By Rick McGahey, the Institute for New Economic Thinking’s Vice President of Programs. McGahey was most recently a Professor of Public Policy and Economics at the New School’s Milano School of International Affairs, Management, and Urban Policy. Originally published at the Institute for New Economic Thinking website
As empirical evidence supporting minimum wage increases continues to roll in, can the theoretical orthodoxy continue to hold their ground?
The proposition that raising minimum wages will increase unemployment, especially among lower-skilled workers and young people, is one of the most widely-held beliefs among economists guided by the basic theory of supply and demand.[1] Yet, a new study from the National Employment Law Project (NELP) finds “no correlation” between minimum wage increases and employment levels. That finding is consistent with a 2013 Center for Economic and Policy Research summary report which found that almost all recent empirical economic research on minimum wage increases “points to little or no employment response to modest increases in the minimum wage.”
Concerned about stagnant incomes and growing inequality, 29 states and the District of Columbia have raised their minimum wages above the federal level, pushed in part by a union-led “Fight for Fifteen” (that is, a fifteen-dollar minimum wage). And the Democratic presidential contenders Hillary Clinton and Bernie Sanders are agreed that the federal minimum wage should increase—their only point of difference is how much, how fast.
Republican candidates debating the issue, however, have all reiterated versions of the orthodoxy that minimum-wage hikes would cost jobs. And some mainstream economists are unmoved by the growing body of empirical evidence regarding the non-impact of minimum-wage increases on employment. They argue the current research doesn’t use the correct methodology, or doesn’t properly control for regional and geographic impacts. But these critics also are shifting their ground, saying that raising minimum wages is not the most effective way to fight poverty and inequality, instead arguing for more targeted policies like the Earned Income Tax Credit. (Many anti-poverty advocates would support increases in both measures.)
The empirical fights over the impact of mandating minimum-wage hikes will continue. And just like theoretical economics, empirical debates can have their own exclusionary practices, or overly esoteric arguments about proper techniques. But having economic debates grounded in empirical research rather than having issues dismissed in advance by mainstream theory is part of a promising trend in economics—looking empirically at real world problems without having to squeeze the findings into a narrow, pre-determined theoretical outcome. And on the job impacts of the minimum wage, empirical research favors those questioning the theoretical claims advanced by mainstream economics, as today’s NELP report further shows.
[1] A 1978 study of American economists found 90 percent agreement with the statement that “A minimum wage increases unemployment among young and unskilled workers.”
56 comments
Comments are closed.
Trump calls for end to federal minimum wage as views shift
http://www.theguardian.com/us-news/2016/may/08/federal-minimum-wage-trump
Trump is going to give Hillary a run for her money on 180s.
I had the same problem with italics as everyone else. The scope of comments are isolated from each other in terms of the HTML tags and any effect they may have.
There is a good article on Trump today by Jack Rasmus at Counterpunch, http://www.counterpunch.org/2016/05/09/trump-vs-the-two-party-system/, in which he points out that Trump’s big trick is to tap into the anti-establishment sentiment by always always being (at least in appearance) on the outside of establishment in his statements. A simple trick that has worked marvelously well. So if the Republican establishment is against a hike in minimum wage, Trump is FOR it (at least until his isn’t ).
This is nothing new to NC readers, but is well presented nevertheless.
States should decide minimum wages … uh this is lowering the minimum wage period.
Some states don’t even have a minimum wage, so people could pay 50 cents an hour with no federal minimum. The federal minimum wage is a FLOOR not a CEILING. States right now can enact a minimum wage above the federal so the federal minimum wage is no hindrance to raising wages locally. It’s just if the minimum wage is below the federal minimum wage or if they have no minimum wage they are bound by the federal minimum wage. Yes the blue states on the left coast and the northeast are probably going to be fine regardless as they have high local wages, but some southern workers are going to find themselves dirt poor and then U.S. businesses can relocate there for 3rd world wages or something. At least it solves the problem of them moving to cheaper countries – 3rd world America.
““I like the idea of ‘let the states decide’,” Trump told NBC’s Meet the Press. “But I think people should get more.”
