Minimum Wage Increase as a Second Best Policy Response to Poverty

Greg Mankiw emails me to remind me he never said precisely the following:

There was the Greg Mankiw claim that no real economist could support a higher minimum wage

He is correct and my exercise in hyperbole was uncalled for. As I apologize, let me suggest why some of us on the left get frustrated with conservatives reminding us of what we already know – that deviations from a perfectly competitive market involve efficiency costs. When Greg Mankiw said:

Here is a question that I would ask any politician: If you could set your ideal policy to help the poor, wouldn’t you prefer to expand the EITC and abolish the minimum wage? Any politician that fails to answer “yes” is either misinformed or engaging in demagoguery.

Max Sawicky reminded him that 650 economists including 5 Nobel prize winners and 6 past presidents of the American Economic Association, believe that increasing federal and state minimum wages, with annual cost-of-living adjustments for inflation, “can significantly improve the lives of low-income workers and their families, without the adverse effects that critics have claimed.”

Mankiw suggests that these economists may be wrong:

I believe that relatively few economists would include the minimum wage as part of their first-best package of policies.

If one assumes that labor markets are perfectly competitive, then a wage floor has efficiency costs. We all know that. None of those 650 economists ever said otherwise and none said that raising the minimum wage is the only means for reducing poverty. I think most economists recognize that a wage floor is part of a second best strategy. There are other approaches that might be more effective in reducing poverty but these strategies are not exactly being endorsed by Dr. Mankiw’s former boss who does hold the power to veto anything Congress proposes.

Then again, a wage floor might also improve efficiency if the labor market has monopsonistic features.

Look for me to misrepresent what someone else said is inexcusable – especially given the fact that I often resent when those on the right misrepresent what we liberals have said. For that transgression, I apologize.