On New Years’s Day, Colorado lowered its minimum wage, the first state in the nation to do so. Colorado ties its minimum wage to the state’s consumer price index, which fell 0.6% over the past year. To accurately adjust for the change in prices, Colorado’s minimum wage should have fallen four cents, from $7.28 to $7.24, but it cannot go below the federal minimum of $7.25.

“It is hard to make it, hard to get by,” said John Mullen, 50, an out-of-work construction worker waiting for a bus on a bitterly cold New Year’s Eve in Denver. Mullen said he remembers making minimum wage at a factory and having enough for small comforts.

“You’d get paid every Friday, have enough money to go catch a poker game or take your girl out to a dinner,” Mullen said. “But the law is the law. What can you do?”

Others said that even a tiny drop for the lowest-paid workers will be felt.

“Yeah, it’s 3 cents an hour. But that 3 cents an hour adds up at the end of 12 months,” said 59-year-old Gary Foeller of Denver, a house painter who hasn’t worked in weeks but usually earns more than the minimum wage when he has a job.

The 3-penny difference would amount to about $62 a year for someone who works 40 hours a week and doesn’t take time off.

But remember, the minimum wage decreased because the price of goods fell. So while someone making the minimum would earn $62.40 less over the year, that same person would, on average, spend $83.20 less to purchase the same goods. In effect, someone making the minimum will have an extra $20.80 to spend over the year.

While the nominal minimum wage — the minimum wage in terms of dollars — might have fallen, the real minimum wage — the minimum wage in terms of goods — has risen.

NPR reports that the island nation of Kiribati recently implemented a fishing subsidy that created unintended consequences. Kiribati has two major industries: fishing and coconut harvesting. Concerned about overfishing, the local government decided to subsidize coconut harvesting. They argued that by raising the incomes of coconut farmers, that some fisherman would give up fishing to start farming. In economic terms, the government increased the opportunity cost of fishing — the money a fisherman could have made by farming.

Unfortunately for the government, a subsidy affects the quantity of coconut harvesting in two ways. The government meant for the substitution effect, the increase in the cost of fishing, to discourage the island’s residents from fishing. Instead, the substitution effect was dominated by the income effect; coconut farmers could obtain the same level of utility with less work, allowing more time for leisure. And in their leisure time, the farmers went fishing. Rather than decreasing, the level of fishing increased 33%.

Whether the substitution effect or the income effect dominates depends on the preferences of the island’s residents. Since the farmers prefer leisure to work, they will consume more leisure with a subsidy. If they had preferred the extra income from work over additional leisure time, then the substitution effect would have dominated.

Congress should consider both effects when deciding whether or not to continue subsidizing unemployment, now two years after the start of the recession. If Congress wants people to get back to work, it might be better to stop writing checks for unemployment benefits.

(h/t Freakonomics)