Minimum Wage Increase: The Debate Continues

Like me, I’m sure most of you have heard the commotion getting underway in regards to this whole proposed minimum wage increase by the President in his State of the Union address. But, if you’re not like me and actually have a life with things to do, here’s are some brief claims that have been thrown around regarding this issue:

Claim: Increasing the minimum wage will do more harm than good. It will cause low-wage workers to lose their jobs.

This has been one of the most common arguments I’ve heard. Certainly, I understand the reasoning of why this would happen. Employers pay their employees on the margin (meaning they are paid the least amount of wages for the most amount of production) and to increase their wages would thus make them too expensive. That’s of course the prediction from the standard view of how the labor market works; that even if the minimum wage were to increase by a few pennies, there would be job losses as a result.

Even so, I point out that we’ve had several federal minimum wage increases and currently we have 19 states with minimum wages above the federal level.  It may well be that I’m wrong, as I’ve been in the past, but could it be that 19 states also have it wrong? Surely if those labor market predictions were correct, we’d have clearly seen the negative impacts by now.

Which makes this issue more about verifiable observation based on data, rather than theory and pure logic. Thankfully, we don’t have to do the research ourselves, as it’s been extensively worked on and reviewed here by economist John Schmitt of the Center for Economic and Policy Research (CEPR).

There are those that argue that the true elasticity–how the change in something is affected by the change in something else–of unemployment with respect to a minimum wage increase hovers about zero, meaning the change is very minimal. In the publication, Schmitt presents a nice graph (shown below) from a “meta-study”—a study of a lot of other studies—showing precisely that effect.  As one can see, there are outliers (observations) on both sides of zero, but the majority of the observations clump around zero, providing a nice summary of over 1,000 studies from 1972-2007 on the subject.

Minimum Wage Elasticity

Source: John Schmitt, 2013 (pg. 5)

Of course, this doesn’t  mean that no worker will lose their job when the minimum wage goes up. Rather, it means the effect of minimum wage increases on employment is very small and that anyone that tries to say otherwise is not looking at the evidence.

Claim: Why stop at $9? Let’s make it $90 if it’s such a great idea.

Keith Hennessey, a Lecturer at the Stanford Graduate School of Business and the Stanford Law School, brought up this topic in one of his recent blog posts. His work is usually very insightful, but this recent post hovered on the side of pure silliness:

If raising the minimum wage is good economic policy, why stop at $9 per hour? Why not increase it to $90 per hour? By the President’s logic, doing so would dramatically increase the income of not just millions of working families, but tens of millions of working families, and indeed of almost all working Americans.

This type of thinking goes against the type of work and literature reviewed by Schmitt. In Schmitt’s writing, he refers to what he calls a “sweep” (i.e. the area between the current minimum wage and the proposed minimum wage) and in table 1 he shows the share of workers affected by the sweep. As is demonstrated by the data (shown below), historically, increases in the minimum wage have affected less than 10% of the workforce. As Keith points out in his post, an increase to $90 would affect almost 100%. There’s a large difference.

Minimum Wage Sweep

Source: John Schmitt, table 1 (pg. 14)

In the real world, there is a range wherein businesses can actually absorb the increase through other options other than laying off workers, including prices, profits, and productivity. If history is a guide, as the figure above shows, any increases affecting less than 10% of the workforce along in the sweep do not generate significant unemployment effects.

Claim: The wage increase wouldn’t reach the people who really need it.

Since eligibility for the minimum wage isn’t determined on income, critics complain it that while it reaches low-wage workers, it wouldn’t reach those who actually need it–low-wage workers living in low-income families.  Instead, as critics claim, it will go mostly to part-time kids.

Once again, look at the evidence, that’s simply not true. Most–not all–low-wage workers actually reside in low-income households and the data of those affected by the sweep contradict the part-time-kids claim.

From new analysis by the Economic Policy Institute of the President’s proposal:*

–84% of total affected workers are at least 20 years old.

–73% of the benefits of the increase go to those in the bottom half of the workforce by income level.

–47% of affected workers are full-timers, 83% work at least 20 hours per week.

–The average worker in the sweep brought home 46% of her household’s earnings in 2011 (from the White House fact sheet).

So while there’s no shortage of arguments against raising the minimum wage, I remind critics and proponents alike to remember:  in-depth analysis on the subject has shown that raising the minimum wage increases the earnings of low-wage workers without harming their employment status. One must stop thinking of the argument from a theoretical standpoint. Refer back to the evidence. The problems facing our country are fixable ones, but we must get our heads out of the clouds and do the math. This is about what works. I think we all want what works.

*Note: that EPI includes workers directly and indirectly affected by the increase, since research also shows that those earning within a dollar of the new proposed minimum also tend to get a wage increase.

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