Raise the Minimum Wage in 2014!

Minimum Wage

by Anders Fremstad

Today’s federal minimum wage is a poverty wage.  At $7.25 an hour, full-time workers earn just $14,500 a year, leaving single parents below the poverty line.  This might explain why Americans overwhelmingly support raising the minimum wage.  Gallop polling shows that in November 76% of Americans wanted to increase the federal minimum wage to $9, up from 71% in March.  And Hart Research polling finds that 80% of Americans support raising the wage to $10.10 per hour and indexing it to the cost of living.

The main argument against increasing the minimum wage – or, for that matter, having a minimum wage – comes from neoclassical economic theory.  Setting the minimum wage above the market equilibrium wage reduces the number of workers that firms can (profitably) employ.  The implication of the neoclassical theory is that, while a higher minimum wage will help some low-wage workers, it will cause others to lose their jobs.

History does not provide much support for the theory that higher minimum wages lead to reduced employment.  In 1960 the minimum wage was $1 an hour, which is equivalent to $7.87 in today’s dollars.  Although firms had to pay workers a higher real wage then, unemployment was lower in 1960 than it is today.  If the US economy could handle a $1 minimum wage in 1960, what could it handle today?  If the minimum wage had increased along with the median wage for full-time workers, it would be $9.20.  If the minimum wage had increased with the incomes of the top 1%,it would be $22.62.

Most economists are unconvinced this sort of historical evidence.  And it is possible that the market for low-wage workers has fundamentally changed over the last fifty years, so that raising the minimum wage above $7.25 might reduce employment in 2014 even if it did not in 1960.  Most economic research on the subject analyzes what happened to employment in states that did and did not mandate higher minimum wages than the federal minimum wage over the last two decades.  Economists on both sides of the debate focus on two groups of workers that are particularly likely to lose their jobs: teens and restaurant workers.  But even among these groups, raising the minimum wage barely impacts employment.  Neumark, Salas, and Wascher, who generally oppose raising minimum wage, conclude in a January 2013NBER paper that a 10% increase in a state’s minimum wage reduces teen employment by almost 3% and restaurant employment by 0.5%.  Allegretto, Dube, Reich, and Zipperer criticize Neumark et al’s methods and results in a September 2013IZA paper.  Using four datasets and three methods of estimating the effect of minimum wage hikes, Allegretto et al. find no evidence that a 10% increase in the minimum wage reduces the employment of teens or restaurant workers by more than 1%, and they find some evidence that it has no impact on employment.

Even Neumark et al.’s estimates do not provide much of an argument against raising the minimum wage.  A higher minimum wage may reduce teen employment.  However, it is not clear how bad this is for teens, who need a good education to ensure decent employment in the long run.  And since teens now make up less than a quarter of minimum wage workers, it is difficult to justify keeping the wages of adults low to prevent minor job losses among 16-19 year olds.  When it comes to restaurant workers, even Neumark et al. conclude that increasing the minimum wage by 10% reduces employment by just 0.5%.  The benefit of providing a substantial raise to the 99.5% of restaurant workers clearly outweighs the cost of having 0.5% of restaurant workers search for employment elsewhere.  Of course, if Allegretto et al.’s smaller estimates are correct, the case for raising the minimum wage is even stronger.

Although economists havehistorically opposed increases in the minimum wage, they have recently changed their minds in light of this evidence that the minimum wage has little or no impact on employment.  A February 2013poll of influential economists finds that 47% agree that it would be desirable to increase the federal minimum wage to $9 an hour and index it to inflation, while only 11% of economists disagree, and 32% remain uncertain.  Of those who have an opinion, 81% of influential economists approve of raising the minimum wage to $9 an hour, which is similar to the level of support among the general public.

Of course, the fact that raising the minimum wage is good for workers and has popular support does not guarantee it will occur.  However, activists are pushing politicians to give minimum-wage workers a raise, and they have hadsome real victories at the state and local level.  New Jersey voters just raised the state’s minimum wage to $8.25.  California will raise its minimum wage to $9 on July 1st and to $10 in 2016.  Following a popular campaign to raise workers wages in Washington DC, the city council partnered with neighboring counties to increase local minimum wages each year starting with $8.40 in October this year and getting to $11.50 in October 2017.  Voters in SeaTac, Washington elected to increase the minimum wage to $15 on January 1st.  Since then, a judge ruled with Alaska Airlines and the Washington Restaurant Association that the law does not affect workers at the Seattle-Tacoma International Airport, but supporters of the law are appealing that decision.  The fight is spreading to Seattle, where Mayor Ed Murray has promised a $15 minimum wage by the end of his term, but the newly-elected City Councilmember (andpopular economist) Kshama Sawant has pledged to work for a $15 wagethis year.  Meanwhile, pressure is building on Congress to act.  Representative George Miller ispushing a bill to increase the federal minimum wage to $10.10 in 2015 and index it to the cost of living, and the bill is becoming central to Democratic strategy in 2014.

Increasing the minimum wage will not magically rollback decades of rising inequality, but it may be the best way to improve the lives of workers this year.  It is good economics and it has popular support.  We need to keep the pressure on politicians to give minimum wage workers a raise in 2014.