market. This follows from basic micro-economic theory and here is nice short video of Milton Friedman, the renowned United States economist arguing against minimum wage laws. To offset this problem, it is essential to have some kind of social security safety net for the unemployed.

Instead, I would like to propose the following scheme which seems to me as more efficient (please let me know in the comments if you know of any country that tried this or something close): Set x= 1.5 * min_wage. Have no minimum wage laws. And folks who earn y which is below x, receive (x-y)/2 in social security. This way, we have (1) lower "skilled" people contributing to the country's GDP in their own small way instead of being unemployed and contributing nothing. If we have a significant number of these guys, the numbers could really add up. (2) The min wage like concerns are taken care of with the government safety net. (3) There is still incentive for people earning below x to work. If we set the social security to something like (x-y), no one earning below x will have any incentive to work since their net in hand compensation would then always be x regardless of what they do.

This above scheme looks almost like a pareto improvement to me compared to minimum wage laws, supported by social security for the unemployed, because it does roughly as good with regard to supporting those whose skills are below the minimum wage, while ensuring less government spending on social security, since many of the formerly unemployed would now be in low wage jobs and the government simply has to top up their current salaries which might be well above zero. This is of course a good thing, because the government then has the option of either using the extra money to reduce the budget deficit and ensure better economic health of the country, or use the money for other worthy endeavors. There is also greater contribution to the country's GDP which is a good objective in itself. Lastly there is reason to believe that people being gainfully employed is better for their physical and mental well being. It will also likely reduce their propensity to indulge in anti-social activities, compared to a scenario where they are unemployed with a lot of idle time on their hands.

I haven't spent much time thinking through the implementation and whether there is greater potential for such a scheme to get scammed and exploited etc. At least at first glance it seems to me that this scheme is no more exploitable compared to welfare benefits for the unemployed, which must necessarily go with minimum wages for it to actually be humane and better for the poor. Some people can probably get away by earning a living and still claiming to be unemployed and collecting welfare checks under the min wage + unemployment welfare method. The same people can do it under the new proposed scheme as well, so I am unable to see any more vulnerabilities and loopholes in this system compared to the previous one.

Thoughts?

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[-]AShepard13y140

Interesting idea. It's in the same family as the Earned Income Tax Credit and the Negative Income Tax.

The immediate potential downside I see is that this would effectively institute a very high marginal tax rate on income below 'x'. For every additional dollar that someone who makes less than x earns, they lose 0.5 dollars of social security. That's a 50% implicit marginal tax rate, on top of whatever the official marginal tax rate is. By comparison, the highest marginal tax rate for federal income taxes in the United States is 35%, which is only applied to household earnings beyond $370,000 (source). The implication of standard economic theory is that many people would simply choose not to work and earn .75x.

2VijayKrishnan13y

Agreed. But does this problem not exist in even bigger measure when you have min wage and social security for those unemployed as a result of minimum wage. The social security cannot be equal to the min wage, since otherwise no one would work at min wage. However the social security would presumably be something like 2/3 of min wage to ensure that those who are unemployed are able to have some decent standard of living. And this per your argument would put the implicit tax rate of those earning minimum wage at 67%!

3AShepard13y

I don't think that's quite right. The marginal tax rate is going to be 50% no matter the value of x, given your formula. Your social security payment is half the difference between your income and the x threshold, so each additional dollar you earn below that threshold loses you 0.5 dollars of social security. This is true whether the threshold is $10,000 or $100,000. You are right, though, that there will be a correspondence between the minimum wage and the level of x. I don't think this is causal, but popular notions about the ideal levels for both the minimum wage and 'x' will probably both reflect underlying notions about an "acceptable standard of living". If there's a correspondence between the level of the minimum wage and the fraction of people who give up working because of this system, I think it would be chiefly because of this correlation (in addition to the employment effect of having a minimum wage at all).

