Among non-economists and politicians, the minimum wage is one of the most misunderstood issues in economic policy. President Biden and almost all Democrats and some Republicans in the US Congress advocate increasing the federal minimum wage from its current level of $7.25 an hour to $15 an hour over four years. They argue that many of the workers earning between $7.25 and $15 will get a raise in hourly wage. That’s true. But what they don’t tell you, and what many of them probably don’t know, is that many workers in that wage range will suffer a huge drop in wages—from whatever they’re earning down to zero. Other low-wage workers will stay employed but will work fewer hours a week. Many low-wage workers will find that their non-wage benefits will fall and that employers will work them harder. Why all those effects? Because an increase in the minimum wage doesn’t magically make workers more productive. A minimum wage of $15 an hour will exceed the productivity of many low-wage workers.
This is from David R. Henderson, “The Opportunity-Killing Minimum Wage,” Defining Ideas, February 18, 2021.
Another excerpt:
Employers don’t hire workers as a favor. Instead, employers hire workers to make money. They hire people only if the wage and other components of compensation they pay are less than or equal to the value of the worker’s productivity. If an employer pays $10 an hour to someone whose productivity is $15 an hour, that situation won’t last long. A competing employer will offer, say $12 an hour to lure the worker away from his current job. And then another employer will compete by offering $13 an hour. Competition among employers, not government wage-setting, is what protects workers from exploitation.
We all understand that fact when we see discussions on ESPN about why one football player makes $20 million a year and another makes “only” $10 million a year. Everyone recognizes the twin facts of player productivity and competition among NFL teams. The same principles, but with much lower wages, apply to competition among employers for relatively low-skilled employees.
Also, see how I discuss the last 28 years of literature on the minimum wage.
And finally:
The University of Chicago’s Booth School has an Initiative on Global Markets (IGM) that occasionally surveys US economists on policy issues. Possibly because of the surveyors’ understanding that the $15 minimum wage would hurt some states more than others, the IGM recently made the following statement and asked forty-three economists to agree or disagree: “A federal minimum wage of $15 per hour would lower employment for low-wage workers in many states.” Unfortunately, the question did not specify what is meant by “many.” Is it ten, twenty, thirty? Some economists surveyed pointed out that ambiguity. That ambiguity could explain why a number of the economists answered that they were uncertain. But of those who agreed or disagreed, nineteen agreed that it would cause job loss in many states and only six disagreed.
One economist who disagreed, Richard Thaler of the University of Chicago, gave as his explanation this sentence: “The literature suggests minimal effects on employment.” No, it doesn’t. As noted earlier, the federal government has never tried to raise the minimum wage by such a large amount and so there is no scholarly literature on such an increase. Would Thaler say that if putting a cat in the oven at a temperature of 72.5 degrees Fahrenheit doesn’t hurt the cat, then putting a cat in the oven at 150 degrees wouldn’t hurt the cat either?
Read the whole thing.
READER COMMENTS
KevinDC
Feb 19 2021 at 2:23pm
I like the precise wording here by using the term “less employment.” One thing I’ve tried explaining to people is that is possible for increases in the minimum wage to decrease employment without increasing unemployment, because economists are bad at naming things in a way that make intuitive sense to people outside the field. (“Public goods? Obviously that means goods provided by the public sector, right?” “Market failure? That’s whenever I personally don’t like a market outcome, isn’t it?”) So, even in the case where particular study doesn’t find increased unemployment after a minimum wage hike, that doesn’t actually mean that the increase in the minimum wage didn’t decrease employment.
This is a very important point, and it also shows a disconnect between what even pro-minimum wage research supports and what activists invoke. It’s like a bizarre game of telephone, where an academic economist starts off making a very measured statement like “It seems unlikely that modest increases in the minimum wage will produce large disemployment effects” and the version that percolates out of the other end at the political rally is “Raising the minimum wages doesn’t cost any jobs so lets double it nationwide!”
Also true and important. I remember reading an interview with some restaurant workers in Seattle as wages were being pushed up there a few years back. The story pointed out that the workers were now making $15 an hour but lost out on several perks of employment, like having their employer pay for their parking fees downtown and free meals. In addition, since people knew of the wage increase, tips had plummeted – all of this combined resulted in these employees making less after the wage increase than they did before.
Dennis H
Feb 19 2021 at 2:58pm
“In the workplace as in the rest of the world, there’s no free lunch.” That sentence alone summarizes many a liberal’s economic thought. They seem willing to propose any idea like an increased minimum wage because there’s a “free lunch” to be had somewhere, somehow. Instead, many people who should, in theory, benefit from an increased minimum wage lose out in terms of money and/or jobs lost.
