Minimum Wage Increase: $9 is Log Linear

February 17th, 2013 at 10:09 pm

Richard Freeman, the godfather of labor economics, once told me that one reason minimum wage increases don’t have the job loss effects their opponents predict is because the political process disallows increases that would be large enough to trigger such effects.  I think that’s right and one way to quantify it is to look at the relatively low (well under 10%) workers typically caught up in the sweep (i.e., between the old and new minimum) as I do in the second figure here (using data from John Schmitt’s must read up-to-date review of the lit on job impacts or lack thereof from minimum wage increases).

But it’s also the case that federal increases dating back to the 1950s are surprisingly log-linear meaning that the wage floor has generally been increased by the similar nominal amounts in percentage terms (changes in natural logs approximate percent changes).  Moreover, the $9 proposed by the White House is right in line with past increases.  That is, if you draw a straight line through the natural log of the federal minimum wage values over time (and go from $7.25 this year to $8 next year and then to $9 in 2015) $9 in right on that line (the figure starts below zero because natural logs of numbers between o and 1 are negative and the minimum wage was $0.75 back then).

I’m not saying $9 is the perfect number to shoot for, though given the battle that’s brewing over this, if you want to end up at 9 you need to start at 10.  But it does seem to be that Freeman’s rule will once again hold: the system tends to offer up minimum wage increases that it can absorb without distortions.

 

Source: DOL, my analysis.

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One comment in reply to "Minimum Wage Increase: $9 is Log Linear"

  1. R. Nemo says:

    Capitalism is run for “capitalists”. If it was run for people in general it would be called “Base-ism”, Art historians get the joke. Economists and politicians–probably not. But then what do they get about the human condition? NOT MUCH.


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