This will guarantee people get less in some states and even make the other states try to compete with this. He’s your working class champion …. not.
If the let the states decide ever came to pass it would be two Americas in more ways than one. So you have your bluish states where they expand Medicaid for the ACA, where they have local minimum wages and none of this really deals with the problem of poverty but it’s some minimal something. And you have southern states where the poor have no medical coverage at all to speak of and they’re earning who knows what Chinese or Mexican equivalent wage (maybe Apple sets up a suicide net outside their new plant in Alabama …).
this [state decision] is lowering the minimum wage period.
Agreed. That’s why I said trump is competing with Hillary to do 180s. Trump was “for” an increase in minimum wage a short time ago, now he is for it the way Hillary is “for” social security.
Trumps mo has been to place himself outside of the establishment on almost every issue, particularly the Republican establishment, and now that he has used that successfully against his fellow Republicans, he is starting to maneuver toward the opposite direction.
Voting for Clinton means asking for more of the same not only with Clinton (which could truly be fatal, but would certainly be destructive) but after Clinton since such a vote would ensure they tried the same trick next time. Palin to herd us to Clinton or Obama, Trump to herd us to Hillary or Hillary, X to herd us to Y next time. Tout bête.
But make no mistake. Voting for Trump is not going to get us any respite. It may be worth it to foil Hillary, but that will come at a great cost.
Not sure why I can’t turn off italics. I favor an increase in the minimum wage to at least 15 dollars. However, the increase proposed is not “modest”- while modest does not appear to be defined the 15 dollar increase would more than double the current federal minimum wage so I am wondering what good reliance on the 2013 study does to this point. The wording certainly implies that more than modest increases might be expected to have some impact. As for the NELP study NELP is an advocacy group for low wage workers. While I have not looked in-depth at the study I wonder why it should be given more weight than say, a Monsanto-sponsored study saying that GMOs are fine and dandy.
While I want the minimum wage raised regardless, this article appears to present somewhat weak evidence with a lot of weasel words. Moreover, whether the increase discussed is 15 or 12, both seem more than modest to me. Again I favor such a move regardless but the reason for the factoid in the article ( that 90% of economists believe otherwise) demonstrates that such studies do not persuade many . My argument would be “do it anyway and let’s see if prosperity builds from there”. If these studies are right, which, hopefully, they are, we will be calling the traditional economists bluff.
I just want to add my 2 cents to the fact that this ‘$15 minimum wage’ is really ‘$15 by 2020’ which is more BS. Looking at California’s wage hikes across the last 50 years, $15 by 2020 is almost EXACTLY the SAME RATE of the last 10 years. So what exactly is this huge change people are speaking of? This is barely a wage hike ffs!!!
Making the minimum wage $15 this year would be a nice experiment that would really illustrate the validity of a wage increase and its impact (or non-impact) on employment etc. Otherwise, this is all just nonsense.
Minimum wage should be tied to MIT’s livable wage metric and should increase EVERY YEAR, not whenever Congress or State governments are pressured to.
The minimum wage, over the years, has never kept pace with true inflation, otherwise it would be close to $100/hr today. Inflation is the true “thief in the night” robbing all classes of purchasing power, but affecting the working poor the most. True inflation rates since 2010 have averaged perhaps 7% compounded per year or a total of 60% overall. Look at health care costs, rent and the price of hamburger which has gone from 1.87/lb (80/20) to over $3. Thus the current Federally mandated minimum wage should already be close to $12. It isn’t, mostly because of corporate lobbying.
But there also is the reality that many prices for goods and services would have to increase, creating more inflationary pressure. There is no “one solution” to this problem.
That is not true. Low-level labor is a small component of finished product costs. For instance, with comparatively well-paid car workers, direct factory labor is only 10-12% of total costs. Moreover, corporate profits are at a record % of GDP. The last two “recoveries” had a record low % of GDP growth going to workers, in the form of increased pay and/or more hiring.
The real culprit is that starting in the mid-1970s, companies stopped sharing the gains of productivity growth with workers. Forcing a reversal would merely reduce the profit share of GDP to a level that Warren Buffett deemed “unsustainably high” as of the early 2000s.
