Should We Raise The Minimum Wage?
One of the most balanced and objective summaries I’ve seen yet:
Should We Raise the Minimum Wage? 11 Questions and Answers
2013 was a good year for supporters of a higher minimum wage. States including New York, California, and New Jersey passed hikes. Residents of SeaTac, Washington, voted to turn their tiny city into a living economics experiment by increasing its minimum to $15 an hour. Washington, D.C., seems poised to raise its own wage. And President Obama threw his support behind a bill that would increase the federal minimum to $10.10 an hour and require it to rise with the cost of living.
You can expect to hear more liberal agitating for a higher wage in 2014. And of course, you can also expect to hear conservatives shout back that the idea is a job killer. To prepare you for the inevitable policy battle, here’s our FAQ.
Just tell me if the minimum wage kills jobs or not.
Patience, young grasshopper. We’ll get to that question. But let’s ease in with some basics first.
Fine. What is the minimum wage anyway?
Ah, good place to start. The federal minimum wage is $7.25 an hour, which means that depending on the city you’re in, 60 minutes of work will just about buy you a Chipoltle burrito (without guac). By historical standards, it’s fairly low. Thanks to inflation, the minimum today wage is worth a few dollars less than when its real value peaked in 1968. (Graph from CNN)
That said, the federal minimum is only part of the national story. Today, 19 states and the District of Columbia have a higher wage floor. Meanwhile, New Jersey just became the 11th state to index theirs to the cost of living. (Graph courtesy of The American Prospect’s Sam Waldman, who has his own useful crash course).
And of course, some local governments take things even further, like SeaTacwith its $15 minimum.
How many people earn the minimum wage?
The short answer is: Not many. But in a way, that’s also the wrong question.
According to the Bureau of Labor Statistics, 1.57 million Americans, or 2.1 percent of the hourly workforce, earned the minimum wage in 2012. More than 60 percent of them either worked in retail or in leisure and hospitality, which is to say hotels and restaurants, including fast-food chains.
If you want to honestly debate the merits of raising the minimum wage, however, you need to think beyond who earns it today. After all, there are millions of workers making $8 or $9 an hour assembling burgers or changing sheets who might be affected by a hike. The Economic Policy Institute estimates that if Washington increased the minimum to $10.10 as Obama would like, some 21.3 million employees would eventually be guaranteed a raise, assuming they kept their jobs. (Another 11.1 million might theoretically benefit if companies adjusted their whole wage scales upwards, which is what the light blue section on the chart shows. But that might just be wishful thinking on EPI’s part.)*
In the end, we’re talking about a policy that would give somewhere around 11 percent of workers a raise.
I thought minimum-wage earners were mostly just suburban teenagers. Is that true?
The Heritage Foundation would certainly like you to think so. Conservative groups often argue that, contrary to the image projected by of liberals, most of the minimum wage workforce isn’t really made up of desperate parents struggling to make ends meet. Instead, they say, it consists of middle-class teens and married women who live above the poverty line but might, for instance, want to work part-time while raising young children.
They’re not all wrong. Almost a third of minimum-wage workers are teenagers, according to the Bureau of Labor Statistics. Meanwhile, Heritage finds, 62 percent of those under 25 are enrolled in school. They’re not necessarily planning to make a career folding snack wraps.
But keep in mind: The vast majority of these workers aren’t teenagers. And among minimum wagers older than 25, Heritage notes that the average household income is $42,000 a year. Is that poverty? Not unless you’re a single parent with eight children. But is it rich? Of course not. In fact, it’s still well below the median household income of $51,000.
We’ll get more into who exactly would reap the rewards of a minimum wage increase later in the FAQ. But here’s what you should remember for now: The beneficiaries wouldn’t all be impoverished adults, but they wouldn’t all be 17-year-olds saving up for the next “Call of Duty” sequel, either.
Do people really get stuck in minimum-wage jobs their whole lives? I’m skeptical.
