U.S. Minimum Wage Policy

No matter how much money you make, and no matter how much you know about economics, the minimum wage is a compelling topic of discussion. It has the potential to affect large swaths of society, from the workers whose earnings lay precisely at the minimum, to the employers who make decisions about whom to hire and how much to pay them. Even more, it strikes to the heart of one’s beliefs about inequality. Survey data suggest that our feelings about inequality are complicated: “Americans are increasingly worried about the gap between rich and poor, but are hesitant to have the government do anything about it.”

Yet the debate about minimum wage policy in the U.S. is not just about feelings on inequality; it’s also about whether such policy works in the way we think it does. The most common motivation for having, or raising, the minimum wage is to improve the livelihoods of those earning the least – i.e., the poorest. However, it is not unreasonable to imagine that an employer who is suddenly forced to pay his or her workers more might decide to cut staff or hours of operation. The most basic economic model of supply and demand suggests exactly that. The implication is that a policy that raises wages for some might, at the same time, lead to some other (equally poor) people losing their jobs. That is, for many, precisely the opposite of what is intended.

The economics profession itself is divided on the question of minimum wage policy and its effects on unemployment. Opinions have changed over time: in 1978, a survey of economists showed 90% to agree that the minimum wage increases unemployment among low-skilled workers; in 2000, another survey revealed only 45.6% to hold that view. The shift is frequently attributed to a large literature devoted to measuring the empirical effects of minimum wage changes in the U.S. The most oft-cited piece of this literature shows that a rise in New Jersey’s minimum wage did not lead to less employment in the state’s fast food industry, as compared to corresponding employment in eastern Pennsylvania (the ‘control group’, which saw no changes in the minimum wage). Since that 1994 research, numerous academic publications have come down on either side of the debate, and it is not difficult to cherry-pick results that support one’s agenda.

Politics and government have no time for academic debate, however. Last month, both the city of New York and the state of California signed into law plans to ramp up the minimum wage to $15.00 (by 2018 and 2022, respectively). These are local experiments in a country whose average minimum wage is among the lowest in the Organization for Economic Cooperation and Development (OECD), relative to the median wage. The federal minimum wage persists at $7.25. How much does that get you yearly at 40 hours per week, 50 weeks per year? $14,500, before taxes.

Many states, of course, have their own minimum wage laws that make sure their constituents make more than that. Importantly, however, all of these minimum wage levels are nominal; they are not indexed to inflation. In the U.S., looking at nominal wages instead of real, inflation-adjusted wages, is like looking at absolute temperature instead of wind chill in the dead of winter: it feels a lot worse than it looks. A graph of the federal minimum wage in both real and nominal terms over time shows that minimum wage earners make 20-25% less in real terms than their counterparts in the 1960s and 1970s. That is not a trivial amount, if one’s baseline pre-tax income is $14,500 per year.

These are huge changes, whose impacts cannot be forecast from the many studies of previous policy changes. It can be frustrating to hear that the answer to an important, long-debated policy question is “We don’t know.” But when it comes to the question of minimum wage policy and its effects on employment (and, ultimately, inequality)? Don’t let anybody convince you otherwise. Even the researchers – from both camps of the debate – agree that the impacts of the big changes coming in New York City and California are impossible to predict. One such researcher says “No one knows. No one could know. There’s no experience with that…Anyone who says ‘I have a pretty good idea of what would happen’ can’t be on solid ground.”


Image courtesy of Flickr. Originally published by S&S on May 30, 2016.


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