Interesting idea. It's in the same family as the Earned Income Tax Credit and the Negative Income Tax.
The immediate potential downside I see is that this would effectively institute a very high marginal tax rate on income below 'x'. For every additional dollar that someone who makes less than x earns, they lose 0.5 dollars of social security. That's a 50% implicit marginal tax rate, on top of whatever the official marginal tax rate is. By comparison, the highest marginal tax rate for federal income taxes in the United States is 35%, which is only applied to household earnings beyond $370,000 (source). The implication of standard economic theory is that many people would simply choose not to work and earn .75x.
Minimum wage has the side effect of leaving unemployed, the people who do not possess the requisite skill to command the minimum wage in the market
That is indeed what economic theory predicts. Treating a theoretical prediction as a fact is generally a mistake, except with extremely well-tested theories (physics at Newtonian scales with a small number of objects is the only example I can think of). This is particularly true of economics, which shows worrisome heuristics as a field and especially true of the minimum wage / unemployment link which has been specifically looked for and not found
A better argument for the minimum wage is that empirically it doesn't have much of a negative effect on employment - see below - but it placates the political demands of a largely uninformed populace that might otherwise try to get much worse policies enacted.
(I seem to recall that Bryan Caplan originally made this argument, but I can't source with a quick google search.)
This seems both not very developed and not particularly on-topic. I would suggest removing it from the main page, perhaps to discussion.
That's a bit harsh. I think the problem is just that Vijay hadn't heard of Friedman's negative income tax proposal, and is reinventing the wheel. Also, it's not polished enough for the Main section.
That was when were discussing things which are true on balance of evidence which are universally tribally disbelieved, so you can use them as a litmus test.
And all data says that communist countries were economically just as successful as non-communist countries on average in terms of growth and convergence. I even linked to data showing exactly that.
I no longer believe it's a particularly good rationality litmus test, people just compartmentalize way too much for there to be any good rationality litmus tests as far as I can tell.
As pointed out by orthonormal, Milton Friedman already came up with this decades ago. This is definitely an improvement over minimum wage laws, but has not been implemented because its primary improvement is over welfare programs, which are too entrenched to be replaced.
One possible problem with this is it's effectively a government subsidy for low-paying employers. Anyone currently on minimum wage, their wage will drop and be made up by the government. Not necessarily the intended effect.
To me this seems just like a slightly more complex way of doing the citizens' income idea, which is one I like in theory and would be easier to implement (as well as probably more popular).
Minimum wage has the side effect of leaving unemployed, the people who do not possess the requisite skill to command the minimum wage in the market. This follows from basic micro-economic theory
This is not technically true. Even in idealized economics, stuff gets non-basic quite quickly.
I think you should replace "earnings" with "hourly wages". It makes more sense, given perfect information, to have a system which tops up hourly earnings rather than earnings generally because this incentivizes work rather than earnings.
We don't, for example, want to issue subsidies to people who work part time at high-payed work just because they'll be topped up by the scheme.
There are very few people whose work is worth between zero and minimum wage; most people's labor is either worth more than minimum wage, or has negative value because of the non-wage costs and risks associated with hiring someone.
So... what we have here is a kind of minimum and maximum entitlement: x/2 and x, with incentives to work more to get more back. Interesting
Let's look at the actual intent of your article - it is not to propose 'the' solution to improve the productivity of the economy, but to device methods to improve it. After all, the fact that you say that you have not spent time thinking about the implementation (and from the depth of the article, the issue itself) reiterates my opening line. Firstly we have to remind ourselves that productivity of an economy is not even a non-linear problem, but a transcendental problem. So linear proposals like the one you attempt will barely scratch the surface. For ...
It's worth pointing out that a couple countries have that sort of social security and still have a minimum wage, and they seem to do just fine. (Australia, I believe UK too?)
It's also very worth watching the politics that go in to that - a mathematically ideal policy is useless if you can't get people to accept it. Proving that it's mathematically ideal is very rarely compelling, either.
I am amused at this comment more than anything else. Of course it should have been (x-y)/r where 1<r<infinity. And of course correspondingly there is no reason to set x to exactly current minimum_wage* 1.5. Your preferred method of writing and talking reminds me a lot of what I tended to do as a Computer Science undergraduate who studied discrete mathematics and formal logic and liked to make statements unambiguously in first order logic. This was all the more because I was doing a bunch of courses that involved mathematical proofs which obviously lended themselves to that format.