This is another issue minimum wage critics sometimes bring up. Practically nobody spends their whole life flipping burgers or folding sweaters, they say, and we shouldn’t make it expensive for companies to hire entry-level workers.
Are they right? In 2000, the Employment Policies Institute, a conservative organization that exists largely to fight against minimum wage hikes, published a paper showing that between 1977 and 1998, two thirds of minimum wage workers earned a raise within one year of starting their job. But the median raise for those lucky enough to get one was just 10 percent—which is to say, kind of a pittance, in terms of actual dollars and cents. Given the weakness of our present economy and the long-term erosion of middle-class jobs in this country, it might be even harder to move up today.
Ok, but seriously now: Does increasing the minimum wage kill jobs or not?
Researchers have been fighting over this question for a century—one of the first major government studies on it, involving Oregon’s early minimum-wage law, was conducted in 1915—and the answer, I hate to tell you, is still murky.
On one side of the debate, you mostly have traditionalists who believe that increasing the minimum wage kills some jobs for unskilled workers, like teens, but isn’t destructive enough to raise the overall unemployment rate. They commonly estimate that a 10 percent wage hike will reduce teen employment by somewhere around 1 to 3 percent. The problem, in their view, is that even if it doesn’t create mass joblessness, legislating higher wages specifically hurts the young and unskilled workers they’re meant to help.
On the other side, you have researchers who believe that increasing the minimum wage doesn’t kill jobs at all and may even give the economy a boost by channeling more pay to low-income workers who are likely to spend it.
In the end, it’s helpful to think of this whole argument as a competition between two stories about the economy. According to the Econ 101 model of the world, increasing the minimum wage should cost some people their jobs. If the price of low-skill labor rises thanks to meddling politicians, demand for itshould fall. Employers might slash their payrolls to preserve profits. They might invest in new technology instead of people (think of the self-checkout kiosks at your local CVS). Or they might start hiring older, more experienced workers in lieu of teenagers to get more bang for their buck.
But some researchers believe the Econ 101 model is too simplistic. They say that instead of forcing businesses to cut staff, raising wages simply spurs them to become more efficient. The typical Burger King or McDonald’s does not really run like a well-greased machine. Fry cooks slack off. There’s lots of turnover, which bogs down operations. And when workers leave, say for the Taco Bell across the freeway, they often take jobs that would otherwise be filled by the unemployed, which is less than ideal for the economy.
When the minimum wage goes up, the theory says, businesses shape up. Managers find ways to make their employees more productive. Turnover slows down, since people are happier with their paychecks, and the unemployed snap up jobs elsewhere in town. Meanwhile, Burger King and McDonald’s can raise their prices a little bit without scaring off customers.
In other words, one theory holds that increasing the minimum wage forces businesses to get thinner. Another says it forces them to get fitter.
And, while Paul Krugman might think the argument is settled, there’s still an evident divide over which narrative is correct. Earlier this year, the University of Chicago’s Booth School of Business asked a panel of 38 economists if they thought raising the federal minimum wage to $9 an hour would make it “noticeably harder for low-skilled workers to find employment.” As you can see, the result was a split decision.
Why can’t economists agree on who’s right?
This is a very complicated case, man. You know, a lotta ins, a lotta outs, a lotta what-have-yous.
Lebowski-isms aside, among academics, the minimum wage debate really has become a war over arcane methodological differences. Most lay-people, your humble journalist included, aren’t in a position to judge the winner. But here’s a basic history of the controversy.
By the 1980s, economists largely agreed that increasing the minimum wage hurt employment among teens and other unskilled workers. But that consensus collapsed during the next decade, with the rise of what’s known now as the “new minimum wage research.” The chief demolition crew consisted of David Card and Alan Krueger, whose most famous study compared employment at fast food restaurants in New Jersey, where the minimum wage had recently been raised, with employment at fast food restaurants in Pennsylvania, where wages stayed stable. When Card and Krueger analyzed the results of this “natural experiment,” they found no evidence that raising worker pay had killed jobs.