1Protagoras13y

A 50% marginal tax rate would be a dramatic improvement on existing programs; at present, it is not uncommon for getting a job to reduce the net income of someone previously depending on government assistance. And yet most people try very hard to get off government assistance as soon as they can (don't tell me about your worthless cousin who hasn't worked in their adult life; I have one of those, too. But the statistics show them to be much rarer than they appear). The problem with this program isn't that there's a bunch of lazy poor people who would choose not to work and take the smaller income, the problem is that our political system is in the grip of vicious stereotypes about lazy poor people that make it impossible for any program like this to gain widespread support, because of irrational fears that it will end up rewarding lazy poor people. A basic income is, of course, an alternative which would eliminate the 50% marginal tax rate problem. It would obviously be more expensive, if you wished people with no other income to be at the same level as on your proposal, but if we're floating crazy utopian schemes, a wealth tax would be a very promising way to raise quite a lot of additional revenue while having some beneficial incentives. It would encourage wealthy people to sell non-productive or insufficiently productive assets to those who would get more use from them, instead of hoarding them out of laziness or tradition; while there are not a lot of rural aristocrats inefficiently farming vast estates because they like being local lords these days, there do seem to be modern phenomena with some similar features to Adam Smith's favorite example of massive, widespread inefficiency.

0AShepard13y

All good points. To clarify, 50% is the marginal tax rate from the OP's system alone. A major reason that effective marginal tax rates can be so high is that programs like (to be US centric) food stamps and Medicaid are means tested, so they phase out or go away entirely as you make more income. If the OP's system would retain those kinds of programs, their contribution to the marginal tax rate would come on top of the 50% cited above.The net effect of enacting this system would depend on which parts of the current bundle of social insurance programs it would displace (in the US, presumably the EITC and TANF, at least).

[-]dspeyer13y130

Minimum wage has the side effect of leaving unemployed, the people who do not possess the requisite skill to command the minimum wage in the market

That is indeed what economic theory predicts. Treating a theoretical prediction as a fact is generally a mistake, except with extremely well-tested theories (physics at Newtonian scales with a small number of objects is the only example I can think of). This is particularly true of economics, which shows worrisome heuristics as a field and especially true of the minimum wage / unemployment link which has been specifically looked for and not found

2jsalvatier13y

Moreover, economics doesn't have a lot to say about the magnitude of these effects. My understanding of the issue is that minimum wage laws seem to have small employment effects (not sure about the sign) and also small welfare effects for poor people. In other words, whether it's a good idea or a bad idea, it's not something worth paying lots of attention to.

[-]Antisuji13y120

This seems like it belongs in Discussion, not Main.

2Vladimir_Nesov13y

Moved to discussion.

[-]Matt_Simpson13y60

A better argument for the minimum wage is that empirically it doesn't have much of a negative effect on employment - see below - but it placates the political demands of a largely uninformed populace that might otherwise try to get much worse policies enacted.

(I seem to recall that Bryan Caplan originally made this argument, but I can't source with a quick google search.)

0Mercy13y

What worse policies are you thinking of? Only this sounds like the socialist argument against the welfare state... In terms of liberterian arguments for the minimum wage, Chris Dillows takes the same tack http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2010/11/small-truths-about-the-minimum-wage.html but the opposite conclusion- fighting to get rid of the minimum wage is a distraction from the problem of unemployment, given it's low magnitude.

[-]CarlShulman13y50

This seems both not very developed and not particularly on-topic. I would suggest removing it from the main page, perhaps to discussion.

[-]taw13y50

Thoughts?

Don't talk about politics on lesswrong ever. This is just painful.

[-]orthonormal13y110

That's a bit harsh. I think the problem is just that Vijay hadn't heard of Friedman's negative income tax proposal, and is reinventing the wheel. Also, it's not polished enough for the Main section.

2taw13y

And politics is a mind killer. And OP seems to have little idea about economics. And more specifically this is 50% marginal tax rate and great incentive for illegal employment.

-2lessdazed13y

The original formulation of "Politics is the mind killer", intuitively seems not as good as yours here. It seems that there are probably other mind-killers. Can we think of specific one's that aren't well described as "politics" and have a mind-killing effect of a commensurate order of magnitude? Is "mind-killing" somehow a better description of what politics does than, say, beginning deliberation by writing one's bottom line first?

3Nornagest13y

Anything that people incorporate as part of their identity tends to generate the cluster of biases that we collectively label "mind-killer". Many of these (body image; musical taste; Kirk or Picard) aren't political issues in the mainstream, but almost all of them become political issues among interested parties; in fact, I'd say that a colloquial sense of "politics" is defined partly in terms of which issues invoke that sort of identification.

0lessdazed13y

That seems right.

2VijayKrishnan13y

Thanks, orthonormal! Yes I had not heard of it and the idea seems very similar.