John hare
Feb 19 2021 at 3:10pm
I think the major underlying problem is that so many people think businesses have a magic pot of money that never runs out. The only reason they don’t pay a “living” way is because they are greedy. Given that type of underlying belief, they will never allow themselves to understand the problems.
Tom Means
Feb 19 2021 at 5:19pm
There are already $15 minimum wages in many cities in California. Most of them are non-binding. Take my former hometown of Mountain View. A few years ago they have raised their MW to $15. At the time the local Walmart and In & Out Burger were paying starting wages of $16/hr for entry level employees. There may be little or no impact from cities in Hi-tech urban areas. However, the impact of a federal minimum wage will have a huge impact in CA cities located in the valley and mountain areas. Similarly for states in the middle of the country. My guess is that there are politicians ( both democrats and repubs) that represent lower wage areas that will object to such a large increase in the federal rate.
Matthias
Feb 20 2021 at 12:28am
I don’t think you even need economics to argue against a federal minimum wage.
Even if a minimum wage was a good idea, it’s just not something that benefits from being set at the federal level. States or even counties and cities can handle that.
Minimum wage is not like national defense.
Andrew_FL
Feb 20 2021 at 2:40am
I used to think that people did not *know* that there would be dis-employment effects from raising the minimum wage. These days it is popular to deny such effects exist. However, I believe the truth is that most proponents of increasing the minimum wage don’t care if it does or does not decrease employment. They simply find the very existence of jobs paying below a certain wage rate aesthetically distasteful. So, in their view, if it doesn’t decrease employment, everything’s good, but if it does, well, better that anyone who can’t find employment at that wage rate be a ward of the state than employed in such an aesthetically displeasing job.
Jairaj Devadiga
Feb 20 2021 at 3:05am
Great article, David, as always. I just have one minor disagreement.
You write:
But what they [politicians] don’t tell you, and what many of them probably don’t know, is that many workers in that wage range will suffer a huge drop in wages—from whatever they’re earning down to zero.
They do know. This is exactly why Republicans mostly support hiking minimum salaries for workers arriving on H1-B visas, while many Democrats oppose it saying it will hurt immigrant workers.
Below is a link to one of my old pieces on the subject.
https://fee.org/articles/politicians-are-well-aware-of-the-harms-of-the-minimum-wage/
Thomas Hutcheson
Feb 20 2021 at 7:39am
What opponents of higher minimum age “don’t tell you” is that the decline in employment hours and or fewer “benefits” is much smaller than the increasing the wage rate, so total income of affected workers will rise. Nor do “tell you” [I will not accuse them of not knowing] is that the decline in hors and loss of benefits could be avoided if we raised workers’ incomes with a higher EITC instead of a higher minimum wage.
john hare
Feb 20 2021 at 2:34pm
The problem being that minimum wage is seen as free to the taxpayer and the EITC is a cost to the taxpayer. The EITC would be better in the long run if managed well. The two main problems are that it would be yet another federal expense in a massive deficit era. And managed well, seriously???
Thomas Hutcheson
Feb 21 2021 at 5:47am
I get the tax argument. I think the difficulty of carrying out lower cost but higher fiscal cost policies is one of our on-going policy dilemmas. But for completeness I’ll say that MW opponents “do not tell you” that we need to raise (preferably progressive consumption) taxes enough to achieve an optimum full employment deficit.
Laron
Feb 22 2021 at 2:44pm
But that fits into the MW story that Henderson’s telling. I’ve never seen a MW-opposing-economist disagree that, in aggregate, the workers that keep their jobs will see an increase in incomes and will probably be pretty happy about it. Still seems pretty callous to then tell every other worker that sees unemployment, fewer job openings, fewer hours, less flexibility/benefits/breaks/etc. that they’re sacrificing for the folks that are now happy with their situation. Especially when considering the longer term negative impact that this can have on future employment prospects.
It’s striking how definitively you state that the decline in hours/benefits is much smaller than the increase in wages. Given the state of this research, it really doesn’t seem like many concrete statements can be made either for or against, and I really doubt that anyone has calculated the hours/benefits lost and compared it to the sum of increased wages in a settled definitive fashion.
Not sure who you’ve been following, but in my experience most opponents of the MW actually do point to the EITC as a better alternative. So opponents do tell you that, but I guess it depends on who’s in your reading circle.
Comments are closed.