This is a class war and you are losing but you want to depict it as something else.
Right, this is the suckers deal that we’ve been falling for since Reagan. If we all take a 50% pay cut to save 10% at the store(assuming labor cost is 20%), that is a losing deal. It doesn’t take a mathematician to tell you that spending 10% more at the store and doubling your pay is a GOOD THING for consumers/laborers. The lie we’ve been told is that we should screw over the laborers to help us as consumers. WE ARE BOTH!
Quite right, the minimum wage should be tested each year. All that’s needed is an independent judicial-styled body, which can hear argument from interested parties, business, unions and government before making binding determinations. Works ok’ish in Australia…
$15 is not what $7.25 was when enacted. Just as there is a marginal tax rate and the real tax rate, so $15 would be the new marginal wage.
Not sure why I can’t turn off italics: Because it’s not turned off at the end of Yves post, or maybe the 1st comment.
I did just fine when I was making 3 dollars and hour. Every time I got a raise every one else raised their prices and I Would lose ground and get poorer. THE Goverment was the only winner as it would haul in more taxes.
What we need is deflation on the cost of houses cars insurance and health ect ect ect.
what the poor gain in wages will be lost with crossing the threshold of proverty and no more goverment handouts.
If everyone was a millionaire then the price of bread would be 40.000.00 a loaf.
what we need is price control on the rich. CEO G S. Blankenfien isnt worth 80 million a year for being a crook. he should be in prison along with thousands of others.
I don’t think the issue is unemployment. The issue is profits. If we raise minimum wage, we reduce corporate profits. Well, that’s not gonna happen, is it?
Actually, raising minimum wage would increase corporate profits though it would take longer than the blink of an eye which is approximately the current time span in which the corporate world can asses the prospect of gain from a given stimulus.
This. How can increasing the incomes of those at the bottom who actually spend the money they earn into the economy not have a salutory effect on the general economy, and hence on profitability in a global sense, in a country the size of the US? The arguments otherwise don’t really pass the smell test. But yes, looking at the next quarter or three and no further, one could get it wrong.
I suspect the reasoning is more tied to the notion that low wage work should be penurious is tied to feelings of moral superiority and base Scroogian notions of the poor being dirty and undeserving. Wealth is made all the sweeter in the proximate presence of poverty and need, seeing the poor struggling in the streets through the tinted windows of a limousine sends a warm self righteous rush of satisfaction through those inside.
Put money in the hands of people who will actually spend it on necessities? Blasphemy! We need to make sure even more money is gifted to the shareholder class so they can stash it away in Panama.
Maybe they can take a picture of their money piles and we can all enjoy it vicariously, alongside the pictures of Obama’s $100M vacations and the pics of the latest 20-bedroom hedge funder’s palace in the Hamptons.
One hedge funder earned more in income last year than all of the tens of thousands of teachers in NYC combined…surely we can do better.
I suspect the reasoning is more tied to […]
It’s tied to loss of control or the sense of it.
I think I understand what you mean. The American people are being stripped of their values and their sense of self-worth. Low wages, high debt, and 24/7 multimedia brain buzz all combine to numb them into submission.
I agree with you, Kurt and PodBay about the beneficial effects of giving more money to people with higher marginal propensity to spend. It would help everyone…
But it would not help the rich as much! They are getting very rich by squeezing the sheeple; they would get less richer (pardon the grammar) by letting the sheeple get a bit fatter.
I think this is over-optimistic. There has always been data in economics. The problem is that, when the data doesn’t match the predictions, there is always some ad hoc explanation of the outcome, such that it is not considered generally relevant for future cases.
sorry to be the party-pooper, but has the Q been settled whether high minimum wages have any affect on migration?
The US has defacto open immigration and weak labor enforcement as is.
Throw in a living minimum wage (which would be great if workable), the temptation for employers to cheat is pretty high.
Are you saying maybe we shouldn’t raise the minimum wage since that will make it more profitable for unscrupulous business people to hire illegal immigrants? That’s not a valid reason to not raise the minimum wage. That’s a reason to demand prosecution for people who hire illegal immigrants.