0VijayKrishnan13y

I spent a bit of time looking at the details of Negative income tax. It is possible that I am not understanding the subtleties of Negative income tax but it appears that what I proposed is different and better than Negative Income tax. The reason for this is the following. In my scheme if a person is making wage y which is less than some threshold wage x, the state pays him (y-x)/2 which satisfied two objectives (1) People who are poorer get more state aid (2) People are still incentivized to work harder and make more money since their total payout (wages + government aid) is an increasing function of their wage. Let's take a negative tax rate of say -100%. Here a person making $1/hour gets another $1 from the government and a person making $4 per hour gets another $4 per hour from the government. This satisfies objective (2) above but not objective (1). Of course, one would argue that there would be tax slabs and consequently even different negative tax rates at different levels, but this problem exists within each tax slab. One could make each tax slab infinitesimally small and achieve the same effect as my proposal but that would be much like saying a function is linear, when it is really exponential and you are approximating it piecewise linear with really small pieces.

1VijayKrishnan13y

My bad. Friedman's NIT implementation seems to be the exact same thing I wrote. NIT seems like a really lousy name for it though, given that it naturally lends itself to the interpretation in my previous comment ; as a fixed percentage bonus added to your salary by the government within some wage band.

7lessdazed13y

I half agree. If you are going to, it had better be good. It's similar to how, if you're going to tell a racist joke, it had better be funny. One thing that should have been noticed is the specificity of the proposal: (x-y)/2. The more specific the proposal, the more likely it is to be sub-optimal, "2" should have been a variable. The less the numbers are bouncing around as variables in your mind, the less likely it is you are thinking about it on a sufficiently general level for it to be fit for LW. This is part of "hold off on proposing solutions until you have discussed the problem thoroughly".

0VijayKrishnan13y

I am amused at this comment more than anything else. Of course it should have been (x-y)/r where 1<r<infinity. And of course correspondingly there is no reason to set x to exactly current minimum_wage* 1.5. Your preferred method of writing and talking reminds me a lot of what I tended to do as a Computer Science undergraduate who studied discrete mathematics and formal logic and liked to make statements unambiguously in first order logic. This was all the more because I was doing a bunch of courses that involved mathematical proofs which obviously lended themselves to that format. The reason why this kind of writing is sub-optimal is the following: 1. That kind of precise writing is needlessly hard to parse. 2. Even after people parse it, to see the intuition behind it, people necessarily have to ground it in some typical/decent instantiations of values. It is therefore much better and you transfer more bits of information from mind to mind per unit time if you directly give people the specific example and allow them to generalize the idea behind the theory in their minds. 3. Admittedly I could have written what I did above and still given you the generalized thing stating the different knobs that could be tweaked in the example. I however thought that at least the knobs above were perfectly obvious to any person intelligent enough to understand my example. I saw no point to treat my reader with kid gloves here. Again, I wasn't proposing a final solution that should be implemented tomorrow! And unless you are among a weird rare set of people incapable of reading anything other than bullet proof first order logic I find it hard to believe that you can ever read such a thing into this. In fact I would argue that there is no easy way to tell the optimal parameters above and possibly even in additional generalizations without any real empirical data regarding the utility functions of different people, how they respond to incentives, what is the histogram

1Emile13y

For what it's worth, I didn't find lessdazed's comment harder to parse or "worse" than yours. Plus, it was shorter!

1lessdazed13y

I communicated my thoughts poorly. To some extent, I assumed you wrote it as you thought it, considering how the other things were variables and just as a general sense I had. The sign that it's not abstract and that you are likely not holding off on proposing solutions is in how one thinks about it regardless of how one ultimately writes it. I'm not primarily arguing that writing abstractly is always optimal (it admittedly may not have been here), but that thinking concretised is suboptimal, and writing concretised is correlated with concretized thinking. It's like Solomon's Problem. So I have no large beef with how you wrote it, and I think you wrote the idea you had in a more than adequate way, but I and many others see it as not on topic. I think that that is because it is too specific. If this (ideal?) way of writing was a reflection of your thoughts, that should have been a hint that the thoughts weren't general enough. My judgement is very susceptible to being wrong insofar as you may have thought about it totally abstractly and been good at avoiding too abstract writing; perhaps you have the good habit of translating the general thoughts in your mind into exemplary exemplary (sic) words, in which case you wouldn't have had this specific hint that this post was fairly off topic by its narrowness. This confused me for a while. In my opinion, it is more specific ideas that are better prepared to be implemented, i.e. the applications of more general forms. I hadn't expected as a defense against a charge of being too practical and not theoretical enough an emphasis of the distance between the idea and its implementation. In general, one isn't concerned with perfection in the initial presentation of any idea, that makes sense, and one brings up the distance from implementation to show critics (that's me) are nitpicking (me?) and misguided (could be me) when they treat a floated idea inappropriately by subjecting it to a standard suited for smoothing a refined