That sparked a fight that’s continued on, in various permutations, to today. Conservatives tend to champion work by David Neumark, an economist at the University of California-Irvine, and William Wascher, of the Federal Reserve Board. Early critics of Card and Krueger, their research compares employment trends across entire states, using elaborate statistical controls to isolate the impact of minimum wages. They have consistently found that requiring businesses to pay their workers more reduces employment among teens. Liberals, meanwhile, favor work by a group of economists fronted by Arindrajit Dube of the University of Massachusetts Amherst. Dube is best co-authored study that used contemporary data to essentially repeat Card and Krueger’s natural experiment in thousands of counties across the the country. It found no significant evidence that higher minimum wages hurt employment among restaurant workers.
Both sides have criticized each others’ ideas fiercely, and attempted variations on the other sides’ preferred research methods, mostly, it seems, to show how their their academic nemeses botched their own approach. Meanwhile, Jonathan Meer and Jeremy West of Texas A&M University have recently added a new wrinkle to the controversy with a paper that says minimum wages can noticeably bring reduce total employment by slowing down hiring. Now they’re in a fight with Dube. And so it goes.
I get it. It’s complicated. But what does most of the research say?
Ask a liberal economist, and they’ll likely point to a 2009 study of studies by Hristos Doucoullagos and T.D. Stanley that pooled together the results of 61 different research papers published over the decades. When averaged together, the results suggested that raising the minimum wage had close to zero impact on employment. An increase of 10 percent, they found, might reduce employment by about 0.1 percent, which they concluded had “no meaningful policy implications.”
“If correct, the minimum wage could be doubled and cause only a 1 percent decrease in teenage employment,” they wrote. Given the raises every other worker would receive, such a move would almost certainly be worth it.
But there are decent reasons to be cautious about these findings, which Neumark, the outspoken minimum wage critic, outlined for me in an interview. Usually, when researchers perform these kinds of so-called meta-analyses, they’re pooling together studies with very similar research designs, such as drug trials. As we’ve just seen, minimum-wage studies aren’t that consistent. The literature is full of conflicting approaches on how best to study the issue. And it doesn’t make much sense to average them out if one side’s approach is simply right, and on is simply wrong. You’re basically juicing together apples and broccoli.
In 2007, Neumark and Wascher produced their own massive lit review, in which they tried to hand-select the best studies that had been written since minimum-wage research heated up in the early 1990s. Not surprisingly, the results seemed to support their previous conclusions (it didn’t hurt that of the 33 papers they deemed most credible, five were their own). “In sum,” they wrote, “we view the literature—when read broadly and critically—as largely solidifying the conventional view that minimum wages reduce employment among low-skilled workers.” Take that as you will.
Let’s say the minimum wage doesn’t kill jobs. Who beneifts the most? The poor, or the middle class?
Mostly the middle class.
Like we discussed up top, most minimum-wage earners don’t live under the poverty line. So you shouldn’t be surprised to learn that most of the people who stand to gain from raising it are also not in poverty. A 2010 study by Joseph Sabia and Richard Burkhauser, who fall on the solidly conservative side of this issue, finds that if the minimum wage were increased to $9.50 from $7.25, only 11.3 percent of beneficiaries would live in impoverished households.
So maybe it’s better to think of the minimum wage as a way of getting more money to the broader working class. The Economic Policy Institute, for instance, finds that if the minimum wage were raised to $10.10 an hour, almost 70 percent of affected workers would live in families earning less than $60,000 a year.
Interestingly, according to Sabia and Burkhauser, even if you do factor in fairly high job losses, both the poor and middle class would likely come out ahead on total pay, thanks to all the workers who would get raises. Meanwhile, here’s how they work out the math if you assume no job losses:
If no minimum wage workers are laid off or have their hours reduced, the minimum wage increase is simulated to yield $4.0 billion in monthly benefits. This estimate can be considered an upper-bound estimate of benefits, given our optimistic behavioral assumptions. However, even under these assumptions, just 10.9% ($439 million) of these benefits will be received by the working poor (column 2), and 24.6% of the benefits will be received by workers living in poor or near-poor households. Nearly 62% of the benefits will be received by workers in households with incomes over twice the poverty line, and 40.7% will be received by workers in households with incomes over three times the poverty line.
