Editorials — April 9, 2014 13:43 — 1 Comment
A Quick Interview with Cal’s Michael Reich
Michael Reich is a professor of economics and Director of the Institute for Research on Labor and Employment at the University of California at Berkeley. He received his Ph.D. in Economics from Harvard. His research publications cover numerous areas of labor economics and political economy, including the economics of racial inequality, the analysis of labor market segmentation, historical stages in U.S. labor markets and social structures of accumulation, high performance workplaces, union-management cooperation and Japanese labor-management systems.
We reached out to Professor Reich, sending him five questions from Monarch contributor Matt Spek Watson, to get his take on some important issues facing Seattle.
One of the presumed benefits of raising the minimum wage is less reliance on social safety net programs. In your experience, does the amount of money saved on these welfare programs come close to covering the difference in wages after the increase? That is to say, if workers end up earning $100 more per week, should we expect a $100 per week drop in social welfare spending?
There is an offset, but it’s much less than 100 percent – more like 25 percent. I just released the first study of this question, for the case of food stamps.
Conservatives argue that by lowering taxes on businesses we can increase both wages and employment, however if we look at the states with the lowest business tax rates, we also find some of the lowest employment numbers. Is there evidence of causality there, or is that coincidence? Are there ways to incentivize businesses to invest in higher wages and higher employment by offering targeted tax cuts?
The literature on this is not promising. State and local level incentives tend to create a race to the bottom.
In order to cover the cost of rising wages, employers will presumably have to raise the price of goods and services they sell, resulting in high inflation and a de facto wage cut for those who currently make more than the proposed minimum wage. How have other communities combated this inflation, and are there any surefire ways to prevent it? Do those methods also address the rise in unemployment that will necessarily follow from a rise in wages?
Price increases for a 10 percent increase in the minimum wage are about 0.7 percent, one-time only and only in restaurants, which are about 10 percent of the economy. Unemployment does not necessarily result: labor supply changes too – turnover decreases and productivity grows, and price pass-throughs also offset increased labor costs, because demand for restaurant meals is relatively inelastic. See our report for the Seattle conference for more details on these points.
Seattle has an impressive set of social safety net programs, and it has been argued that programs like these essentially subsidize businesses that employ low-wage workers by allowing those workers to survive on such low wages. Do you consider that an accurate characterization of the relationship between low-wage employers and social welfare programs?
A paper by my Berkeley colleague Jesse Rothstein in the American Economic Journal supports this view in the case of the Earned Income Tax Credit. I’m not familiar with the programs in Seattle so can’t comment on those.
The $15/hour movement has gained considerable momentum in Seattle in recent months, despite the fact that it is widely accepted that a raising of the minimum wage is not the most efficient way to raise people out of poverty. It feels as though much of the support for this movement comes from the fact that we haven’t seen many proposed alternatives, and certainly none that are as tangible as 15Now. Can you suggest some other, more efficient public policy alternatives to pull people out of poverty?
Most studies show that minimum wage policy is much more efficient at raising people out of poverty than is widely believed. See the December 2013 paper, Minimum Wages and the Distribution of Family Income, by Arindrajit Dube, available on his website.
The answer isn't poetry, but rather language
- Richard Kenney