The minimum wage is much less important than people think. That assertion might anger some on both ends of the political spectrum, particularly when the Minnesota Legislature is considering a minimum wage increase and Milwaukee is considering a city-mandated minimum wage because of inaction in the Wisconsin statehouse.
If one examines the U.S. minimum wage since it was instituted by the 1938 Fair Labor Standards Act, it is hard to avoid the conclusion that its positive effects are not as great as supporters assert. Nor is its downside as bad as critics claim.
Given the expectations loaded on this single policy instrument, it isn’t surprising that its real effects are less dramatic than claimed. Some advocates of a higher minimum wage argue it is an important tool for raising incomes of poor households and decreasing inequality. Moreover, they say, it counters the monopoly power of dominant employers over wage rates in regions where labor markets are far from competitive.
Many further argue that higher minimums push up wages for higher-paid workers as well, just as jacking up the bottom of a ladder would raise all the people standing on it — not just the one on the lowest rung where the jack is placed.
Critics note that economic theory demonstrates that imposing a minimum price above what market forces determine inevitably increases unemployment. The quantity of labor demanded decreases and the quantity supplied increases. More people want to work at the minimum wage than there are jobs available.
Minimum-wage critics often go a step further by pointing out that when a minimum wage causes unemployment, it usually falls heaviest on low-skilled, minority or young inner-city workers. “If you liberals are so concerned about the plight of youth,” they argue, “why do you favor something that will make it harder for them to find jobs?”
Actual experience with the minimum wage in our country shows that the hopes or fears of both groups are seldom realized.
The minimum wage has done little to alleviate poverty for the nation as a whole. In recent years, only a minority of minimum wage earners are members of households that are below the poverty line.
Most of the nation’s poorest households don’t even have anyone in the labor force. Studies of income distribution conclude that minimum-wage levels are less important than several other factors in increasing or decreasing income inequality since 1938.
Many economists who study poverty maintain that programs such as the Earned Income Tax Credit are much more effective in reducing poverty for working families than increases in the minimum wage.
But, while the minimum wage falls short of achieving the objectives envisioned by its champions, neither does it cause significant unemployment. Parsing the effects of a minimum wage out from other factors is difficult. Results do vary.
A decade ago, two Princeton University economists, David Card and Alan Krueger, studied the effects of an increase in the minimum wage on employment in fast-food businesses. Surprisingly, they found that a boost in the minimum wage actually increased employment.
This conclusion was highly controversial and other economists immediately set out to replicate the study. Some came to opposite conclusions: Higher minimum wages did, in fact, increase unemployment. Each side of the debate made heated statements about the other side’s competence.
Looking at this mass of studies, it is clear that while one side sees pluses and the other minuses, in most cases the size of the effect claimed was very small relative to overall employment and unemployment.
One reason that identifying minimum wage effects is so difficult is that the United States does not have just one “labor market.” Rather, there are many different markets separated by geographic region, occupation and skill level.
A minimum wage well above the levels that markets would determine in poverty-stricken areas such as rural Mississippi is well below what the market-bearing wage would be in Manhattan.
The market for inexperienced teenage workers in fast-food joints is different from that for skilled wait staff in nicer restaurants. Yet both groups might nominally earn the minimum wage. Labor markets in Minneapolis-St. Paul are competitive, but a large employer in towns the size of Pipestone or Pelican Rapids might have some monopoly power to skew local wage rates. A nationally uniform minimum wage is a very blunt instrument.
Students in Econ 101 learn that a price floor at or below the market-equilibrium level is largely irrelevant. Some observers argue that in many periods, the national minimum wage is pretty close to what the average market-determined wage would be for such jobs.
The federal minimum’s buying power rose fitfully from the Roosevelt to Kennedy administrations and stayed roughly constant through the Johnson, Nixon, Ford and Carter administrations. Since the election of Ronald Reagan, it has declined by roughly a third. Thirteen states have minimums above the federal level.
Would a moderate increase harm the economy or increase unemployment? Probably not much, if at all. Would it do much to alleviate poverty? Probably not much either.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.