“The Social Costs of Paying Low Wages”

March 5, 2014
By Oren M. Levin-Waldman, Ph.D.

The recent release of the Congressional Budget Office’s report that an increase in the minimum wage could lead to a loss of as much as one million jobs by 2016 has created quite a stir. Those  on the right hailed it as proof that an increase in the minimum wage is a bad idea precisely because we are still plagued by long-term unemployment. Meanwhile, those on left hailed the report as a vindication that the minimum wage would result in at least 16 million Americans getting a raise, which in turn would benefit the economy through increased spending.

On one level, the controversy over the CBO report only highlights the narrowness of the minimum wage debate to date: adverse employment effects v. anti-poverty benefits. But on another level, it is typical of the type of cost-benefit calculus, which itself is too narrow. The only costs really considered are employment, specifically among low-skilled workers. Meanwhile, the only real benefits considered are those that accrue to the low-wage labor market earning either the minimum wage or wages around the minimum. And yet, there is a broader calculus that needs to be taken if we as a political community truly seek to formulate policy that truly reflects the collective will of the people.

The problem with a narrow cost-benefit analysis is it invariably misses the larger social costs associated with paying workers low wages, and the larger social benefits that may accrue when those workers are paid a liveable wage instead. First, let’s consider what the CBO report actually said. It did not say that a million jobs would definitely be lost. Rather, it said it could happen. In this vein, it appeared to be acknowledging that the data on the effects of the minimum wage have been ambiguous at best. Rather than ambiguity being a justification for doing nothing, it ought to be an opportunity for policy experimentation. The report also was not entirely clear about just what it meant to talk a about lower employment.

Lower employment could result from three possibilities: 1) employers lay workers off in response to a higher wage floor, in which case the lower employment is a “disemployment” effect; 2) A higher minimum wage might lead employers not to create new jobs in the future, in which case the lower employment is the result of slower growth as individuals are maturing and getting ready to enter the labor market; and 3), a higher wage might attract individuals who had previously shunned the labor market back into the labor market in search of the higher paying jobs, in which case the lower employment is a function of more workers chasing the existing supply of jobs. In this case, the higher wage has attracted more people into the labor force, with no corresponding increase in the number of workers actually employed.

Although a fine line to be sure, there is still a difference between a disemployment effect because the minimum wage caused people to lose their jobs and lower employment because either more workers were attracted to the labor market or employers decided not to create more jobs in the future.

Of course, one might ask what difference does it make? After all, lower employment is still lower employment. The problem with framing the question in this fashion is that we are inevitably led to the competitive market model solution of lower wages. This flows from the underlying assumption that unemployment is caused by wage rigidity. If we only lower wages, more people will be hired. And yet, rarely is the question asked: just what are the larger social costs to society of paying workers low wages?

When employers pay their workers low wages, they are imposing a social cost on all of society. True enough, consumers benefit from lower prices. But those same consumers who are the beneficiaries of lower prices are also put in the position of having to subsidize those low wages in the form of higher taxes to pay for programs like food stamps, increased housing allowances, and other public assistance these workers may need because their wages are below subsistence. And yet, there may be other social costs as well.

Poorly paid workers are less likely to be engaged in civic organizations than highly paid workers, and they are less likely to participate in the political process at the most nominal level of voting. Does the political community not bear the social cost of political anomie?

Poorly paid people may have poorer health because they cannot afford healthier food and the costs associated with regular exercise. Studies have found that the rates of diabetes tend to be higher in poorer communities where residents have less access to gym facilities. Again, society then has to pick up the cost when they truly do get sick.

When people are poorly paid we are able to see the social costs more acutely in the nation’s cities where the effects of poverty are most visible. Of course, it is also in these same decaying urban areas that crime rates tend to be higher. Society, then, has to bear the additional cost of incarceration.

When all of these social costs are tallied up, it would appear that society in effect is being asked to subsidize the profits of low-wage workers’ employers. Now if we can see what the true costs are, we can also get a sense of just what the larger social benefits to paying higher wages might be: less reliance on public assistance programs, lower political anomie, more civic engagement, healthier workers, less incarceration because of lower crime rates, and less urban blight. In tangible terms, the benefits of paying higher wages should translate into lower taxes because of the reduced social costs. Moreover, a workforce that is more self-sufficient and less reliant on the largesse of others only maintains the social fabric of the nation, especially one predicated on the American work ethic.

Economics is not dispositive; rather it is about behavior and should serve as no more than a fountain of information in the larger policy calculus. There are indeed social costs associated with paying lower wages. We can either support those at the bottom of the distribution through higher confiscatory taxation needed to provide the necessary subsidies because their wages are too low or we can support them by paying them a liveable wage that will enable them to be self-sufficient and live in dignity. At the end of the day, the minimum wage is about the type of society we would like to be.

March 4, 2014

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