0VijayKrishnan13y

| perhaps you have the good habit of translating the general thoughts in your mind into |exemplary exemplary (sic) words, Yes I do and it has served me very well with regard to being a clearer communicator. It's all the more helpful when communicating with people less used to talking abstractly. I strongly suggest you try it. You'll save time and be more clear 95% of the time unless the people you are communicating with are some really biased sample. | in which case you wouldn't have had this specific hint that this post was fairly off topic by its narrowness. I have no idea what you are saying here :)

0lessdazed13y

narrow/specific/concrete<----------------------------------------------------------------->broad/abstract raise the gas tax 3 cents........................tax energy use............................internalize externalities Other people have downvoted your post/said it should be taken from the main page/criticized it and given general criticisms. I believe that I am being more specific than they and agreeing with them. The problem with this post is that it is narrow, specific, too close to an implementation that "should be implemented tomorrow!" It is not general enough, abstract enough, to fit here. I am articulating why I think it doesn't fit, and I think I am explaining why the others think so. So, if when considering whether or not to post something on the LW main page, part of what I am considering is an economic proposal with a big fat "3 cents" with the number three rather than something I am thinking of in variables, that should be a big flashing warning sign that I am making the mistake of suggesting something too removed from its abstract, generalizable framework, I am possibly summoning politics, the mind killer, as a side effect, and I probably committed the error of not thinking through a problem before being fixated on a specific, narrow solution. "Tax energy use" would be better, "internalize externalities" better still.

0SilasBarta13y

Not as painful as when you pull the hipster "communism was actually successful" contrarian routine.

[-]taw13y110

That was when were discussing things which are true on balance of evidence which are universally tribally disbelieved, so you can use them as a litmus test.

And all data says that communist countries were economically just as successful as non-communist countries on average in terms of growth and convergence. I even linked to data showing exactly that.

I no longer believe it's a particularly good rationality litmus test, people just compartmentalize way too much for there to be any good rationality litmus tests as far as I can tell.

6satt13y

All data? That would amaze me if true.

4sam034513y

All the data shows that communist countries were as good at producing carboard imitations of cars, as capitalist countries were at producing actual cars. When I visited Cuba in 1992, it looked like nothing had been replaced, built, repaired, painted, or maintained, since the 1950s. There was this big corral of ancient farm equipment.

2thomblake13y

FWIW, I got a similar impression visiting England in 2007. Not to mention the lack of free public wifi and toilets that you have to physically touch in order to flush!

1taw13y

Just read the paper.

1SilasBarta13y

Are you expecting Sam's reading of the paper to modernize all the stuff he saw in Cuba or something?

4Vladimir_M13y

I'd be really curious to see these data, if you don't mind posting these links again. However, I will be very disappointed if these data boil down to measures of economic growth based on "real" GDP statistics, for at least two good reasons. First, the official communist statistics are known to have been doctored to an extreme degree. (Occasionally, as in e.g. the 1937 Soviet census, people who dared to submit truthful but bad-looking statistics were denounced as wreckers and shot. Admittedly, the repression after Stalin was much milder, but it's still naive to think that numbers weren't fudged or even faked outright at every level.) Second, for obvious reasons, meaningful comparisons of purchasing power between planned and market economies are impossible, and any attempt to do so is likely to favor the former.

5taw13y

Here's the paper which many people cannot even get themselves to read. This is actually totally unproblematic, because GDP was not one of the ways communist countries measured their economies. They used primarily industrial production statistics, and GDP was the competing Western system of measurement they didn't like because it wasn't exactly putting them in the best light (with their economies being relatively more industry-focused and Western economies being more services-focused). And the paper uses OECD data, not any official data. And you get the same result with GDP proxy studies like life expectancy as with GDP. So the data is solid no matter how you look at it. There's no way to tweak the data to make communist China grow more slowly than non-communist India, or communist Poland to grow more slowly than non-communist Peru.

