The Minimum Wage

On July 24, 2007 the FMW (Federal Minimum Wage) rose from $5.15/hr to $5.85/hr; on July 24, 2008 it rose another $0.70 to $6.55/hr; in two weeks it will rise again, to $7.25/hr. This follows the longest ever period without a change: nearly 10 years. During that time the purchasing power of the minimum wage has declined steadily -- as it has declined since 1968 when its value in constant dollars was highest.

Since its first appearance in 1938 during the Great Depression, advocacy of the FMW has been a staple of Democratic and union politics, while it has been a subject of general Republican scorn. The first group views it as an important anti-poverty tool, and the second group sees it as anti-business and counterproductive.

So who is right about this?

I've spent the past week researching the arguments: looking at statistics, asking economists, and reading columns, websites and blogs of people with training in economics. I started writing a long explanation of what I found out, but that began to make even me nod off. So, in a nutshell, here's the conclusion: It depends. (You can tell I've been reading a lot of economists...)

The arguments from classical economics -- supply and demand, maximizing profit, etc. -- would suggest that when businesses have to pay their workers more, especially their lowest-paid and least skillful, then they will seriously consider laying some of them off if they can. Often, businesses can extract more productivity from their more skilled employees to compensate for firing or not hiring the least skilled, lowest paid.

(Recently, Wal-Mart has been supporting a raise in the FMW. One cynical interpretation has it that the company has enough money so that it can afford to train its workers to be more productive -- for example via computer training. This enables it to avoid minimum wage employees, while saddling its less-capitalized competitors with the increases in payments to their minimum-wage workers.)

So what actually happens when the minimum wage goes up? Analysis is complicated. It is certainly well-documented that raising the minimum wage -- either on the local or federal level -- seems to hurt the employment chances of teenagers and unskilled workers in their early 20's. On the other hand, in places where there are a lot of low wage laborers, the sheer number whose wages increased modestly due to the legislation (including a "ripple effect" on slightly higher-paid employees) tended to create a modest decrease in poverty rates -- but this was not found in every study. Also, there are documented positive effects for certain younger and low-wage workers, especially high-school educated women and unwed mothers (my colleague, Andrew Sum, clued me into this).

There was a famous study by David Card and Alan Krueger comparing fast-food workers in the contiguous states of New Jersey and Pennsylvania. In 1992 NJ raised its minimum wage nearly 20% while the minimum wage in PA remained the same. When this happened, the full-time employment of the NJ workers actually increased by about 0.6, while the rate in PA declined by about 2.2. Some liberal economists take great heart from this study, but many economists don't think it means much; some dismiss it entirely. Given the difficulty of comparing all the factors involved here, it is probably only safe to say that NJ low-wage workers didn't pay any obvious employment penalty when the floor on their wages went up.

Actually, very few workers work for minimum wage, and, it seems, less than half are actually "breadwinners" in a family of more than one (themselves). Of course, this is not surprising since the minimum wage is nothing like a living wage. Any family with principal income from only a minimum wage would be placed well well below the poverty line. It is also not surprising that a large percentage (maybe a third) of minimum wage earners are students or other very young people living at home, and usually in families well above the the poverty level.

So, in summary, it seems that raising the minimum wage may be marginally useful; however, Paul Krugman, no right-winger, says in a book review:

"Now to me, at least, the obvious question is, why take this route? Why increase the cost of labor to employers so sharply, which--Card/Krueger notwithstanding--must pose a significant risk of pricing some workers out of the market [my emphasis], in order to give those workers so little extra income? Why not give them the money directly, say, via an increase in the tax credit?

(http://www.pkarchive.org/cranks/LivingWage.html)

I will post more details and references in a future blog.