How to Handle Minimum Wage Job Losses

Lydia DePillis has a wonderful piece at the Washington Post asking the question: would it be so bad if the minimum wage killed jobs? Here's DePillis:

Underneath that rhetoric, however, the economic architecture that supports the Fight for $15 is built on entirely different logic. For its advocates, the question isn’t whether minimum wage hikes will kill jobs, but rather how to help people who end up unemployed when they do.


"Why shouldn’t we in fact accept job loss?” asks New School economics and urban policy professor David Howell, who’s about to publish a white paper on the subject. "What’s so bad about getting rid of crappy jobs, forcing employers to upgrade, and having a serious program to compensate anyone who is in the slightest way harmed by that?"

Howell is talking about something like the Trade Adjustment Assistanceprogram, which assists people who lose their jobs due to international trade deals. Sure, it might be harder to prove that your job was eliminated because of a minimum wage hike, or that a high minimum wage kept you from getting a job in the first place. But in principle, he says, the savings created by all the welfare benefits that won’t have to be doled out to people who are now making more money could be re-invested in vocational training, subsidized jobs, and direct income supports for those who can’t find work.

In addition to DePillis' points, it's worth noting here that killing jobs through wage floors was at one point in time an intentional policy goal of the Rehn-Meidner model that prevailed in Sweden during its golden years of social democracy.

Under this model, Sweden put in place a solidaristic wage policy that shrunk wage differentials across job types and forced all firms to pay the same wages for the same kind of work, regardless of their ability to do so. This was done on the understanding that firms that could not keep up would fail, thereby causing the workers in the firm to become unemployed. Those workers would then receive generous unemployment benefits and, through active labor market policies, be absorbed into surviving firms. This policy would thus force an ongoing reallocation of labor to higher-productivity firms while also helping to cut inflation through constant disemployment.

Of course, the purpose here wasn't purely to kill off lower-productivity firms. It was also to encourage them to become higher-productivity firms. Solidaristic wages meant that firms near the bottom in performance had to constantly find ways to stay ahead of the wage monster crawling up behind them.

When I share this factoid about the Rehn-Meidner model in discussions, I am mostly met with disbelief. I think this is mostly a function of the fact that job loss in the US can be unbelievably devastating. Unemployment benefits are weak. You lose your health insurance. You have no assistance in finding new work. You are kind of cut loose into the abyss. But that doesn't have to be the case and was not the case in Sweden at the time. If you lost your job, most of your earnings were replaced with unemployment benefits. You didn't lose your health insurance. You didn't fall behind on rent or the mortgage. Active labor market policies (ALMP) were there to do what it took (training, in-work subsidy, schooling) to get you into a new firm. In short, having your job killed was a much more comfortable experience.

That difference is also arguably why job-killing could be more problematic in the US. Professor David Howell, quoted above, is obviously correct to say that you could provide benefits and ALMP to anyone disemployed by a wage hike (as Sweden did and does) and everything would basically be fine. But does the US have the stomach for such a sensible welfare scheme? That is somewhat less clear.