The reason why this kind of writing is sub-optimal is the following:
That kind of precise writing is needlessly hard to parse.
Even after people parse it, to see the intuition behind it, people necessarily have to ground it in some typical/decent instantiations of values. It is therefore much better and you transfer more bits of information from mind to mind per unit time if you directly give people the specific example and allow them to generalize the idea behind the theory in their minds.
Admittedly I could have written what I did above and still given you the generalized thing stating the different knobs that could be tweaked in the example. I however thought that at least the knobs above were perfectly obvious to any person intelligent enough to understand my example. I saw no point to treat my reader with kid gloves here.
Again, I wasn't proposing a final solution that should be implemented tomorrow! And unless you are among a weird rare set of people incapable of reading anything other than bullet proof first order logic I find it hard to believe that you can ever read such a thing into this. In fact I would argue that there is no easy way to tell the optimal parameters above and possibly even in additional generalizations without any real empirical data regarding the utility functions of different people, how they respond to incentives, what is the histogram of people at different levels of wage in a world with no prevailing wage floor in different places etc. You would also need to evaluate if any fresh perverse incentives get created if this is implemented in some places and not others. All these go for any idea that is economics related and it is foolish to not put an idea up for discussion until you have collected data from all over the world and analyzed it thoroughly to get the optimal set of parameters, have guarded for perverse incentives thoroughly etc.
I am now an internet entrepreneur and have realized that the main objective with communication in most settings (writing research papers, pitching VCs, pitching other companies for partnerships etc.) is to transfer maximum bits of information in the shortest possible time. It is not necessary to get verbose and guard yourself against any possibly misinterpretation in the world. Such language is best used only in the context of an adversarial scenario such as a debate or a legal battle where the other party has every incentive in the world to misrepresent any of your statements, throw red-herring arguments your way etc. This is exactly why legal language is so tedious and annoying - to avoid adversarial parties at any point coming up with responses such as yours. In most normal non-adversarial scenarios, this approach is extremely sub-optimal for communication.
For what it's worth, I didn't find lessdazed's comment harder to parse or "worse" than yours. Plus, it was shorter!
Minimum wage has the side effect of leaving unemployed, the people who do not possess the requisite skill to command the minimum wage in the market. This follows from basic micro-economic theory and here is nice short video of Milton Friedman, the renowned United States economist arguing against minimum wage laws. To offset this problem, it is essential to have some kind of social security safety net for the unemployed.
Instead, I would like to propose the following scheme which seems to me as more efficient (please let me know in the comments if you know of any country that tried this or something close): Set x= 1.5 * min_wage. Have no minimum wage laws. And folks who earn y which is below x, receive (x-y)/2 in social security. This way, we have (1) lower "skilled" people contributing to the country's GDP in their own small way instead of being unemployed and contributing nothing. If we have a significant number of these guys, the numbers could really add up. (2) The min wage like concerns are taken care of with the government safety net. (3) There is still incentive for people earning below x to work. If we set the social security to something like (x-y), no one earning below x will have any incentive to work since their net in hand compensation would then always be x regardless of what they do.
This above scheme looks almost like a pareto improvement to me compared to minimum wage laws, supported by social security for the unemployed, because it does roughly as good with regard to supporting those whose skills are below the minimum wage, while ensuring less government spending on social security, since many of the formerly unemployed would now be in low wage jobs and the government simply has to top up their current salaries which might be well above zero. This is of course a good thing, because the government then has the option of either using the extra money to reduce the budget deficit and ensure better economic health of the country, or use the money for other worthy endeavors. There is also greater contribution to the country's GDP which is a good objective in itself. Lastly there is reason to believe that people being gainfully employed is better for their physical and mental well being. It will also likely reduce their propensity to indulge in anti-social activities, compared to a scenario where they are unemployed with a lot of idle time on their hands.
I haven't spent much time thinking through the implementation and whether there is greater potential for such a scheme to get scammed and exploited etc. At least at first glance it seems to me that this scheme is no more exploitable compared to welfare benefits for the unemployed, which must necessarily go with minimum wages for it to actually be humane and better for the poor. Some people can probably get away by earning a living and still claiming to be unemployed and collecting welfare checks under the min wage + unemployment welfare method. The same people can do it under the new proposed scheme as well, so I am unable to see any more vulnerabilities and loopholes in this system compared to the previous one.
Thoughts?