We’re now engaged in another divisive debate over the minimum wage and its offspring, the “living wage.” We’ve been here before, because both sides seem to have strong arguments. On the one hand, raising wages by government fiat seems a job-killer. Economics 101 teaches us that if you increase the price of something — including labor — people will buy less of it. On the other hand, guaranteeing that full-time work protects against poverty seems a decent standard. The present federal minimum ($7.25 an hour) doesn’t do this. At 40 hours a week, it amounts to $15,080 a year; that’s above the government’s poverty-line for a single person ($11,702 in 2011) but not for a family of four ($22,811).
To make sense of this debate, you need to know three things.
First, whatever else it is, a higher mandated wage is not a plausible solution for poverty — at least not as defined by government. The reason: Most of the poor don’t have jobs, and even those who do typically don’t work full time. In 2011, 46.2 million people were below the government’s poverty line. Of these, 26.5 million were of working age (18 to 64), but fewer than 40 percent worked at all and only 10 percent had full-time, year-round jobs.
Second, all low-wage workers aren’t poor. “There’s a big distinction between low-wage workers and low-income families,” says economist David Neumark of the University of California at Irvine. About a third of minimum-wage workers, he says, come from families in the top half of the income distribution, with annual incomes of $50,000 or more. These may be teens or spouses who are a family’s second or third earner. This means that gains from mandated wage increases don’t go exclusively to the poor and low-skilled.
Third, economists disagree whether past increases in the minimum wage destroyed jobs. One group of studies finds little or no effect; these studies usually compare employment levels in states that have raised their minimums above the federal level with nearby states that haven’t changed their minimums. Without job loss, it’s a no-brainer to raise the minimum, argue Sylvia Allegretto and Steven Pitts in a paper for the Economic Policy Institute, a left-leaning think tank. Adjusted for inflation, it’s now 23 percent lower than in 1968, they say. By contrast, Neumark and others find that minimum-wage increases have reduced employment. Every 10 percent increase may cut teen jobs by 1.5 percent; a 30 percent wage increase implies job reductions of almost 5 percent. A higher minimum involves a “trade-off of higher wages for some against job losses for others,” says Neumark.
Where do I come out? Somewhere in the muddled middle.
The federal minimum has more political symbolism than economic significance. Originally instituted in 1938 at 25 cents an hour, the rate has been lifted intermittently, usually after a period when inflation and an expanding economy have eroded its importance. It’s the modest nature of the increases that explains their small impact on jobs, which is what all the studies show. In 2012, the minimum affected only 4.7 percent of hourly paid workers, down from 6.7 percent in 1997.
The Obama administration proposes raising the minimum in stages to $9 by the end of 2015. That’s 24 percent since the last increase in 2009. I doubt its impact, for good or ill, would be large. Some workers might lose jobs, but the greater purchasing power of those who received wage increases might more than offset the losses of the added unemployed.
But large, abrupt increases in the minimum would almost certainly kill lots of jobs. That’s the danger of “living wage” proposals, which often involve steep increases. Striking fast-food workers want $15 an hour. In Washington, the D.C. Council has passed legislation (the mayor must still approve or veto it) that would require Wal-Mart to pay $12.50 an hour, roughly 50 percent higher than the city’s existing minimum, $8.25. Wal-Mart has plans for five stores in the city, with three under construction. If the law takes effect, the company says it will cancel the others.
Here’s the larger issue.
In the short run, even sizable increases in mandated wages may have moderate effects on employment, because businesses won’t abandon their investments in existing operations. But companies that think themselves condemned to losses or meager profits won’t expand. Not surprisingly, a study by two economists at Texas A&M finds that the minimum wage’s biggest adverse effects are on future job growth, not current employment. To this defect must be added another: An excessively high minimum will attract more skilled workers, denying the less skilled an entry point to work and on-the-job training.
The minimum wage seems a shortcut to social justice. It isn’t.
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