The Case for a Higher Minimum Wage “If a meteor ever smashes the earth,” Molly Ball, of The Atlantic, tweeted on Wednesday, “there will still be 2 economists arguing whether minimum wage laws kill jobs.” More than two, I would say. For the past twenty years, studying the impact of minimum-wage increases has been a growth industry. One extensive review of the literature cited more than a hundred and sixty studies, and that was published in 2007. By now, we may well be approaching the two-hundred mark. And it’s still a contentious issue. Some economists say minimum-wage laws are harmful; others say they aren’t.
When experts disagree like this, it’s tempting to throw your hands up and say, “Who knows?” In this instance, though, there’s no need to despair. While the labor economists and econometricians are still arguing about which of their many studies can be relied upon, there are quite a few things about minimum wages, and their impact on the economy, that we know for sure. Taken together, these things amply justify raising the minimum wage, as President Obama called for in his State of the Union address.
The first statement we can make without fear of contradiction is that, at $7.25 an hour, the current minimum wage is pretty low. In nominal dollars, it’s gone up quite a bit over the past twenty-five years. In 1978, it was $2.65; in 1991, it was $4.25. But these figures don’t take into account rising prices, which eat away at purchasing power. After adjusting for inflation, the minimum wage is about $3.30 less than it was in 1968. Back then—forty-five years ago—the minimum wage was $10.56 an hour, according to a very useful chart from CNNMoney.
We also know that the U.S. minimum wage is low compared to its counterparts in other advanced countries. In France and Ireland, for example, the minimum remuneration level is more than eleven dollars an hour. Even in Great Britain, which is usually regarded as a country with a flexible, U.S.-style labor market, it is close to ten dollars an hour. Another informative chart, this one from Business Insider, shows that the U.S. minimum wage is comparable to ones in places like Greece, Spain, and Slovenia—countries where G.D.P. per capita and labor productivity are markedly lower than here in the United States. We have an advanced economy but a middle-level minimum wage.
A second important and (largely) undisputed finding is that there is no obvious link between the minimum wage and the unemployment rate. During the nineteen sixties, when the minimum wage was raised sharply, unemployment rates were sharply lower than they were in the nineteen eighties, when the real value of the minimum wage fell dramatically. If you look across the states, some of which set a minimum wage above the federal minimum, you can’t see any sign of higher rates leading to higher unemployment. In Nevada, where the national minimum of $7.25 an hour applies, the jobless rate is 10.2 per cent. In Vermont, where the minimum wage is $8.60 an hour, the unemployment rate is 5.1 per cent. What these figures tell us is that other factors, such as the overall state of the economy and how local industries are doing, matter a lot more for employment than the level of the minimum wage does.
Now, this doesn’t mean that changes in minimum wages don’t affect employment at all. Other things being equal, they can obviously have an impact. Faced with a rise in their wage bills, some employers may choose to employ fewer workers. But this happens much less often than some elementary textbooks (and many neoclassical economists) would suggest. When the minimum wage goes up, many firms that employ low-wage workers simply pass on the higher costs to the customers in higher prices. (Since many of their competitors face an identical rise in costs, they don’t necessarily lose any business.) Other firms work their employees harder or give them more training, to increase their productivity. Even in academic studies that do show higher minimum wages having a negative impact on employment, the effect is generally a small one, and it is usually confined to teen-agers and unskilled workers.As is—or as should be—well known, there are also a number of studies that show minimum-wage laws having no effect at all on employment, and even some studies showing a small positive effect. Since Berkeley’s David Card and Princeton’s Alan Krueger (who is now chairman of the Council of Economic Advisors) carried out their famous survey of New Jersey fast-food restaurants, two decades ago, and a found a slight increase in employment following a rise in the minimum wage, an enormous amount of effort has been put into discrediting their results, which many orthodox economists saw as a violation of fundamental economic laws. (If the price goes up, the quantity demanded must fall!) But this effort has largely failed. For whatever reason, minimum-wage laws just don’t seem to affect employment very much. This finding applies not just to studies carried out in the United States but to those done in the United Kingdom, Australia, and other countries, too.In short, the potential costs of raising the minimum wage are small. But what about the potential benefits? For somebody who works a forty-hour week, and earns the minimum wage of $7.25, setting the rate at nine dollars would increase his or her annual salary from $15,080 to $18,720, which would be enough to push the person’s work income above the poverty threshold for a family of three. The numbers of people involved are far from insignificant. According to the White House fact sheet, some fifteen million workers would immediately receive a substantial pay rise. In addition, as employers reacted to the new law, many folks who currently earn a bit more than the minimum wage would also see their wages raised. Lawrence Mishel, the president of the liberal Economic Policy Institute, reckons that raising the rate to nine dollars would ultimately benefit twenty-one million workers, and boost overall wages by more than twenty billion dollars a year.There is no truth in the suggestion that most of the beneficiaries would be high-school kids working at McDonalds on weekends for beer money. A study that the Employment Policy Institute published last summer said nearly nine out of ten workers who would benefit from a rise in the minimum wage are at least twenty years old. More than half of them work full time; over a third are married; more than a quarter are parents. More women than men would be among them: about fifty-five per cent of minimum-wage workers are female. In addition, most of the beneficiaries would be Caucasian. According to the E.P.I.’s tabulations, 56.1 per cent of those affected would be non-Hispanic white workers, 23.6 per cent would be Hispanic, 14.2 per cent would be black, and 6.1 per cent would be Asian or another race. To be sure, Obama’s “rainbow coalition” would benefit from a higher minimum wage, but so would many white working stiffs.
Because a good number of the people who would benefit are second earners, or third earners, in families that earn more than fifty thousand dollars a year—roughly the median household income—it is often argued that raising the minimum-wage laws is an inefficient way of tackling poverty and near-poverty. (Time’s Christopher Matthews, in making this argument, points out that Paul Krugman also used to make it in his pre-firebrand days.) The arithmetic cannot be denied. If your only goal is raising the after-tax income of the lowest-paid workers, it costs fewer dollars to do it via an income-support program, such as the Earned Income Tax Credit.
However, that doesn’t justify keeping the minimum wage where it is. In the current political and budget environment, there is little chance of pushing through another hike in income-support programs. Raising the minimum wage pushes the burden onto corporations and consumers, and it could also have some broader ramifications. After decades of wage stagnation, virtually everybody agrees that increasing the incomes of middle-class families is a top priority. Putting a higher floor under wages won’t solve the problem, but it can be part of the process of transitioning to a high-wage, high-productivity economy. When workers are paid more, they tend to work harder, and quit less readily. Firms, knowing they can’t simply rely on low wages, have an incentive to invest in new equipment and training programs. All of these things can boost productivity, which is the lynchpin of prosperity.
Finally, there is the moral issue. (Prior to the twentieth century, economics was considered a “moral science.”) With the decline of trade unions and the spread of aggressive management techniques, low-paid workers now have little bargaining power and few legal protections. Only the government can ensure that they receive a living wage. “Even with the tax relief we’ve put in place,” President Obama noted in his speech, “a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong.” And he’s right.new yorker
