Minimum Wage

Raise the price of something – we all intuit – and people will want less of it. Raise the minimum wage and low-wage employment will decrease. Great theory – cryin’ shame the facts dont support it.

If you could raise the minimum wage and hold all else constant, it’s hard to imagine that employment wouldnt be adversely affected. But you cant. People working minimum wage jobs are poor. Poor people are fairly predictable in this regard: give them extra cash, and sure enough, they go and spend it. So when you increase the minimum wage, you should expect to get a commensurate bump up in consumer demand.

Tax cuts for cagillionaires, by comparison, have less predictable effects. When so-called “job-creators” get a tax break, the extra cash rarely goes into consumption. You can only drive one Maserati or sleep till noon in one ski chalet at a time. Their extra income tends to go to saving/investing – and since capital is free to cross borders in search of the best return, tax cuts for the rich are as likely to create jobs in Thailand or Mexico as anyplace else.

On the other hand, when you give a McWorker a raise, the extra cash is not likely to go into a Roth IRA. It will almost certainly be spent locally – at Walmart, the supermarket, the dentist, Jiffy Lube, etc. And guess what: the cumulative effect of raising the income of ALL minimum wage workers at the same time MORE THAN offsets the increased labor costs. Employers experience an immediate bump-up in demand, and so not only do they maintain employment levels – if anything, they add jobs. The charm of this theory is that it’s actually borne out by the facts.

Twenty years ago, this effect was only suspected – it at best constituted a minority opinion among economists. Then two yet-unknown, up-n-coming economists seized on a change in state law as a “natural experiment.” New Jersey raised its minimum wage; neighboring Pennsylvania did not. David Card and Alan Krueger looked at the border area to see if employment in the two states diverged – they found that it didnt.

With increasingly sophisticated methods, Card and Krueger and other researchers have since reproduced these same results many times over: when you increase the minimum wage, low wage workers do in fact experience an increase in income (that is, their employers dont cut their hours in response); and employment holds steady. This effect has become common knowledge among economists – not that conservatives care – their beliefs arent based in fact anyway – they’re happy hanging on to refuted, sophomoric theories – if they cant wrap their brains around evolution, what chance could they have to grasp economics?

Minimum wage is a classic case in which free markets can NOT be relied on to produce optimal results. If an individual firm chooses to increase wages, it’s not likely to experience an offsetting increase in demand – it will probably cost the firm. However if everyone increases wages at once, everyone comes out ahead: the nation’s poorest employees get a raise that costs their employers nothing. It’s a textbook case for using legislation to improve wellbeing when free markets cant do the job.

In constant dollars, today’s $7.25 minimum wage is lower than it was during the entire 30 year period 1955-85. With American poverty at its highest in decades – the highest of any rich country – and with its poorest workers increasingly unable to keep up, raising the minimum wage is sound, sensible policy at a critical time.

Refs:

http://economix.blogs.nytimes.com/2010/11/01/along-the-minimum-wage-battle-front/?_r=3

http://www.nber.org/papers/w4509

http://press.princeton.edu/titles/5632.html

http://www.infoplease.com/ipa/A0774473.html

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