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POV: Raise the Minimum Wage, but Don’t Expect Much

Modest benefits outweigh modest downsides

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In 1988, the economist Charles Brown published an article titled “Minimum Wages Laws: Are They Overrated?” His implicit answer was yes. More than 25 years later, minimum wages laws remain a hotly debated topic. Senate Republicans in April blocked a vote on raising the minimum wage, even though economists have a reasonable consensus about their effects. The disagreement among economists is much more over values than over facts.

Simple, as well as the most complicated, economic models predict that forcing firms to pay higher wages reduces labor demand and causes firms to substitute more-skilled for less-skilled workers. Despite some famous papers that failed to find an adverse effect on employment, most studies have found modest employment losses in response to increases in the minimum wage. There is also some evidence that when the minimum wage is high, eating and drinking establishments hire more teenage and student workers and fewer low-skill adults, while retail establishments shift employment towards adult women.

The important point is that all of these effects are small. Minimum wage jobs have a high turnover rate. When the minimum wage goes up, the typical minimum-wage worker will spend more time unemployed, but this loss is more than offset by higher earnings. The higher minimum wage is a “win” for most low-skill workers.

On the other hand, economic theory teaches us that there must also be losers. Fewer workers means less output. If workers are earning more and we are producing less, business owners must earn less, and in theory at least, they must lose more than the workers gain because total output has gone down.

How you feel about this depends on your values. If you believe, as many economists do, that we should simply add up the gains and losses, then the minimum wage increase is bad. On the other hand, if you care about who wins and who loses, you might come to a different conclusion. In particular, you might support a minimum wage increase, even if the losses outweigh the gains, if you feel the winners need the money more than the losers do.

Here again, the effects seem to be small. Minimum wage workers are disproportionately drawn from lower income households, but many also come from households with relatively high incomes. An important minority of minimum wage workers are secondary earners in families where the primary earner has an income above the median. The minimum wage is not well targeted to address income inequality. Still, the weight of the evidence is that it reduces income inequality a little, although there is less evidence on this issue than there is on employment effects. Economists disagree, because some value the reduced inequality more than they value the efficiency loss, while others place more weight on the latter.

Economists tend to think about “better” and “worse,” but much of the rest of the world thinks about “right” and “wrong.” The argument that “if you work hard, you shouldn’t be poor” holds a great deal of sway among the broader public. It is an argument about human dignity or rights. The natural response is, “What about the people who want to work hard, but can’t get a job because of the minimum wage?” To me, this counterargument would be more compelling if the employment losses from minimum wage laws were large, or if job turnover were low, so that minimum wage jobs were scarce. But there is sufficient turnover that minimum-wage workers are able to find jobs within a reasonable time period.

So even if you believe that minimum wage laws are inefficient and do little or nothing to address income inequality, you can still favor increasing the minimum wage, because there is an important minority of workers whose dignity is increased.

The issues surrounding President Obama’s decision to raise the minimum wage for workers on federal contracts are somewhat easier to address, even though we have experience with this type of minimum wage only at the local level, where it is more commonly called a “living wage.” Government need not reduce its demand for goods just because the executive order raises costs. Of course, firms will still shift employment away from low-skill workers, but the employment effect should be small, and the low-wage workers are more likely to be low-skill adults. Therefore, the positive effects are likely to be somewhat larger, and the adverse effects somewhat smaller, than for a general increase in the minimum wage.

What’s the bottom line? In the end, I come down on the side of raising the minimum wage and supporting the president’s executive order. Given my values, the benefits outweigh the costs. But mostly, I agree with Charles Brown: the issue is overrated.

Kevin Lang, a College of Arts & Sciences professor of economics, can be reached at lang@bu.edu.

“POV” is an opinion page that provides timely commentaries from students, faculty, and staff on a variety of issues: on-campus, local, state, national, or international. Anyone interested in submitting a piece, which should be about 700 words long, should contact Rich Barlow at barlowr@bu.edu.

4 Comments

4 Comments on POV: Raise the Minimum Wage, but Don’t Expect Much

  • Econ student on 05.12.2014 at 1:39 pm

    What about how increasing government expenditures reduces the wage rate? Also as economists, we understand the substitution effect where as people have more incentive (higher wage) to do something, and less incentive to do something else (reduced profits from opening a small business) then there will be an effect where people decide to work at the minimum wage rate rather than open a business. In my mind, the American dream has been to own and operate your small business which this raise will no doubt stymie in more than one way. Along with the affordable care act, which like it or not has increased costs on small businesses, this effort could deliver a knock out blow to many owners who simply don’t have the margins to afford to keep their shops open. Also Milton Friedman has many good YouTube videos in which he discusses minimum wage and how it isn’t the road out of poverty. I suggest you search them as they are incredibly enlightening.

    • Anonymous on 05.12.2014 at 2:46 pm

      Capital has had plenty of incentive to open up business. The rate of return of capital now compared to labor is a big problem. If you have more than 50 employees then you aren’t a small business anyways.

    • nathan on 05.12.2014 at 3:46 pm

      Milton Friedman’s theories from the 60s are fast becoming as outdated as Adam Smith’s(we no longer live in a world full of small agrarian towns.)

  • nathan on 05.12.2014 at 3:40 pm

    Citing a survey of studies from 2006-7 may not be very useful considering the lag between income and expenses has continued to increase.

    More recent anecdotal information, such as San Jose,Ca. after measure D seem not to fit the older data. http://www.mercurynews.com/opinion/ci_25315215/san-jose-minimum-wage-year-old-success-story

    A modest improvement for a few people on the edge of the poverty line is a MAJOR improvement in the lives of those few people. Just as a modest decline in employment is a MAJOR loss for the few people affected.

    Everyone who is poor or unemployed is 100% affected by poverty and unemployment. It might not make statistical sense, but a statistically modest improvement is a personally substantial improvement for those whose lives are directly affected.

    I support a compassionate response that benefits people in need.

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