What the Literature Actually Reveals about Raising the Minimum Wage
Despite economist Thomas Sowell’s laconically phrased observation that the real minimum wage is zero, progressive elements within the Democratic coalition are likely to push for increasing the federal minimum wage once Biden takes office. While whether or not to raise the minimum wage is therefore ultimately a political question, a school of thought has gained purchase within mainstream economic circles in recent decades that contravenes long-held classical assumptions about supply and demand. If the cost of a commodity increases, demand should fall if the price rises beyond the point at which the marginal utility of acquiring another unit of that commodity is less than the cost of another unit of that commodity (Sowell 2011). Not so with labor, argue these economists (Harris and Kearney 2016; Tcherneva 2020; Stiglitz 2012, 2020; Pollin and Luce 2000; Reich 2017). Because pay to labor constitutes a large part of aggregate demand, higher wages translate into more purchasing and hence an approximately equivalent increase in the sales of businesses to offset the higher cost of labor.
Such demand-side economics trace their origins to Keynes, but interest was rekindled by the publication of Card and Krueger’s empirical study of fast food workers in New Jersey and Pennsylvania (Card and Krueger 1993). Widely cited following its publication, the next decade saw a strong shift in opinion among economists. A survey by the American Economics Association found that well over half of its members now disagree or doubt that minimum wages by themselves cause unemployment or underemployment (The Economist, August 2020).
Such cautious inquiry has translated in the world of the post-2008 k-shaped recovery to demands for almost doubling the federal minimum wage. A host of academics have voiced their support for the Seattle minimum wage coalition, with even the formerly skeptical Paul Krugman making an about-face, writing in the New York Times that wages were so low that significantly raising the minimum wage would do no harm to the economy (Krugman 1998, 2015).
According to the literature, however, the real picture is more nuanced.
Based on the large body of research being compiled, we find evidence that raising the minimum wage affects different sectors of the economy differently, and that it is not clear what would happen in the event that the minimum wage is significantly increased (Neumark and Wascher 2007; Jardim et al. 2017).
Because of this, even left progressive economists like Thomas Picketty are skeptical of broadly raising minimum wages in an effort to offset wealth and income inequality. He is likely correct, as most of the economic inequality in the United States is structural in origin, the result of technological displacement, skills hierarchies, geographic concentration, and trade, fiscal, and monetary policies (Moore 2014).
Given the potential dangers and inability of the government to successfully execute such microeconomic tinkering during the 1960s and 1970s, a time of much more functional governance than now, it seems unlikely and unwise to grant the federal government the power to set wages in this way in an attempt to optimize economic growth.
Research indicates average take home income since 2014 has increased slightly in some sectors, while going down in others, but with no noticeable uptick in the cost of basic consumer items (Vigdor et al. 2016, 2017). This may be unique to Seattle, a diverse and competitive economic zone. More local experimentation in the coming years is likely and will provide us with a better understanding of the impact of raising the minimum wage on various sectors of the labor market. While nationally it may be that the Biden administration, which so far has boxed out the more progressive elements of the Democratic coalition, will not prioritize the fight over federal minimum wages, in any event, the public should not be misled into believing that the data unequivocally supports the fight for a fifteen-dollar-an-hour federal minimum wage.
Resources and Works Cited:
Card, D., & Krueger, A. (1993). Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania. doi:10.3386/w4509.
Harris, B., & Kearney, M. (2016, July 29). The "Ripple Effect" of a Minimum Wage Increase on American Workers. Retrieved October 06, 2020, from https://www.brookings.edu/blog/up-front/2014/01/10/the-ripple-effect-of-a-minimum-wage-increase-on-american-workers/
Jardim, E., et al. (2017, June 26). Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle. Retrieved January 05, 2021, from https://www.nber.org/papers/w23532
Krugman, P. (1998, September). The Living Wage. Retrieved October 06, 2020, from http://www.pkarchive.org/cranks/LivingWage.html.
Krugman, P. (2015, July 17). Liberals and Wages. Retrieved October 06, 2020, from https://www.nytimes.com/2015/07/17/opinion/paul-krugman-liberals-and-wages.html
Moore, H. (2014, June 03). Seattle Misreads Thomas Piketty as its Minimum Wage Mascot. Retrieved January 05, 2021, from https://www.theguardian.com/money/us-money-blog/2014/jun/03/thomas-piketty-seattle-minimum-wage-risks-jobs
Neumark, D., Wascher, W. (2007). Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research: Cambridge.
Pollin, R., & Luce, S. (2000). The Living Wage: Building a Fair Economy. New York: New Press.
Reich, R. B. (2017). Saving Capitalism: For the Many, not the Few. London: Icon Books.
Rolf, D., & Bryant, C. W. (2016). The Fight for Fifteen: The Right Wage for a Working America. New York: The New Press.
Sowell, T. (2011). Basic Economics: A Common Sense Guide to the Economy. Fourth Edition. New York: Basic Books.
Stiglitz, J. (2012). The Price of Inequality. New York: W.W. Norton Company.
Stiglitz, J. E. (2020). People, Power, and Profits: Progressive Capitalism for an age of Discontent. UK: Penguin Books.
Tcherneva, P. R. (2020). The Case for a Job Guarantee. Cambridge: Polity Press.
Vigdor, Jacob, et al. (2017). The Seattle Minimum Wage Ordinance October 2017 Update: Report on Employer Adjustments, Worker Experiences, and Price Changes. Seattle. University of Washington, Daniel J. Evans School of Public Policy.
Vigdor, Jacob, et al. (2016). Report on the Impact of Seattle’s Minimum Wage Ordinance on Wages, Workers, Jobs, and Establishments through 2015. Seattle. University of Washington, Daniel J. Evans School of Public Policy.
What Harm do Minimum Wages do? (2020, August 13). The Economist. Retrieved October 6, 2020, from https://www.economist.com/schools-brief/2020/08/13/what-harm-do-minimum-wages-do