Again, Sabia and Burkhauser see these numbers as an argument against raising the minimum wage. But, if your goal is suring up the broader working class, they might seem like a rather good deal.
If I want to help the poor, but I’m not totally sold on raising the minimum wage, what can I get behind?
One alternative is the Earned Income Tax Credit. First instituted by President Richard Nixon, it’s widely considered one of the most successful poverty–alleviation tools the federal government has ever deployed. And many would prefer to expand it in lieu of increasing the minimum wage.
The EITC is a refundable tax credit Washington makes available to low-income workers, meaning that if it’s larger than the amount they owe to the IRS, they get the difference back in cash. Its expansion played a major role in welfare reform, and as David Neumark illustrates through the graph below, it can add thousands of dollars to the annual income of a poor family.
Conservatives like the EITC because, first and foremost, it encourages people to work (you can’t get it unless you’re employed). And, unlike the minimum wage, nobody thinks it kills jobs.
Liberals like it too, but they have reservations. First, it mostly benefits parents. Single adults receive a much smaller income supplement. Meanwhile, economists like Jess Rothstein of the University of California, Berkeley, argue that by drawing more people into the labor market, the EITC actually pushes down wages. As a result, we end up subsidizing companies like McDonald’s or Walmart that have a large, poorly paid work force.
This might sound like a selfish question, but how much more expensive would my hamburgers get if we raised the minimum wage?
You’re not being selfish at all! If raising the minimum wages caused a lot of inflation in the economy, it might cancel out the benefit to workers.
Thankfully, the evidence suggests that probably wouldn’t be the case. Sara Lemos reviewed the literature and found that most studies reviewed above found that a 10 percent US minimum wage increase raises food prices by no more than 4 percent and overall prices by no more than 0.4 percent.”
But what about burgers specifically? Well, their prices would might go up a bit more. Based on data from 80s and early 90s, Daniel Aaronson estimated that a 10 percent increase in the minimum wage drove up the price of McDonald’s burgers, KFC chicken, and Pizza Hut’s pizza-like product by as much as 10 percent. Assuming that holds true today, it means that bringing the minimum wage to $10.10 would tack $1.60 onto the cost of your Big Mac. That said, international evidence—Mickey D’s makes a killing in high-wage countries like Australia and France—suggests the price hike could be lower.
TL;DR: Just tell me if we should raise the minimum wage or not, please!
I think we should raise it.
As for you, do you want to focus on the risk or the reward? The high-risk scenario is that Neumark and Wascher are right, and a minimum-wage hike to $10.10 an hour cuts teen employment by up to 12 percent (for econ nerds: that’s assuming an elasticity of -0.1 to -0.3, with an increase of 40 percent).** That said, it’s also possible that increasing the minimum wage would boost wages among working families with a small or possibly non-existent cost to overall employment. And even if there are job some losses, the math seems to suggest that the middle class and poor would still earn more income collectively in the deal. It wouldn’t cure poverty. It wouldn’t solve income inequality. But it could make many families’ lives more financially stable without a great economic cost.***
*Update – Dec 20, 10:10 AM: After this article was published, the EPI revised its estimates to account for recent state minimum wage increases. I’ve edited the piece to reflect their new findings, since who doesn’t love up to date information?
**The absolute worst-case scenario is that Meer and West are right in their new paper, and the minimum wage really brings down employment overall. But their findings are so new and untested, I’m not yet that concerned by them.
***Update – Dec. 16, 5:57 PM: My original version of this paragraph said that it was “more likely” that there’d be no impact on employment. I feel that was an unintentional overstatement, and I’ve edited this paragraph to tone it down.