Home > Uncategorized > Quick thoughts on the minimum wage

Quick thoughts on the minimum wage

from Dean Baker

President Biden’s proposal to raise the minimum wage to $15 an hour by 2025 is prompting a backlash from the usual suspects. As we hear the cries about how this will be the end of the world for small businesses and lead to massive unemployment, especially for young workers, minorities, and the less-educated, there are a few points worth keeping in mind.

While $15 an hour is a large increase from the current $7.25 an hour. This is because we’ve allowed so much time to pass since the last minimum wage hike. The 12 years since the last increase in the minimum wage is the longest period without a hike since the federal minimum wage was first established in 1938. Few workers are now earning the national minimum wage, both because of market conditions and because many states and cities now have considerably higher minimum wages.

If the minimum wage had just kept pace with prices since its peak value in 1968 it would be over $12 an hour today and around $13.50 by 2025. Keeping the minimum wage rising in step with prices is actually a very modest target. It means that low-wage workers are not sharing in the benefits of economic growth.

From 1938 to 1968 the minimum wage rose in step with productivity growth. This means that as the economy grew and country became richer, workers at the bottom of the ladder shared in this growth. If the minimum wage had continued to keep pace with productivity growth it would have been over $24 an hour last year and would be close to $30 an hour in 2025.

There has been considerable research on the extent to which the minimum wage leads to job loss. Much recent research finds that even substantial increases in the minimum, such as the $15 an hour minimum wage that is already in place in Seattle, have no effect on employment.[1] 

It is worth noting that even the research that finds the minimum wage reduces employment generally finds a relatively modest effect. A recent review article by prominent opponents of the minimum wage found that the median estimate of elasticity was -0.12 for affected workers. This estimate means, for example, that a 10 percent increase in the minimum wage would lead to a reduction in employment among affected workers (e.g. workers with less education or young workers) of 1.2 percent.

It is important to realize that even in this case we are not talking about 1.2 percent of affected workers going unemployed. Low-wage jobs turn over rapidly. For example, in a typical month before the pandemic hit, more than 6.0 percent of the workers in the hotel and restaurant industries lost or left their jobs. If we take the elasticity estimate of -0.12, it would mean that at a point in time we have 1.2 percent fewer people working in the sector as a result of a ten percent increase in the minimum wage.[2]

Carrying out the arithmetic, this means that an average low-wage worker would be putting in 1.2 percent fewer hours in a year, but getting 10 percent more money for each hour they worked. That would mean that they would be pocketing roughly 9.0 percent more in wages each year. And, this calculation assumes there is an employment effect, ignoring considerable evidence that there is none.

A higher minimum wage also has positive societal effects. A recent review of the literature found that a 10 percent increase in the minimum wage would reduce the poverty rate by 5.3 percent. Another study found that a 50 cent increase in the minimum wage reduced the likelihood that formerly incarcerated people would return to prison within a year by 2.8 percent. The long-term effects of these and other benefits are likely to be quite large.

Finally, it is worth remembering that there is a lot of money on the side of those looking to stop minimum wage hikes. This can affect the research on the topic. While few researchers may deliberately cook their results to favor the fast-food industry, they know they can get funding for research that finds a higher minimum wage leads to job loss. There is much less money available for supporting research that finds no effect. (I know that first-hand in my former capacity as co-director of CEPR.)

Probably the clearest case of such bias affecting research findings was a paper by David Neumark and William Wascher, two of the most prominent opponents of higher minimum wages. Neumark and Wascher analyzed data given to them by the Employment Policies Institute (a.k.a. “the evil EPI”), a lobbying group for the restaurant industry. They used this data to replicate a pathbreaking study by economists David Card and Alan Krueger, which found no job loss associated with a minimum wage hike in New Jersey.

Neumark and Wascher’s study found that there was in fact a significant loss of jobs in fast food restaurants in New Jersey following the minimum wage hike. However, an analysis of the Neumark and Wascher data by John Schmitt, found patterns that were not plausible. It was subsequently revealed that an owner of a number of fast-food restaurants in New Jersey and Pennsylvania (the control state) had submitted fake payroll data to the Employment Policy Institute to be used in the study. (There is no reason to believe that Neumark and Wascher realized they were working with fraudulent data.) If the faked data was removed from the analysis, the finding of minimum wage induced job loss disappeared.

This story should be seen as a warning. Most researchers are honest and will accurately report what they find in their analysis. However, we should realize that there are some pretty big thumbs on the scale in the minimum wage battle, and those thumbs want to show that minimum wage hikes will cause job loss.

[1] A paper by John Schmitt explains why it could be the case that, contrary  to the textbook story, a higher minimum wage may have no effect on employment.