5Vladimir_M13y

Thanks for the link. I skimmed Kenny's paper, and it uses "income" statistics, which are certainly problematic for the reasons I mentioned. The industrial output numbers it cites are also problematic for the same reasons: if reporting unfavorable census figures was enough to get you shot, do you think it was much better when it came to production statistics? (Also, a lot of Kenny's figures are of that comically absurd nonsense-on-stilts variety where "real" GDP statistic for countries from a century ago are calculated to four and more significant digits.) I don't know what exactly you mean by "OECD data," but as false as the official statistic were, it's naive to think that anyone outside the communist countries had an accurate idea on what the real numbers were. (And again, it should be obvious that comparing income based on purchasing power between a market and a command economy is inherently meaningless.) It's also naive to think that respectable Western economists didn't have strong pro-Soviet biases. A good example is the almost comical story about Samuelson's Orwellian revisions of his Soviet growth predictions in consecutive editions of his textbook. As for comparisons with non-Western countries, I'll certainly agree that various Third World regimes often messed things up even worse than the Soviet Bloc. After all, many of them were equally ruthless and violent, and most were explicitly socialist to at least some degree. (By the way, it seems like both you and Kenny underestimate the intensity of both socialism and violence in the 20th century Third World.) I'll also agree that communist countries did make some advances in public health and education, as reflected in life expectancy, literacy, and other statistics, though it's also pretty clear that similar, if not greater advances would have been achieved by their realistic historical alternatives. On the other hand, it's also important to understand how much they were free-riding on global public goods pr

-4taw13y

The point might or might not be trivial, what I use this paper for is the "if data says so, data must be wrong, and I won't even look at it" knee-jerk reaction that you can easily observe in this thread. A lot of people here find the empirically true claim that "communist countries did economically about as well as non-communist countries on average" not only far from trivial, but more of the "omg that's totally impossible, data lies, die in fire you Communist pig!" variety (except they're more polite about the last part by the time they get to write comments).

3SilasBarta13y

It takes a lot more than some obscure hipster "I'm going to prove everybody wrong" contrarian's paper to outweigh the massive cases of people fleeing communist countries when they get the chance. That's not refusing to look at evidence; it's recognizing the relative informativeness of different data points. If you want to prove that communist economies were so much better than believed, you need to directly address the imbalanced migration, not just cite self-reports that assure us everything's totally awesome there.

2lessdazed13y

I'm more skeptical about the relevance of averages in cases like this than I am about communism.

3Eugine_Nier13y

Calling Peru or India during the relevant period non-communist is certainly debatable.

4SilasBarta13y

Then the data were wrong. Sorry, enormous net exodous rates trump Goodharted metrics. When you use a metric, you have to know the extent of its applicability. When "high growth" coincides with people risking death to get the hell out, you don't say, wow what amazing growth!

5taw13y

The "if data disagrees with my view so the data is wrong" reaction is exactly what I thought makes it a good litmus test. The test was not for agreement or disagreement, it was for absence or presence of kneejerk reaction that rejects all data without even bothering to look at it. But as far as I know, you might still be perfectly rational as long as it doesn't involve economics or politics, just as the Pope can be perfectly rational as long as it doesn't involve religion. People just have their weird compartments.

4SilasBarta13y

What Eugine said. See I defy the data, which I summarize as: Your models of the world must be consilient. If you find "growth" coinciding with "nothing new being built since before communists took over", then yes, you should "defy" the supposed growth data. If growth means anything, it means, "people don't risk death trying to float away because of poor opportunities". If you try to reinterpret the world so that such a circumstance "really" counts as growth, then you've fundamentally forgotten why you came up with that metric in the first place. It is far more a case of "compartmentalization" to say that "except with respect to every on-the-ground observable, this country has high growth, because that's what their economic numbers say, and don't tell me about what you saw there, that's a separate, non-overlapping magisterium".

1Eugine_Nier13y

No, this is a case of "the data fails to agree with observation and furthermore is in a field notorious for data manipulation and sometimes outright falsification, therefore the data is wrong with high probability". Relying on "data" even when it blatantly contradicts direct observation, as you seem to insist on doing, is precisely the kind of straw rationality gives rationality in general a bad name and more importantly causes many rationalists to fail.

