Raising the minimum wage is so hot right now. President Obama, of course, proposed increasing the federal minimum from $7.25 to $9 an hour, and indexing it to inflation thereafter, in this year's State of the Union address. Rep. George Miller (D-CA) and Sen. Tom Harkin (D-IA) introduced legislation to established a $10.10 an hour minimum. The Center for American Progress's massive economic growth plan calls for setting the minimum at one half the average wage for production and non-supervisory workers; at the current average, that means a minimum of $10.04 an hour. A recent report from the New America Foundation's Michael Lind includes a long argument for the superiority of the minimum wage to other means of raising wages, like the Earned Income Tax Credit.
But no one's proposal goes quite as far as that of Nick Hanauer, a venture capitalist worth hundreds of millions of dollars who's made a name for himself as an extremely wealthy critic of economic inequality. Hanauer proposes raising the minimum wage to $15, a more than doubling of the federal minimum. That's way beyond anything Obama, Miller and Harkin, or CAP is proposing. But is it a good idea?
Probably not. It's never a good sign when the argument relies on mischaracterizing evidence. Hanauer's description of the work of Council of Economic Advisers chair Alan Krueger and UC Berkeley economist David Card on the minimum wage is incomplete, to put it generously. Hanauer writes that Card and Krueger show that, "contrary to conventional economic orthodoxy, increases in the minimum wage increase employment." And it's true that in two papers from the 1990s, one on the fast food industry and the other by Card on the state-by-state effect of federal increases in the minimum wage, the team found modest increases in employment follow an hike.
But Card and Krueger's conclusion is that there's no effect, not that increases in the minimum wage increase employment as a general rule. "We believe that this research provides fairly compelling evidence that minimum-wage increases have no systematic effect on employment," they write in their 1995 book, "Myth and Measurement: The New Economics of the Minimum Wage." They also write, "On average, however, our findings suggest that employment remains unchanged, or sometimes rises slightly, as a result of increases in the minimum wage." It would be fair for Hanauer to cite the individual studies showing an increase in employment, but to characterize Krueger and Card's work on a whole as showing an increase in employment resulting from a minimum wage increase is inaccurate.
The bigger problem, though, is that there's been a lot of work on the minimum wage since Card and Krueger, much of which contradicts their findings. David Neumark at UC - Irvine and William Wascher of the Federal Reserve Board of Governors concluded in a 2007 review of the literature that a solid majority of studies find that minimum wage increases reduce employment, while very few, if any, provide convincing evidence that it increases employment.
Neumark and Wascher have recently been challenged by work from the University of Massachusetts-Amherst's Arindrajit Dube. Dube's work on this topic, done in conjunction with William Lester, Michael Reich, and Sylvia Allegretto, among others, finds no effect on employment from minimum wage increases in either direction. That finding got him called before the Senate Health, Education, Labor, and Pensions (HELP) committee by Elizabeth Warren:
And there are studies from other researchers backing up both Neumark/Wascher and Dube. A recent study from economists at the London School of Economics and the central bank of Turkey found higher minimum wages increased unemployment, while Berkeley’s Laura Giuliano found no effects, as does the Center for Economic and Policy Research's John Schmitt. It's fair to say that this is an empirical question on which labor economists are divided, though Neumark and Wascher's literature review suggests that the bulk of the research on the topic points to negative effects on employment.
Hanauer doesn't even mention Dube's work, let alone Neumark and Wascher's. He does cite an analysis from Lester, David Madland, and Nick Bunker at the Center for American Progress that analyzes 35 cases where states raised the minimum wage during a high-unemployment period, and found that in 21 (60 percent), the state in question had higher growth than the national average. But as the analysts themselves concede, that analysis "does not have the rigorous controls required of full-blown academic research." Maybe the states that raised the minimum wage were doing better anyway, and so could afford to impose more labor market regulation. It's just hard to draw any causal conclusions from that analysis.
The scale of the increase Hanauer's proposing is also remarkable. When asked what the effect of a doubling of the minimum would be, Neumark replies, "No one knows. No one could know. There's no experience with that…Anyone who says 'I have a pretty good idea what would happen' can't be on solid ground."
