Subsidized — not minimum — wages should assist workers during the pandemic

The Democratic Party platform approved this week calls to more than double the federal minimum wage to $15 per hour. Democratic presidential nominee Joe Biden has declared that he’ll do just that if elected president, and the many supporters include his running mate, Sen. Kamala Harris (D-Calif.). But there is a more innovative way to help low-wage workers, and it’s hard to overstate how bad a minimum wage increase would be right now. 

The pandemic has slashed demand for restaurant dining and retail goods, industries that employ the majority of low-wage workers. That means the prices customers are willing to pay have fallen. The revenue produced by many low-wage workers’ labor is, through no fault of their own, lower than it was before the pandemic. 

Worse yet, the (necessary) safety precautions mean that workers’ productivity has also fallen. This is true both because fewer customers can be served (for example, there are fewer seats in restaurants) and because the cost of providing service has risen due to rigorous cleaning protocols. Workers wait on fewer tables, ring up fewer customers, etc.

No company can stay in business if it’s consistently paying its employees a dollar for producing 75 cents worth of revenue, regardless of the product in question or the structure of the market. This is not an abstraction, but basic accounting. Businesses in areas with high minimum wages, including the three states and 21 local jurisdictions which raised them this summer, are especially likely to face this situation.

Increasing the minimum wage would make it even harder for businesses – themselves teetering on the edge of insolvency – to retain their existing staff, let alone hire back some of the millions of unemployed workers. This isn’t a comment on the worthiness or effort of the workers doing what is now a more difficult and dangerous job. It’s just another unfortunate part of the pandemic tragedy. 

Even the usual arguments in favor of minimum wages are less applicable than usual today. 

Increasing minimum wages in labor markets where employers have power to dictate wages, in theory, might not reduce employment. Leaving aside whether that holds in reality, the pandemic has reduced or even reversed any wage-productivity gap. Firms simply cannot pay wages higher than the revenue produced by workers’ efforts. Furthermore, profit margins in many businesses, especially small family-owned restaurants, were already razor-thin, so there’s not much in the way of “excess profits” to redistribute or fat to trim. Increasing the cost of labor will just accelerate those (usually smaller) companies’ path towards bankruptcy. 

Another common argument is that minimum wage increases are a win-win for everyone by motivating workers to work harder, making the company (and the economy) more productive. But in reality, this idea is a tacit admission that higher minimum wages reduce job prospects for unemployed workers (who now come with higher price tags). Those who still have jobs re-double their efforts to make sure they aren’t fired and face the same difficulty. Because workers already fear losing their jobs during this recession, raising the minimum wage won’t provide any additional benefit.

So, if raising the minimum wage is a counterproductive, terrible idea, what can we do? 

We can directly subsidize employers in a manner akin to the now-defunct Advance Earned Income Tax Credit (AEITC). In this program, employers “top up” workers’ wages and receive a credit on their own taxes. This increases the money going to low-wage workers and reduces the cost of employing them, keeping the benefit of the minimum wage while mitigating its disemployment effect.

And because AEITC payments are reported on workers’ W2 tax forms, the subsidies that go to those who do not need them (like the dependent teenage children of high-income families) could be clawed back. 

Obviously, it’s a complicated undertaking. Should employees opt-in or be added automatically? What is the right wage subsidy amount? Would businesses’ reduced revenue due to the pandemic require Congress to advance their tax credits? What about the implementation problems with the old AEITC? But it’s no time to shrink from these hurdles, especially if the alternative is raising the minimum wage and creating unclimbable employment barriers for the very people we’re trying to help. 

Raising the minimum wage would unequivocally slow the recovery and add enormously to many people’s misery during the worst recession in nearly a century. They deserve better than the same-old “solution.”

Jonathan Meer is the Mary Julia and George R. Jordan Professor at the Department of Economics at Texas A&M University. Michael Farren is a research fellow with the Mercatus Center at George Mason University.