4FAWS13y

Would you say Latin American capitalism also failed by that metric? (Mostly) Capitalist Latin America and the Soviet Union performed about equally well, from about equal starting points, and Latin America didn't have the damage from two world wars and the need to compete in military spending with the richest nation in the word as a excuses.

-1SilasBarta13y

Latin American countries are generally much closer to the communist/capitalist border (edited to fix dropped word) than Western Europe over that time period, and they generally did suffer a higher (though not as striking) net emigration rate (see the US/Mexico border).

-2FAWS13y

I can't decipher this. You don't seem to have answered the question, either.

1SilasBarta13y

I was disputing that Latin Americans were capitalist in the sense that US/Canada/Western Europe are, and saying that on a scale they were closer to the middle and had net migration rates consistent with this. What did I not answer?

1FAWS13y

I thought you were saying something about closeness to geographical borders or the like. You did not answer whether you consider Latin American capitalism to have failed by your metric. Half way between communism and "real" capitalism (which would seem to include e. g. France, Italy and Sweden)? That sounds like a post hoc justification. (I'm assuming you are not talking about soviet aligned governments, which controlled only a small fraction of the total Latin American economy over the time frame in question) I couldn't find anything for 1989, but check the economic freedom ratings of the Heritage Foundation for 1995: The variation among Western European and Latin American nations is much greater than the difference between their averages and most Latin American nations are within the Western European range. The reason the Latin American nations score a bit lower on average is mostly corruption and they score "better" on government spending.

0SilasBarta13y

I don't know much about the specifics of Latin American countries, just that has a lot of revolutions that involve socialist governments taking power, which justifies not labeling them as capitalist to the extent that the canonical cases are.

0FAWS13y

Where except Cuba and Nicaragua did communist or socialist governments try to and manage to stay in power long enough to make significant headway in establishing a socialist economy, rather than being disposed by US -backed coups?

0SilasBarta13y

Long story short, I don't know enough about Latin America to know whether it's strong contrary evidence, but what I've seen suggests it's not. I will say, though, that most of these cases of a US-backed "capitalist" regime taking over after a communist revolution are really just changes in names. For example, Reagan backed Mobutu Sese Seko in Zaire as an "anti-communist stalwart", even though his regime was about as far from a market economy as you could get! However, most of Latin America was run by explicitly socialist, Marxist-influenced regimes, which was why Pinochet's rebelling against one (and yes it was murderous and horrifying, I won't defend that) and setting up an actual pro-market economy was such an anomaly.

0FAWS13y

Are you talking about parties that have the word "socialist" in their name or are members of the Socialist International like the Parti Socialiste in France, or about parties that tried to transition to a socialist economy? Those are very different things! The first would probably be closer to true for Western Europe (I can't think of a Western European nation that hasn't been ruled by a Socialist International member party, though conservative parties generally ruled longer) and the second just isn't true at all.

0khafra13y

Umeshism: If nobody is willing to risk death to leave your country, you're trying too hard to please everybody. Alternate interpretation: People leave capitalist, socialist, and anarchist countries regularly. Do all of them have a marginal benefit for leaving below an [x]% risk of death?

2SilasBarta13y

Note that I was using the net exodus rate as a metric. For countries that are about equally good, you will find people leaving one for the other, but they won't be strongly biased in favor of leaving any particular one of them. OTOH, if one of them has a huge net emigration rate, and everyone tells you they left, "because we could"...

[-]Vaniver13y40

As pointed out by orthonormal, Milton Friedman already came up with this decades ago. This is definitely an improvement over minimum wage laws, but has not been implemented because its primary improvement is over welfare programs, which are too entrenched to be replaced.

[-][anonymous]13y30

One possible problem with this is it's effectively a government subsidy for low-paying employers. Anyone currently on minimum wage, their wage will drop and be made up by the government. Not necessarily the intended effect.

To me this seems just like a slightly more complex way of doing the citizens' income idea, which is one I like in theory and would be easier to implement (as well as probably more popular).

