What Farm Policy Can Teach Us About the Minimum Wage
Government interference in agriculture began in the 1930s when FDR decided to address the issues of low farm income and the imbalance of power between small farmers with perishable crops and large buyers of those commodities. After some difficulty in convincing the Supreme Court that government handouts to farmers were allowed under the Constitution, we began an over 50 year saga of how governments can distort markets and cause harm to both market participants and taxpayers. Today's farm policy is much smarter, much less market-distorting, and less financially burdensome on the taxpayer. The lessons learned as farm policy has evolved would do much to inform us on the minimum wage, the dance between employers and employees, and how we should be going about providing income support to low-wage workers.
Initially, farm programs were based on two different floor prices. (I am going to simplify things a little, but only to save space and make the analogy clearer; the following is how things worked.) The lower price, called the loan rate, was a price at which the government promised to buy a farmer's crop. Thus, no farmer would sell a commodity for less than the loan rate, making it a hard price floor for market transactions. Thus, the loan rate is akin to a minimum wage, no transactions take place below that price.
The higher floor price, called the target price, was used to provide government income support to farmers. If you sold your crop for more than the loan rate but less than the target price, the government paid you the difference. Thus, the target price and the payments attached to it (called deficiency payments) are analogous to the Earned Income Tax Credit. A farmer has to sell some output to qualify, and the payment is meant to bring insufficient market income up to some legislatively determined level.
Two important lessons can be learned from the fifty-plus years that these policies were in place. First, farm family average incomes remained lower than those of non-farm households through almost this entire period. Second, the price floor for commodities meant that in years with either low demand or bumper crops, the government ended up having to purchase mountains of farm products.
In other words, government support did not cure farm poverty and the price floor created surpluses that cost taxpayers billions of dollars. In labor markets, the parallels are that government subsidy programs will not cure poverty and that a minimum wage causes unemployment (a surplus of labor).
Luckily for farmers, the government got smarter about policy and farmers used markets to help solve their own problems. The farm income problem was solved by the market as farm households now have higher average incomes than non-farm households because they combine farm income with off-farm income (at least some members of the family got other jobs). The government improved policy on their end by moving toward forms of decoupled income support.
In a decoupled farm income-support policy, the government eliminates the price floors and stops buying surplus commodities. Instead, the government simply pays farmers a transfer payment in order to raise their income. For a time, the government did just that. The lump sum payments, called transition payments were based on past production levels, so farmers could do whatever they thought would be most profitable in the market place and still received the same payment to help support farm income. These straight income support payments were similar to the Earned Income Tax Credits except that the amount a farmer received did not drop once his market income exceeded some level.
The advantage of these new policies is that they produced less distortion in the market place, meaning they have a smaller impact in terms of changing farmers' behavior. Because the lump sum payments were fixed, farmers made current decisions without regard to their income subsidy.
Right now, people receive many benefits (welfare, unemployment, Medicaid, food stamps (or SNAP), and on and on) that they can lose as their incomes rise. As I showed here, the way benefits phase out means that an increase in the minimum wage or a low-wage worker simply getting a raise in the marketplace without any government help can lead to an implicit marginal tax rate of over 50 percent. This is bad policy as it means the working poor (or non-working poor thinking of taking a job) face steep penalties for earning more money. The impact of such poor policy is that the government is discouraging low-wage workers from earning more money and eventually escaping from the government's anti-poverty programs altogether.
Government improved farm policy when it moved to "decouple" support payments from behavior. The parallel for low-wage workers would be to make the EITC and other benefits more a function of past work or earnings so that workers received income support without having such a big disincentive to increasing earnings. Right now, telling workers that the government will take over 50 cents of every extra dollar they earn is surely affecting many low-wage workers' decisions. After all, that is a higher tax rate than the one percenters face.
Rather than raising the minimum wage or forcing more benefits into pay packages through regulation (like health insurance or paid sick leave), what is needed to efficiently help the poor is a more "decoupled" policy. At a minimum, the Earned Income Tax Credit should phase out more slowly, perhaps reducing the implicit tax rate to 25 percent, the rate paid by middle and upper-middle class households.
With a smaller penalty to higher incomes, workers' decisions would be less distorted by the government policies that are meant to support them. Fewer market distortions will mean a better allocation of labor in the marketplace and eventually less poverty. The government already learned how to decouple policy in the agricultural arena; we don't need to reinvent the wheel. The current anti-poverty policy has had a fifty year run without solving the problem. It is time to give a decoupled policy a try.