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Should We Raise the Minimum Wage?

Among the various proposals put on the table during his State of the Union earlier this month, the president called for a higher federal minimum wage. That was guaranteed to push the ideological buttons. Along the absurdly one-dimensional political spectrum that now defines the norm of policy debate, each side has its arguments for or against such a move. The minimum wage has been around since the Great Depression, when it was set at a quarter.

For all its longevity, divided interests have not succeed in settling the minimum wage debate conclusively, in part because distributional considerations are an important part of the evaluation that clouds clear thinking on both sides.

chandan silo for webWho would be most affected by an upward adjustment in the minimum wage and its indexing to inflation? The White House estimates that 15 million people would be impacted by its proposal. Minimum wage earners are more likely to be employed in part-time service occupations; they are more likely to be women, young, and to have exited high school before completing their diplomas. They are primarily employed in Southern states, and variation across race is less pronounced than might be supposed.

Democrats cite stagnant wages for low-income Americans as part of the rationale, pointing out that a family of four subsists below the poverty line if the breadwinner is paid the federal minimum. Even as the top of the distribution has seen its incomes rise, wages at the bottom evince the growing imbalance. Minimum wage has not kept pace with inflation.

As part of their economic rationale, they may also suggest that the weak recovery reflects lagging demand from households with ever-tighter budgets. By raising the minimum wage, we help families in the lowest strata of the economy. We also support new economic activity, since these households are more likely to spend their marginal dollar.

The Republican counterpoints to the Democratic thesis postulate that employment will fall if wages rise. Higher costs to employers mean that fewer people will be employed, blunting the impact of a rise in salaries. As described in virtually every undergraduate textbook in microeconomics, higher costs for labor inputs will lead to substitution from labor into capital.

The arguments for a higher minimum wage are not just rooted in equity considerations. During his address to Congress, the president offered that “we know our economy is stronger when we reward an honest day’s work with honest wages.” He is undoubtedly correct in one sense. All things being equal, consumers are better off when paid higher wages. Very income-constrained borrowers are more likely to spend an additional dollar, doing more to support the economy than if those dollars were saved.

In its press release on the issue released earlier this month, the White House posits that “a stronger middle class is key to a stronger economy.” All things being equal, they are correct here again. But greater care is called for in presenting their arguments. The middle class is not impacted directly by a higher minimum wage.

The efficacy of the proposal comes down to the employer response to higher labor costs. Do they really lower employment in a way that negates the positive intent of the program? Professors David Card and Alan Kreuger have authored the seminal research on the question. Mr. Kreuger was appointed chairman of the Council of Economic Advisers in August 2011, signaling the administration’s interest in labor market policy. Their analysis has found that an increase in the minimum wage did nothing to undercut employment.

Messrs. Card and Kreuger’s findings date back to the mid-1990s. The weight of academic evidence has been stacking up in their favor in the years that followed. In a letter to the president and the Congressional leadership last summer, the brightest minds in the field of labor economics made the point succinctly. They state that “increases in the minimum wage have had little or no negative effect on the employment of minimum wage workers, even during times of weakness in the labor market.”

Secondary effects are an important factor in the analysis as well. These same economists proffer that higher minimum wages “stimulate the economy as low-wage workers spend their additional earnings potentially raising demand and job growth.” Where some analyses show a negative employment impact from higher minimum wages, some of the most current research shows those results may result from incompletely specified empirical models.

On balance, the evidence shows that a higher minimum wage will do more good than harm. You can believe it or dismiss it on ideological grounds. If you take the latter route, you only have the weight of evidence against you.
dsc@chandan.com

Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.

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Comments

  1. tripn4days says:

    As a lower-middle class earner, I think a largely and overlooked aspect of this whole minimum wage debate might lie in the fact that minimum wage is typically just the baseline against which the purchasing power of ALL OTHER WAGES are measured. The further away from minimum wage somebody is, the more purchasing power they possess.

    Already make $9/hr? Guess what? The “better than minimum wage” paycheck you used to earn that allowed you to buy MORE stuff than a lower paid minimum wage worker, has just become the new minimum wage paycheck. Once the cost of everything else goes up, you’ll find your ability to buy stuff has been reduced by newly inflated prices for all goods and services. And no, you’re probably not very likely to see a $2/hr wage increase to offset your losses.

    If the only skill set one can offer is that required of min. wage jobs, he or she needs to accept the fact that (w/o investing in his or her own skill set) if you want to provide for a family, pay a mortgage, and afford a nice car, these folks are looking at 100 hour work weeks… no matter what min. wage is raised to.

    Want to work LESS HOURS for the SAME STUFF? Make yourself marketable to higher paying jobs. This is precisely what skilled manufacturers, lawyers, technicians, nurses, firemen, etc. do every day in this country.

    In theory, we could raise the minimum wage to $100/hr if we wanted, but no matter what, doing so will never allow a McDonald’s employee the ability to afford a BMW and live in Aspen… Giving these folks a $100/hr raise just means the price of a Big Mac value meal is going to cost everyone $107 instead of $7.25

    Obviously prices don’t skyrocket the same day minimum wage increases take effect. The markets take time to adjust after wage increases. Certainly this lagging price adjustment temporarily allows minimum wage earners to buy more stuff. However, once this brief window of “extra purchasing power” closes, the resulting price increases wind up crippling the economy. This is because the price increases end up undercutting the purchasing power once possessed by “everyone else” in a society which won’t be seeing a matched 25% increase in their wages and likewise won’t be so lucky as to have the government intervene in regulating their own net loss in purchasing power.

    Although I don’t possess an economics degree, I do suspect this phenomenon is partially responsible for the sluggish post-recession recovery we are currently experiencing. In the heart of the recession, we distributed a sizable increase in minimum wages, but subsequently witnessed a sizable increase in the prices of goods and services everywhere.

    Despite the claims made back in 2006 justifying the 2007 wage increase, a minimum wage paycheck still isn’t enough to live on, and those making minimum wage still find themselves scraping by with no more purchasing power than they had prior to their government mandated raise. On the other hand, now that prices have gone up considerably since 2007, while non-minimum wages have essentially flatlined, middle-classers making 30K a year are left with less purchasing power than ever.

    As much as I love a good GOP conspiracy theory, this recent debate has got me wondering if all this isn’t just a ploy to pull often “undecided” middle class voters DOWN into the voting ranks of a traditionally poorer Democratic Party in attempts to strengthen the Dem’s future political power?

    Hmmmmm…