0VijayKrishnan13y

It's not obvious that it's a subsidy. This would be a subsidy only if an employer would have to pay a person less here compared to a market with no minimum wage laws and no social security. For example, imagine that in such a market a person's wage is $4 per hour (who is currently almost certainly unemployed in California due to the $8/hr min wage). Now let's analyze what happens to the prevailing wage of a person of similar skill with the above scheme where the government ensures that a person makes at least $6 an hour. The marginal utility of money is lower for the aforesaid person given that he is already guaranteed $6 an hour. This will cause some of the people to not work (whereas in the min wage + fixed social security for the employed scheme, all the people fitting the above profile wouldn't be working). Since there are smaller number of people of the same skill level competing for the jobs, employers will actually have to pay more money to make it worth the while of the employees! So if anything it is the very opposite of a subsidy for the employers who will now be employing all the people who cannot command minimum wage, and are unemployed now.

[-]Manfred13y20

Minimum wage has the side effect of leaving unemployed, the people who do not possess the requisite skill to command the minimum wage in the market. This follows from basic micro-economic theory

This is not technically true. Even in idealized economics, stuff gets non-basic quite quickly.

[-]Hyena13y20

I think you should replace "earnings" with "hourly wages". It makes more sense, given perfect information, to have a system which tops up hourly earnings rather than earnings generally because this incentivizes work rather than earnings.

We don't, for example, want to issue subsidies to people who work part time at high-payed work just because they'll be topped up by the scheme.

0VijayKrishnan13y

This seems to be a good idea. But the only problem with it is that the labor market is not as liquid as a financial market. It is in principle quite possible for a person in a free market to be commanding 1.5 * minimum_wage in a part time job or for part of the year, but unable to find work for the rest of the year or rest of the free time, which would push his annual salary below minimum wage. Theoretically there should be absolutely zero unemployment with no minimum wage laws. However in practice it would still be a couple of percent due to liquidity holes in the market, with people in between jobs, in the process of talking with multiple employers etc. In my method, there is still incentive for people earning above min wage to work as hard as possible, since the state subsidy is only (x-y)/2 and not (x-y). I agree with your point though, that the incentives would be stronger in the event of replacing earnings with "hourly wages", if only you could handle the issue of genuine unemployment due to liquidity holes that prevent the person from making min wage averaged across the year.

0Hyena13y

I don't think we need to handle liquidity problems, though, except through unemployment insurance. Designing its incentives would overcome most of its ill-effects (for example, creating a cash bonus for getting a job that diminishes the longer you on it, a la a shared savings model). I actually live on UI, I know way too much about what unemployment looks like from the inside at this point.

[-]jimrandomh13y10

There are very few people whose work is worth between zero and minimum wage; most people's labor is either worth more than minimum wage, or has negative value because of the non-wage costs and risks associated with hiring someone.

5nerzhin13y

I'm not sure I believe you. By "non-wage costs and risks" do you mean things like health benefits, or lawsuit liability, or what? I can think of a lot of productive uses for cheap labor. There's a bunch of trash and graffiti in my city. There's lots of unemployed people whose labor cleaning it up would be worth, say, a euro an hour.

1Larks13y

Reference?

1Manfred13y

This estimation might be affected by the availability heuristic - I don't see a reason why marginal cost of labor should jump around a lot, so maybe it's so common for low-benefit jobs not to be filled that nobody comments on it.

[-]rosyatrandom13y10

So... what we have here is a kind of minimum and maximum entitlement: x/2 and x, with incentives to work more to get more back. Interesting

1Jonathan_Graehl13y

The article proposal is between 0 and x/2 (not that it changes much).

1Sniffnoy13y

Yeah, thinking about it in terms of how much total you get, rather than how much additional you get, you can always pick some minimum and maximum and make a linear function to fit. (Though you want minimum<maximum, obviously...) Then you can subtract off x to get the entitlement part. Of course at the maximum the entitlement is always 0.

[-]qwerty13y00

Let's look at the actual intent of your article - it is not to propose 'the' solution to improve the productivity of the economy, but to device methods to improve it. After all, the fact that you say that you have not spent time thinking about the implementation (and from the depth of the article, the issue itself) reiterates my opening line. Firstly we have to remind ourselves that productivity of an economy is not even a non-linear problem, but a transcendental problem. So linear proposals like the one you attempt will barely scratch the surface. For ... (read more)

[-]handoflixue13y00

It's worth pointing out that a couple countries have that sort of social security and still have a minimum wage, and they seem to do just fine. (Australia, I believe UK too?)

It's also very worth watching the politics that go in to that - a mathematically ideal policy is useless if you can't get people to accept it. Proving that it's mathematically ideal is very rarely compelling, either.

[+]DanielLC13y-50

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