The Minimum Wage: Time to Start Working On the Next Increase

February 7th, 2012 at 7:33 am

I’ve always thought the national minimum wage is a lot more important than most people tend to think.  By definition, it sets a floor on the low end of the job market, though to their credit, many states now set their minimums above the federal level of $7.25 (Washington state clocks in at a cool $9.04).  So it’s a floor, not a ceiling.

Lots of low-wage workers and their families depend on it, and its long slide, as shown in the figure below, especially over the Reagan years, contributed to wage losses and working poverty for many who toil to this day in low-end services.

Of course, when someone raises the idea of a raise, you hear a huge outcry from some in the business lobby.  Their generic argument is that the increase will lead to job losses among those low-wage workers affected by the higher wage level.  Such workers, they say, will now be “priced out of the labor market.”

Yet, you hear the opposite from groups that represent low-wage workers’ interests, groups like the National Employment Law Project, or NELP (proud disclosure: I’m on their board).

Now, let’s just pause here for a second.  The DC lobby that represents low-wage employers say they’re against the increase but not because it would raise labor costs and cut into profits, but because it’s bad for the workers themselves, who will suffer reduced hours and layoffs.  But the workers’ groups say “Bring it on!”

Hmmm…who you gonna believe?

In fact, with all this state variation—and some international variation as well (the UK has seen quite sharp increases in its minimum wage since it was re-introduced in the late 1990s)—we’ve had the benefit of natural experiments, rare in economics, enabling econometricians to fight it out as to the job loss effects (here’s mine with the great John Schmitt from a few years back).

It’s a large, gnarly literature, but I think it’s fair to say that most objective parties come away thinking that the hysteria around the increase is overblown.  It helps some low-wage workers, most of whom are adults, many of whom have kids.  Some studies find small job loss effects, some none.

A much more interesting question, economically speaking, is why don’t we see the horrifics that opponents scream about?  I mean, the textbook theory implies that a one penny increase in a market wage should lead to massive unemployment, and that, I can say with 100% confidence is not at all what we’ve seen.

In fact, there are numerous other channels through which the higher wage is absorbed:

–profits: to the extent that the increase is paid for out of profits, we shouldn’t expect job losses.  And in an economy where profits have dazzled while paychecks have fizzled, that ain’t a bad thing.

–prices: some studies find that a small bit gets passed through to higher prices.

–productivity: to the extent that higher wages reduce turnover and vacancies, a higher minimum can partially pay for itself by squeezing out such inefficiencies.  It’s not wishful thinking—some studies have found just that.

–reasonable rates: it matters what the level you raise it to, and historically, increases have affected less than 10% of the workforce, often even smaller shares.  With relatively few in the “affected range” we wouldn’t expect to see large distortions.

–it’s stimulus!  Minimum wage workers tend to spend the extra cash, so there’s more economic activity than otherwise would occur—btw, even under the redistributive scenario described under “profits” above, you’ll get this effect if low-wage workers consume more of their last dollar than those in the sky boxes.

Finally, I’ve got to partially give it up to Gov Mitt Romney as the dude has taken significant incoming from his rivals for advocating indexing the national minimum wage, as is already done in some of those states noted above, so it doesn’t lose value over time as prices rise.  It’s an excellent idea in that a) you avoid the dips in the figure below—which shows the real value of the national minimum since 1960, and b) businesses know what to expect.  I mean, after all, we index lots of stuff like this, including Social Security and EITC benefits.

Why just “partially” in terms of giving it up to Mitt?  Again, look at the figure.  We don’t want to index the national wage to such a historically low level.

So where should we set it?  I need to do more research on the question of “affected range” as noted above, but given that a national campaign will take numerous years to gain traction, I suspect I’ll end up in the $9-$10 range, phasing it in starting a year or so down the road.  That’s higher than the historical record as shown below, but of course, average wages have gone up considerably over these years and the divergence between the wage floor and the average is both a symptom and a cause of increased earnings inequality (a graph of the minimum wage compared to the average wage would trend downward; I’ll make that soon).

What’s that?  I’m dreaming??!!  I don’t think so.  Surely there’s a minimum wage increase out there in our future.  The sooner we get to work on it, the sooner that future arrives.

Source: Economic Policy Institute

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21 comments in reply to "The Minimum Wage: Time to Start Working On the Next Increase"

  1. D. C. Sessions says:

    The DC lobby that represents low-wage workers say

    I’m pretty sure you meant to write “low-wage employers”


  2. Comma1 says:

    As long as people are being pushed to “volunteer” and scores of young people (supported by their well-to-do families) are forced to intern (for free) to have any hope of employment after graduation, there is no minimum wage.


  3. Nhon Tran says:

    Thank you. I note that the minimum wage in San Francisco is $10.24 from 1/1/2012. Compared with Australia, the US federal minimum is low. In Australia, it’s $15.51($A1=$US1.07), reviewed annually by an independent commission. Gov Romney’s proposal is fine, but the level from which indexation starts should be reviewed, as you said. I agree with you that as long as the increase is not large, the effects on employment should be small. The important point is that increase in minimum wage should be part of national efforts to increase employment and income more generally. Thank you for the posting on employment rates. Regards.


  4. save_the_rustbelt says:

    “where profits have dazzled while paychecks have fizzled, that ain’t a bad thing.”

    Jared, you are confusing the Fortune 500 with a lot of small businesses where profits have not dazzled at all, many are hanging on by a thread today.

    FYI, much of the country is still effectively in a recession, despite what the economists and politicians may say.


  5. Tyler says:

    Full suspension of the FICA tax? You know, the kind of suspension that never ends. Sorry, I’m obsessed with tax cuts for the poor.


