Mutant Supermodel asks:
what do economists think about raising the minimum wage? Is there a general consensus either way or is it as mixed up as it is on my Facebook feed?
#1 is not the economist but I’ll say that I support it right now, within reason. What does #2 say?
Ok, the short of it is: Economists are still divided on the topic of whether or not, and at what point, raising minimum wages decreases jobs or job growth.
Basic econ 101 theory says that if you raise the minimum wage, creating a wage floor, in a perfectly competitive market, then employment will go down because all the people who would have gotten jobs at lower wages will no longer get jobs. (This is usually taught in the same chapter as why rent control is bad.)
That’s basic economic theory in a perfectly competitive market. Market intervention hurts jobs.
HOWEVER, we don’t live in a textbook world. So this is an empirical question. And there are literally hundreds of papers exploring the effect of minimum wage increases in a non-experimental framework. They find mixed results based on functional form.
The first major natural experiment on this topic is one by David Card and Alan Kruger. They look at the effect of a minimum wage increase on employment of fast food workers at border counties in Pennsylvania and New Jersey. They find that employment doesn’t change or actually *increases* in the state where the minimum wage goes up. It doesn’t seem to be decreasing employment at all.
There are a number of potential explanations. One that I’ve always liked (for its simplicity), but many prominent economists don’t share my like of is the thought that these fast food markets have monopsony power– which is like monopoly power, but what you have when you’re the only employer (or one of the only employers). When employers have this kind of labor market power, they can keep wages artificially low because they can say either you work for us or you get nothing, because there’s no competitor to say you can work for me and I’ll give you a penny more (thus bidding up wages). (You don’t need just one employer for there to be some monopsony power– just a small number of employers if they’re willing to collude, or for there to be other frictions in the labor market.) When this happens, increasing the minimum wage would just reduce profits but wouldn’t negatively affect employment.
David Neumark is the big anti-Card and Kruger guy. His work with coauthors argues that Card and Kruger’s survey data are inaccurate and that employment goes down based on administrative data. Card and Kruger disagree. There was some back and forth. Cambridge-school economists tend to believe Card and Kruger. Chicago-school economists tend to believe Neumark and Wascher.
More recently there’s been some work that reconciles all of the findings, suggesting that minimum wage increases don’t actually have a lot of effect in the short run. People don’t get fired because the minimum wage increases, because firing people is bad for company morale (among other things). HOWEVER, this newer work suggests that the minimum wage does depress job growth in the long-run. As people leave (as they often do in minimum wage jobs), they’re not replaced one-for-one. There may also be an effect on overall growth by industry (with firms that can only afford minimum wage workers shrinking or going out of business), which would further disguise any negative effect on employment.
What’s the bottom-line? Economists don’t know. Most, if not all, economists will agree that there’s some point at which the minimum wage really does decrease employment rates. (If minimum wage were $100/hr, most of us would stop sending our kids to daycare and fast food workers would be replaced entirely by machines.) Many economists will also point out that, historically, real minimum wages have been much higher, particularly at times of economic growth (correlation not being causation, but slyly winking and nudging that direction), and some will even note that we’re subsidizing companies that don’t offer a minimum wage with foodstamps and other benefits. Without those government subsidies, companies might be forced to offer living wages.
Personally, I think the minimum wage should be raised right now. However, I’m not sure that it should be raised as much as some people are suggesting, particularly in some parts of the country where living costs tend to be lower. (Just as a sniff test, I’m willing to hire people at $10/hr for standard minimum wage jobs that I’m not willing to hire at $12.50/hr– I’ll just do it myself at that price unless I already know the person is exceptionally competent.) And then there’s all those exceptions to think about… should teenage wages be lower (and what does that do to adult unemployment?)? Waitstaff positions? And so on. It’s a very complicated question full of many moving parts, and if economists can’t even agree on the direction, it’s hard to know what the magnitude is!