[2] The actual story is a bit more complicated, since typically these studies look at a specific type of worker, such as young people or workers with less education. It could be the case that employment in an industry has not changed, but we have seen older or more educated workers replacing younger and less-educated workers.

  1. January 27, 2021 at 5:40 pm

    Raising the min wage to fifteen per hour is the exact same scam Bernie used back when he was talking $10.10/hr

    Can anybody in the US reading this live with dignity at $15/hr? Of course not. That’s not the idea… The idea is to scam people into some weird idea that politicians care anything about anybody that;s not an oligarch.

    For advanced economic theory please check my newly updated fiction (pros can’t explain anything pertinent about economics because it’s real job is to scam workers into believing they will be able to pay rent in 2025 on $15/hr. it’s an internal democratic party austerity joke on their conned voters.

    Fiction or solid theory? https://www.constituentassembly.org/Chapters/pacifica-web/Pacifica-ch0.html

  2. Yoshinori Shiozawa
    January 27, 2021 at 6:50 pm

    This must be the case in which we need a good economics.  

  3. Mr.T
    January 27, 2021 at 8:42 pm

    Sorry to put it so bluntly, but the essential problem is that economists measure the minimum wage in terms of productivity, growth, or unemployment (or other “effects”) and thus miss the point of what a minimum wage is and should be: The minimum wage is a social policy instrument and is very fundamentally linked to normative claims on the sale of labor power, e.g., subsistence and fair participation in real value creation. Even if the minimum wage would lead to the reduction of jobs, the claim to existence security would not be wrong! On the contrary, the minimum wage is simply the minimum condition for reasonable and acceptable working conditions. Sounds too “normative”? One could also argue economically for a minimum wage: as a guarantee of economic production relations in which production factors (here: labor) are compensated by output; as an incentive function to participate in the labor market in the first place, etc. But there is often little to be read of such points (i.e. of ethical as well as economic justification). I am not surprised, since many economists are not at all familiar with normative analyses, not at all familiar with economic ethics. But this leads to the fact that they do not discuss the actual problem.

    • Yoshinori Shiozawa
      January 28, 2021 at 4:11 am

      Mr. T,
      you must be intentionally provocative. In an aspect the minimum wage is surely “a social policy instrument.” However, it possesses another aspect. For example, well-designed minimum wage plan can be a good stimulus for enhancing productivity and international competitiveness. It is told that Britain has been successful in this policy. There is an adviser to the Japanese Cabinet who recommends a similar policy for Japan. This is the main reason why I have written that we need a good economics in my post on January 27, 2021 at 6:50 pm.

      You can blame economists who “are not at all familiar with normative analyses”, but it is quite difficult to understand or know what kind of repercussions would (most likely) happen if once this and that policy was adopted. This is the main reason why we need economics. Although I am not a labor economist, I can easily guess that the repercussion problem is of a quite difficult kind among economic problems, because we should know how employers and managers react and what will happen in the production techniques. Proponents of minimum wage increase policy contend that it will stimulate the productivity increase. I do not deny the possibility but it needs many studies based on empirical studies. Dean Baker has given us the first minimum information on this question. Normative argument must be necessary but it is not sufficient at all.

      • Mr.T
        January 28, 2021 at 8:21 pm

        I can well understand that it seems provocative to point out that economists often do not understand the actual meaning & purpose of a minimum wage. But that does not change the fact that the minimum wage is a fundamental convention of justice, specifically: to be able to live from one’s own work. Who wants to make these necessities of self-preservation dependent on other factors, undermines this convention of justice. Good economics should know this and be able to deal with the institutional environment – which also includes conventions of justice such as the minimum wage.

  4. Craig
    January 28, 2021 at 5:26 am

    A 50% discount/rebate price and monetary policy at the point of retail sale immediately doubles everyone’s purchasing power and not only completely eliminates the possibility of inflation (the highest yearly inflation rate in the US’s modern history is 14.4%) but does the impossible so far as orthodox economics is concerned by integrating BENEFICIAL price deflation into profit making economic systems. With the rebating back of the retailer’s discount how much more employment do you think we’d have with a 50% discount/rebate policy compared to the debt deflationary austerity we are looking at until private debt is reduced by a large percentage. Also, I cannot think of a greater incentive to work than that your first day on the job you get a 100% raise in your purchasing power with the above policy.

    • Craig
      January 28, 2021 at 11:51 pm

      Pair the 50% discount/rebate policies with a universal dividend of $1000/mo. and you have everyone over 18 years of age guaranteed $2000/mo. of purchasing power for life and every two adult household $4000/mo or $48k/yr. If each of the two adults get jobs making $18k/yr that means they have $48k plus $72k or $120k/yr.