And let’s not forget our lovely H1-B visas: Replacing skilled American tech workers with low paid
indenturedcontracted foreign workers since 1990!I suppose you’re right if the social net is there to catch everyone who isn’t ready, willing, and able to work.
Where does rationing occur, if not by wages and the labor market, or are all lunches free? I think not.
I’m more in favor of broad-based public works projects that pay a living wage. A large enough impact on a local, or national, level would force all industries to raise wages if they wanted to keep their labor. Of course the wage-inflation hawks would never allow such a policy to be enacted in the first place. But one can dream…
Not really sure Baumol’s Cost Disease is much of a long-term solution.
Is Baumol’s disease necessarily a disease? Socialising productivity gains to spread them more evenly throughout the aggregate economy is one way to reduce inequality and prioritise resources for socially valuable investment.
That said, Baumol does not really apply to Milton’s infrastructure example above, since (in addition to the agg demand increases from lower unemployment) improved infrastructure leads to better overall productivity.
Part of the problem with discussing the effect of minimum wage increases comes from economists’ fallacy of assuming that observations at the extremes are connected by a smooth curve. If minimum wage were $.10 I would have a butler. If it were $2,000 I would be out of work. But these two observations are connected not by a smooth curve but by a series of inelastic segments. I would submit that if the minimum wage were reduced to $7.24 not a single job would be created and if it were increased to $7.26 not a single job would be lost. The question becomes how long are the inelastic segments. My guess is they are shorter than $7.75 so a $15 minimum would result in some additional unemployment. But setting that level then indexing it to CPI would probably not have any additional effect in the long run.
This is a great example of the challenge of framing problems that are primarily about the quality of jobs from the perspective of caring about the quantity of jobs. Once one accepts the monetarist premise that the quantity is what matters, then quibbles over job gains and losses is baked into the cake. It becomes part of the system that justifies wage gains always and forever lagging behind productivity and any semblance of fairness in distributing the wealth of society.
Instead, we could reject the notion that more is better. In the era of the Two Income Trap and the longest working hours in the industrialized world, we don’t need more jobs. We need better jobs. The quantity is irrelevant. We should raise the minimum wage because workers should be paid a fair wage – even if it means fewer worked hours in the formal economy. Which of course a real minimum wage would cause. The ruse that a ‘moderate’ increase is all we should ask for is part of the problem, not part of the solution.
Here’s a great chart by the OECD showing the appalling inequality of US earnings & wages vis-a-vis the RoW. So, despite the second chart showing a high average it is truly ‘spewingly’ skewed within the US……….
http://www.oecd.org/employment/emp/employmentdatabase-earningsandwages.htm
Oh, that’s interesting! My average wage last 5 yrs was somewhere between Greece and Mexico. I live in NY and have ~25+ yrs experience + education in my field at my own expense. And they wonder why I am no longer support the party line.
It’s an average not a median so it’s driven up by well the extreme wage inequality. Median individual wages are nowhere near that high although household wages come close. So you are probably like many other Americans.
The biggest flaw in the anti-minimum-wage camp is the assumption that only high-school kids work minimum-wage jobs. The reality is that there are more than a few adults, with bills to pay, working minimum-wage jobs.
If high-school kids have been at a disadvantage in recent years, it’s most likely due to being crowded out by older, more experienced workers–namely college graduates struggling to break in and those who have been laid off from a decent paying job–and are desperate for any job.
Foes of decent minimum wage should be careful what they wish for, since mass unemployment is not going to lead to some pleasant Malthusian die-off amongst the superfluous proles. It’s going to lead to universal basic income. Some kind of major uptrend in workplace automation caused by high minimum wage will only bring this day faster.
Elites will not permit mass unemployment and destitution on the mid-20th century model. It’s too destabilizing and threatens profits.
The problem is that many, though perhaps not all, opponents of raising the minimum-wage delude themselves into thinking that it’s only high-school kids, who want a bit of extra spending money but have minimal expenses, working minimum-wage jobs. When you point out the fact that there are in fact people working theses jobs that actually have to support themselves somehow, the response is frequently a straw-man argument along the lines of “well those jobs weren’t meant to pay a living wage.”