Interestingly enough, Dube agrees. The evidence we have on the effects of minimum wage increases, he notes, are "limited to a historical period where statutory minimum wages have ranged between roughly 35% and 50% of the national median wage." Hanauer's proposal would put the minimum wage at roughly 75 percent of the national median, which Dube notes would put it higher than any OECD country, including several European social democracies. "We just do not know what a $15/hour minimum wage would do based on the type of careful research designs that have become the hallmark of modern labor economics, and ones I strive to use in my work," Dube writes in an e-mail.
What of Hanauer's claim that a minimum wage increase would pump $450 billion into the economy, a point enthusiastically repeated by Felix Salmon? That's pretty dubious too. Daniel Aaronson and Eric French of the Chicago Federal Reserve Bank did a thoughtful analysis of this point, which Brad ably summarizes here. It's true, they note, that the minimum wage leads to more spending on the part of low-income workers. But historically that spending has come out of increased borrowing, an avenue that may not be available in the context of today's tight lending standards. Add in the potential job losses from a minimum wage increase, and you get a very mixed picture of the likely stimulative effects of an increase. Aaronson and French conclude, "We should be somewhat suspicious of claims that the minimum wage will significantly boost the economy."
Neumark's skeptical too. "The stimulus argument is silly, even putting aside those numbers. I even got Sylvia Allegretto [one of Dube's coauthors] to admit this on Bloomberg," he writes in an e-mail. "Maybe the slightest effect if minimum wage workers spend a little more of their income than those who pay the minimum wage. But it's not clear, especially if low income consumers buy the output of minimum wage workers."
Dube is doubtful of the stimulus claims as well. Thinking about an Obama or Miller-sized increase, to $9 or $10 an hour, "it's hard to get to something bigger than a few billion dollars in net stimulus," he emails. A $15 wage is historically unprecedented, he notes. "We don't know what happens to employment of low skilled workers when the minimum wage is doubled," he says. If it falls, that dilutes any stimulative impact. If employer pass along the increased wage in the form of higher prices, that means inflation, which, as Salmon notes, may be stimulative in its own right, but which dilutes the real earnings gain the minimum wage effects, and any stimulus coming out of that wage gain. "I don't see why this is a serious consideration," he says. "Economically speaking I think we have more targeted ways of providing stimulus - like give money to the unemployed."
Hanauer's piece also attacks transfer programs like the Earned Income Tax Credit (EITC), which is generally a far better targeted means of helping low-income workers than the minimum wage. Raising the minimum wage, he argues, would make "low-income families less dependent on government programs" like that. There's an argument to be made that the minimum wage is a good complement for the EITC, but an arbitrary distinction between taxing high-income individuals directly and giving the money away to low-income workers (as the EITC does), and taxing corporations indirectly and directing the money to low-income workers (as the minimum wage does), isn't it.
On this point, Neumark and Wascher found that the combination of the two policies enhances the EITC's positive effect on single women with children but creates worse outcomes for low-skilled minority men, women without children, and teenagers who the EITC currently doesn't help much. "Whether the policy combination of a high EITC and a high minimum wage is viewed as favorable or unfavorable ultimately depends on whose earnings or incomes policymakers are targeting," they conclude. If you want to help children and their parents, especially single moms, the combination is helpful, while those concerned with the fate of low-skilled minority men have good cause to oppose adding on a minimum wage hike to the EITC. If Hanauer wants to favor the interests of single moms over unskilled black and Latino men, that's his prerogative. But this has nothing to do with the odd distinction between explicit and implicit taxes he's making.
There's a case to be made that mild increases in the minimum wage are worth it, either because one doesn't believe in employment effects or because one believes the wage increases it causes are worth it. But Hanauer's proposed increase is recklessly large and even supporters of minimum wage hikes don't think it's a serious option. If he wants to help poor workers and not subsidize corporations, then he should advocate expanding the EITC and funding it with a new tax on corporations. It could be a carbon tax or a payroll tax or a cash flow tax or a profits tax or a tax on capital income - whatever. That's the efficient way to accomplish his goals. A $15 minimum wage could very well accomplish none of them.
Update: Neumark alluded to a debate on NPR that was actually on Bloomberg. The quote has been updated with a link to the interview.