      If you don’t have to worry about poverty with the $48k of guaranteed purchasing power for life and you negate any possibility of inflation with the 50% discount policy…why would individuals and businesses need to pay the transfer taxes for welfare, unemployment insurance and even social security which could be fazed out according to how long you have paid into it?

      Government graduated taxation, RIGOROUSLY enforced, in the zero to 10% range for those making $0-10,000,000/yr. IS necessary because humans and the systems they command are not perfectly rational and ethical and so the government, practically, must have a form of control, but with inflation and unemployment solved and a directly distributed monetary system that can fund government there is no reason to have the high rates we presently have. Perhaps for all income over $10,000,000/yr. a 70% rate or, if one gives 70% of their additional income over $10,000,000 to selective charities, actually productive investments that they do not have majority ownership/control of and/or green projects/green bonds deemed necessary to combat climate change….a 12% rate on the remaining 30%.

      The enhanced business profitability, tax cost savings and individual economic stability and democracy of these policies should make them politically integrative compared to the long term partisan gridlock we currently labor under.

  5. Ken Zimmerman
    February 16, 2021 at 4:10 pm

    Wage is a relatively recent invention. Karl Polanyi argues, ‘formal economics’ is applicable only to ‘an economy of a definite type, namely, a market system’ (1957: 247), in which livelihood routinely involves choice arising from an insufficiency of means (economising). ‘This is achieved by generalizing the use of price-making markets’ (1957: 247), on which almost all goods and services (including land, labour and capital) are purchasable and from which all income (including wages, rent and interest) is derived. Thus, livelihood in market economies necessarily involves both buying and selling, and economic means as well as ends are necessarily quantified as money prices. In short, such an economy is ‘a sequence of acts of economizing, that is, of choices induced by scarcity situations’ (1957: 247), and so is amenable to analysis by ‘formal economics’. All economies have mechanisms of distribution, but only market (capitalist) economies are integrated (primarily) through ‘exchange’ on price-setting markets. All earlier economies have been integrated, instead, mainly through reciprocity and redistribution, even if they had marketplaces. And even capitalist markets are integrated but through denial of the integration.

    The ‘minimum wage’ was invented as part of FDR’s ‘New Deal.’ It is the result of the recognition of the practical bureaucrats who administered the New Deal that wages in the vast depression effecting the country would never keep pace with the needs of the citizens of the US so long as the control of wages was left to capitalist markets. It was part of the ‘tweaking’ rather than rejecting of capitalism that characterized the New Deal. One name associated with invention of the minimum wage is Ethelbert Stewart. Starting off as a ‘muck raking’ journalist, his reputation for uncovering scandals and cheating by the nation’s plutocrats brought him into the Federal Government as commissioner of the federal Bureau of Labor Statistics in 1920. That in turn placed him at the pivot point when that small, underfunded agency helped define the parameters of the Great Depression. After a career spent advocating for better information about the struggles and needs of the working class, Stewart’s crowning achievement was to be present at the creation of a national unemployment rate, which has ever since shaped our common picture of jobs in America.

    Zachary Karabell in ‘The Leading Indicators: A Short History of the Numbers That Rule Our World’ describes Stewart as “…Sardonic and pithy, Stewart was very much what Mark Twain would have been had Twain been a statistician.” Stewart had little interest in homilies and ignorance and saw in statistics a way to force society to deal with pressing issues of justice, fairness, and decency. “The working people of the United States,” he declared, “are entitled to know what the changing industrial conditions are . . . and the nature of and extent of the occupational readjustment which is necessary to meet them without loss of earning power.” As an advocate for a minimum wage law long before that was fashionable, Stewart saw the issue as one of simple social utility: unless people had sufficient means to meet their needs, their lives would be diminished, as would the strength of the country. (Joseph P. Goldberg and William T. Moye, The First Hundred Years of the Bureau of Labor Statistics (Washington, DC: US Government Printing Office, 1985), chapter 5; Ethelbert Stewart)

    Even so, he was skeptical of too much reliance on science and math. Statistics were a guide and could provide a map, but he was wary of the “mania for statistics” that accompanied the early 20th century mantra of rigorous measurement. The belief that society could be treated as a machine and that by understanding the inputs you could determine outcomes had limits. “The things that make human life human do not lend themselves readily to the statistical method,” he wrote. (Goldberg) Decades later Robert Kennedy expressed similar sentiments more poetically.

    Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product . . . if we should judge America by that, counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.

    Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans. (campaign speech March, 1968 at the University of Kansas)

    On June 6, of that same year Robert Kennedy was assassinated.

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