It’s really a pay now or pay later problem: i.e. either guarantee a living wage on the front end or force taxpayers to make up the difference later.
As far as implementing minimum-income, call me skeptical and not because it’s necessarily a bad idea. Rather, I’m skeptical because of the widespread fear in this country—as irrational as it may be—that somebody somewhere is getting something for nothing.
Ultimately though, I think you’re right that the powers that be are smart enough to realize that allowing too many people to become unemployed, impoverished, or otherwise have nothing means the pitchforks literally come out which can easily spiral out of control
The usual lack of joined up thinking from the technocrat elite:
1) We must compete in a global economy.
2) The basic wage needed to cover high mortgage payments or rent and debt payments from students loans ensure we can’t compete in a global economy.
Just to make things worse, privatise all services that were once free or subsidised and charge for them at markets rates to push the basic wage higher still.
The basic cost of living has risen to a level that makes the West uncompetitive.
The idea of national competitiveness is a myth. It’s based on the false assumption that everyone can or should be a net exporter. Wash your mouth out. We’ve rum a number of posts debunking that idea.
I know it’s a zero sum game but has anyone told the technocrat elite?
Especially in Germany.
“Why doesn’t everyone run a surplus like us?”
These are the people you need to get the message to.
Except that most economists nowadays have updated their views on the minimum wage. The survey you cite is from 1978!
For better or worse, the politics of economists have shifted towards a more leftist (if technocratic) direction. I think this is partly due to the 2008 crash, which led folks to reconsider market orthodoxy.
Also, the NELP paper is truly horrendous–the author is a lawyer, not a researcher. There is far better pro-MW research out there to link to, including that CEPR article.
Thanks for posting this. I am pretty sure this idea has been debunked at NC before and I was trying to search for it in response to seeing the myth pop up in comments, but I couldn’t track it down.
Anecdotal arguments against raising the minimum wage usually go something like this: my business runs on very thin margins, so raising wages for employees would require me to put up prices to a degree that my customers wouldn’t accept, so I would go out of business. I’ve seen people compare it to a big rent increase. This ignores a couple of key factors:
– A rise in the minimum wage would affect all businesses equally (unlike the rent increase) so there would be no competitive disadvantage from paying workers more, as all your competition would be doing the same thing;
– Even assuming that your product/service is discretionary (not always the case, e.g. room cleaning for hotels) your customers are likely to have more money available, either directly as a result of the change (if they are low-middle income consumers) or indirectly as a result of increased spending on the part of those consumers. Therefore price increases are very likely to be a non-issue.
A higher minimum wage is NOT an overall cost in economic terms – low income workers typically spend all or nearly all of their income every month, so the extra money would go right back into circulation as consumer spending. This is not true of money going to the wealthy, who are more likely to invest it. In fact if you want to stimulate consumer spending while controlling asset bubbles then (human rights issues aside) raising the minimum wage is actually an attractive option for improving the economy. The fact that it’s almost universally portrayed as the opposite is one of the many crimes of neoliberalism.
The question of the minimum wage should be put in context with the monetary policy that focuses mainly on achieving positive inflation rates in the cpi and the extend of society’s safety net. E.g. real wages would also grow when the cpi is allowed to show the effects of increased productivity in the form of lower consumer prices. But instead, productivity gains were/are, under the guise of various mechanisms, in its finality transferred to the 0,1%. The point I am trying to make is, that we should be humbled by the economic system’s complexity and to simply argue that central planning (e.g. national minimum wage) will solve some problem may divert from the fact that, depending on its extent, central planning is generally reducing economic vitality and the derived standard of living of a society. This does not mean that the 0,1% have not perverted the capitalistic system into crony capitalism but there may be better ways to address that problem.
Discussions concerning minimum wage and the right to work invariably lead down the path of technocratic jargon and false moral outrage from both sides of the political spectrum. What needs to be focused on is the ultimate sense of what is right.
Extend and pretend, along with the aggravating condition of concessions made but never implemented is a form of cynicism – or aggression- that is literally destroying our society before our very eyes.