  6. Thorsten Schulten says:

    I think your arguments on the minimumm wage are perfectly rigtht. But why has Obama not increased the national minimum wage yet as he promised to do so in his election campaign?


  7. rjs says:

    a number of left-leaning economists are arguing just the opposite in comments here:

    http://noahpinionblog.blogspot.com/2012/02/lower-wages-can-be-good-thing.html?ext-ref=comm-sub-email


  8. Jwalker says:

    Jared,

    Are you crazy? Think about the cost of even a $7.25 minimum wage. If you figure 40 hours per week and 50 weeks per year (I guess they must have Christmas off, but be here all the ealier.) That means they make a whole $14,500 per year! ;-) Interesting what the minimum wage means when put into perspective. I’m not sure you can live even in Appalachia on that level of income. And yet people argue the minimum wage is too high.


  9. Edmundo says:

    where should we set it?

    Too low a level of wages mean businesses are being subsidized. At the macro level, they get a full working life for less than it costs to support a full working life.

    On that basis, 55 years x minimum wage should equal 2yrs min wage (for mum at home) + 3yrs childcare cost + 10yrs schooling cost + 35yrs rent & power (half of 70 – two parents living together) + lifetime food & clothing. That’s what the business gets and should pay for.

    10yrs schooling is about 2/3 the annual employment cost of a teacher, or approximately the national average annual wage + employment taxes.

    That is the cost. How should it be paid? Well if you average it out it simply won’t work. The regular weekly cash inflow will not pay the irregular outflows of child care, education (of the two children to replace the two parents) and eventual retirement.

    So some of that minimum wage has to be state administered to time shift it into where it is needed, and to compensate for the fact that two people on minimum wage will not tidily have two replacement kids, and they will not neatly die on reaching actuarial life expectancy.

    But if you want to know where to set it, there’s a starting suggestion.


  10. CEK says:

    I have lived through lots of minimum-wage increases, and never in my life has it ever gotten high enough to noticeably reduce minimum-wage employment. Every single time an increase is proposed, either state or federal, employers and Republicans yell out the same old line about how a higher wage will make jobs disappear. And every time an increase passes, the only visible sign is that some low-income people get a little more money.


  11. genauer says:

    just 2 short comments:

    a) I think there is correlation of minimum wage with subsequent rising unemployment, in this picture. Obvious exception Vietnam time.
    b) for a very long time the German union(s) (there is effectively only one, those with half the board seats : – )
    opposed minimum wages, for first the government not to interfere in wage disputes, and second that it might set a guide line to the lower end. Germany has no and will not have a general minimum wage.

    Most Germans see a general social minimum as more effective and just.


  12. John Miller says:

    Mr. Bernstein,

    Thank you for the article. I would like to pose a couple of questions.

    1) You spoke of the average wage in the us as a benchmark for comparison of minimum wage. I am curious why you did not choose the median wage instead. I know it sounds like semantics, but particularly with data subject to a hard floor and unlimited ceiling, I would expect a person of your experience and education to choose a more meaningful statistic.

    2) Your own data points to the fact that a modest increase increase in minimum wage would effect less then 10% of workers. Meaning, I presume that workers who start at minimum wage and then receive pay raises after a probationary term. Given that, should the statutory minimum truly be considered “a living wage.” Could it instead be considered a minimum starting wage? Would you support a plan that allowed newly hired workers to be payed a lower rate in order to reduce the risk of hiring in exchange for a higher long term minimum? (Just for example $7.00/hr for 3 months, $7.75/hr after 3 months, 8.50 after 6 months, $9.50/hr after a year. Perhaps with a limit of not more then 10% of a businesses employees making below the $9.50 rate)


    • Jared Bernstein says:

      I think the average is the right choice here because you want to show the how the minimum is tracking an aggregate measure that is not itself affected by inequality trends. For eg, suppose the economy and productivity are growing but the median is stagnant…the minimum relative to the median might be stable but the min wg relative to the average would be falling.


  13. Tony Zirngibl says:

    As soon as you attach raises automatically after 3 months, 6 months or one year, employers will review whether to dump people to avoid keeping them at higher wages. That becomes a revolving door to recycle people for less wages.


  14. Dilip says:

    There is a related article talking about Greece’s minimum wage pertaining to the Euro-crisis here:
    http://www.economonitor.com/rebeccawilder/2012/02/08/the-unfounded-obsession-with-greek-minimum-wages/


  15. Jamison Kuhle says:

    Great Post, Mr. Bernstein!

    There does seem to be a pragmatic issue with your solution, however. It is certainly true that some states stay ahead of the national minimum wage curve by raising floor standards in internal legislatures, but is this not largely due to differences in relative incomes, cost of living, and a slew of other QOL indicators, from state to state? If national minimum wage was indexed to, say, CPI, or any other national aggregate for that matter, would that not inhibit business potential in states with lower living costs? At the very least, national indexing would certainly skew the efficacy of any measuring stick thereafter in smaller economy states. Could the federal mandate be simply that states index to their own unemployment, GDP, CPI? Great discussion!


  16. pjr says:

    Using the BLS calculator, the 1968 minimum wage ($1.60) was $10.34 in 2011 dollars. The country is far richer today. We probably ought to raise today’s minimum wage by a dollar each year for the next three (or more) years and then index it to inflation. Ignore the false claims that it will hurt the economy and do it.


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    • Chris says:

      Producers pass cost increases through by raising prices or seeking other cost savings such as outsourcing to other economies or implementing computer systems. Imagine how much it would cost to go to the movies if the minimum wage were 25/hour? Raising the price of the movie means less people go to the movie and then over time there are less movies. Socialism does not work. It has been tried MANY times before and it has always failed.


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