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New Year, New-Old Fights

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The first political battle of the year is already taking shape. It involves unemployment benefits, spending, and the minimum wage. Congressional Democrats are seeking the reinstatement of long-term unemployment payments, a federal minimum wage hike, and without cutting any spending, as the GOP is likely to request.

President Obama will probably mention the minimum wage increase in the State of the Union address later this month. He has already started his pitch to extend long-term unemployment payments.

Again, Republicans have already indicated that they are open to the extension of jobless benefits, but in exchange for some modest spending cuts.

Both proposals are problematic in a time such as this in that both put downward pressure on employment. Once can argue the extent of the effect, and probably with hard data, but making it more expensive for employers to keep or hire employees and subsidizing unemployment provide incentives for lower employment.

Many commentators have written glowingly that raising the minimum wage by nearly $3/hour to $10.10 would lift this number or that number of people out of poverty, which is a problematic assertion to begin with. But accepting this as a premise, most of these assertions omit non-wage effects of this course of action.

Artificially raising wages will price certain people out of jobs. Since the minimum wage is arbitrary and not tied, per se, to a worker’s value or production, a floor on wages will necessarily mean that many low-skilled workers do not provide that much per hour in value, ultimately leading to the elimination of their positions in favor of more experienced, more productive workers who do provide $10.10 per hour of value.

Historically, artificially higher wages reduce employment by making low-skilled workers more expensive to hire. Ironically, these are the very workers a minimum wage is said to help.

Then, extending unemployment payments for workers who have been out of work for nearly two years reduces their incentive to take jobs. Such a prolonged subsidy of joblessness only diminishes the skills of these workers, who are most likely on the lower-skilled side of the spectrum. At some point, benefits must stop, and it is at that point that the long-term unemployed will find ever greater difficulty landing jobs.

In essence, it might have been better long ago to only grant 32 weeks of payments with a date certain ending, at which point the jobless would likely have taken positions somewhere, even if substandard relative to their old jobs. Then, showing gainful employment, such workers would have had a better chance of finding higher-paying jobs. Of course, there must be jobs to be had, and perhaps this proposal is a tacit admission that the economy is still quite weak.

So it seems it’s up to the GOP to make the next move since the Democrats have already played their hand. The bet is that compassion is a political winner and prudence is not.



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