My eldest son was born with Dandy Walker Syndrome, a congenital brain malformation that effects intellectual development and coordination. Randomness of the universe in action. In my case, I am fortunate. My son is highly functional and has the support of a good family. However, the social system as it stands is a travesty when viewed from a moral perspective. Social Security defines a person as disabled if they cannot work and earn a certain income. It is not based on physical disability itself. The disability prevents gainful employment so you are disabled. All benefits are based off this calculation and the threshold to be cut off of benefits is horribly low, currently, just over 1,000 a month USD. The funny thing is, my son, although disabled mentally and physically in many ways, is one of the most dependable employees at his place of work. In low wage jobs, the turnover rate is enormous. However, my son will be penalized the better he does, but by an act of nature, will never be able to remotely compete on a even level with his peers. One cannot survive under those conditions.
Exploitation of workers of all stripes is the problem and talking around the edges only perpetuates the problem- forever. The perpetrators of class warfare must be defeated. Physically defeating them will be a difficult task but moral defeat seams like a no-brainer.
FDR’s polio played an important role in guiding his actions in life. Power of empathy. Calling our elite out as the uncaring SOB’s that they tend to be will do more to bring about change than anything I am convinced. At least the courtiers of the elite seem pretty thin skinned.
Go check the BLS data. The Minimum Wage was raised from $5.15 per hour to $5.85 on July 24, 2007. Black employment peaked that month, at 16.307 million. We didn’t see that many Blacks employed again for SIX YEARS. And the Black employment to population ratio that month was 58.8%. We’re still 3% below that.
Thanks for nothing.
http://www.bls.gov/data/#employment
That is the dumbest correlation ever. Correlation is not causation.
July 2007 was when the financial crisis started. The first acute phase started then with Bear hedge fund meltdown. The downturn in housing construction had already begun before then. Construction employs a lot of men with low education levels. Those are relatively high paying jobs.
What a surprise — the Minimum Wage hike just happened to trigger the Great Recession. But nothing to see here folks, let’s do it again!
Seriously? Raising minimum wage triggered the financial crisis? Not Lehmann and Bear? The Commodities Futures Modernization Act and the rise of derivatives, interconnectedness and shadow banking? Mortgage and rating agency fraud? No doc and NINJA loans? The housing bubble bursting? The Magnetar doomsday machine?
Have you been living under a rock for the last 10 years?
So, they threaten to sue banks for not giving home loans to people who cannot afford them (“racial discrimination!!”), then price those people out of their jobs so they cannot pay the mortgages, and it’s the banks fault? The banks were trying to make money on bad loans that were forced on them.
Did you notice that the Great Recession started when Democrats took control of the House and Senate, and ended when the Republicans took control of the House?
But that’s just “correlation,” isn’t it?
The recession was over long before the Republicans came “back”. The credit contraction was already underway in mortgage markets by the time Democrats took over in January of 2009 as seen with the New Century collapse.
Live in denial all you want.
The Demonrats took control of both the House and Senate in January 2007, not 2009.
We only started having positive job growth in 2011.
Your “correlation” is nonsense. Banks couldn’t make these crappy loans fast enough to bundle them up, and collect the profits.
This also happens to flip the decades of racist predatory lending and redlining into blaming the victims. Possibly couldn’t be an ulterior motive behind this faulty narrative, could it?
So it was only BLACKS that were dumb enough to take these loans?
Please.
They were targeted for the loans.
http://www.huffingtonpost.com/2014/12/03/wells-fargo-loans-lawsuit_n_6261356.html
Your shtick is 10 years old now and still doesn’t have one single thread of truth to it. But, keep fucking that chicken!
Show me one loan that a bank was forced to make.
Why is it the most foolish commentators can’t see their own level of folly? I’ve read Yves on and off for nearly eight years. On and off because she so often writes over my head. Though I’ve been called genius by numerous people in my lifetime, i have reasonable doubts about myself. Yves on the other hand, i have no doubt. In contrast, i also have little doubt about you — you are as far removed from genius as they come.
Me so smart!