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

February 7, 2012 - The Huffington Post - By Jared Bernstein

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 -- by the way, 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 shots 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.

This post originally appeared at Jared Bernstein's On The Economy blog.