One Intern’s Bizarre Notion of “Subsidy”

minimumwageThere’s a recent Guardian article headlined, “Tax breaks for CEOs pay for million-dollar salaries: CEOs’ salaries are ballooning thanks to tax breaks that turn bonuses into government subsidies for corporate America”.

It makes two laughable assertions: that stock options are a government subsidy to businesses, and particularly bizarre, that the minimum wage is a subsidy to businesses. The latter is positively Orwellian, straight out of the Ministry of Truth: the state is imposing a regulation on you making it harder to run your business, and that’s a favor to you so you should appreciate the good efforts of the state.

Jana Kasperkevic, described as “the fall US Business intern for the Guardian US”, writes that “Many argue that there are two subsidies at work: tax breaks to keep CEO pay high, and a low minimum wage to keep worker costs low.”

Payment in stock options is incredibly complex for accounting and tax purposes, and complex topics can be easy to demagogue, which Kasperkevic faithfully does. To  get a feel for some of the complexity, read this. Here, however, I want to focus on the other main allegation: that the current national minimum wage is a subsidy to employers.

First of all when an employer is coerced by the government into paying a minimum wage above the market-clearing wage, that’s the opposite of a subsidy. It’s a cost – imposed by the government.

What Ms. Kasperkevic probably means to say is that welfare benefits such as food stamps are not only a government subsidy to a particular person, but also to that person’s employer, and faults the employer for accepting that government subsidy.

Kasperkevic doesn’t realize it but she’s actually making an indictment against the government. Her argument assumes that the employer is getting away with paying lower wages than would be the case without the welfare payment, which in turn assumes that if the welfare payment were removed, then the employer would be forced to raise wages by the amount of the welfare payment in order retain that worker. So under this situation the government is creating artificially low wages. Remove the welfare, and wages will rise, she implies.

Whether wages actually would rise is an open question with many factors involved. If not, then Kasperkevic is wrong – the employers are not getting a subsidy; only the direct welfare recipient is.

Meantime, Kasperkevic essentially says that coercing employers to raise wages by boosting the minimum wage would reduce government spending on welfare benefits such as food stamps.

While some people could become ineligible for welfare under this scenario, many other people would become newly eligible for welfare due to being laid off. If the minimum wage were raised from $7.25 to $10 per hour, a worker only would be retained if he or she produces more than $10 per hour of output. While many people have the skills to produce just above $7.25 per hour of output, they don’t have the skills to produce $10 per hour of output. In that case the employer would be losing money on that worker, and the latter would be laid off (unless the employer for some reason is fine with losing money).

So a higher minimum wage would result in more unemployed people, creating new demand for welfare benefits. Spending on welfare benefits, therefore, likely would not go down, but up. The reality of a minimum wage hike would be the opposite of what Ms. Kasperkevic implies.

A higher minimum wage can only avoid unemployment if all of the working population is skilled enough to produce output above the minimum wage. For example if the minimum wage is $7.25 per hour and all of the working population is skilled enough to produce, say, at least $11 per hour of output, then raising the minimum wage to $10 likely won’t produce unemployment.

But alas, large segments of the U.S. working-age population aren’t skilled enough to produce $11 per hour of output let alone $7.25 per hour of output, especially minority youth and those who can’t speak English. And it shows: unemployment among black teens is a mind-boggling 42 percent. Raising the minimum wage would boost that unemployment rate even higher (all other things being equal). And it would boost demand for welfare even more.

So in addition to a minimum wage boost being a cost, not a subsidy, to employers, it would be the kiss of employment death for low-skilled workers.

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