February 17, 2013
Let’s Try a $25 Minimum Wage
Among President Obama's recommendations in the State of the Union address to Congress was an increase in the federal minimum wage from its current $7.25 to $9.00 an hour. This is not the first time he has done so. In 2008, Senator Obama called for the minimum wage to rise to $9.50. Now, I am uncertain just what has transpired over the past five years to lead him to lower his target, so I'll just mark it up to bad memory. Still, thinking about the economics of the matter is useful.
As the president noted, no one should doubt that raising a family while earning the minimum wage is a hard business; perhaps that is why almost nobody does it. In fact, only about 1.0 percent of adult workers actually earn the minimum wage (another 1.0 percent or so are wait staff earning tips). Indeed, for every one minimum wage adult worker, ten work in the shadow economy, outside the view of tax collectors.
As difficult as it may be for many folks to understand, labor markets are subject to the laws of supply and demand. The inability to find a job above the minimum wage means that the market does not value your skills at that level. For an adult worker, this is a damning market assessment of one’s labor value. Still nearly 8 million Americans have fallen into this category since Mr. Obama proposed a $9.50 minimum wage. To be sure, labor markets are imperfect, but minimum wage laws do nothing to improve them.
Research on the matter is not clear and for very good reasons. While the federal laws treat all labor markets alike, they are not. The market wage for an unskilled worker is a lot lower in Hartford City or Cannelton than it is in Manhattan or San Francisco. So, a minimum wage increase might have devastating employment effects in some places and go unnoticed in others. The research I have done suggests it is primarily young workers who lose jobs when the minimum wage increases, but it is a far from settled matter. Obama's chief economist has published some of the most interesting and controversial work in this area, including the only empirical study that suggests employment increases (in a study of the Philadelphia area). There are too many studies that conclude otherwise to review here.
Mostly the minimum wage debate is political kabuki theater. It is a way to pretend to help the poor without having to face the actual problems of failing schools and failing families, which would upset all sorts of political donors.
Perhaps we don't need to heed economists on the matter. Instead we could simply try a policy experiment. In lieu of the $9.00 minimum wage Obama wants, we should require all businesses to pay $25.00 an hour to all employees. If the president is right, that should end poverty. If he is not, we can focus on real issues slowing our economy and hurting the poor.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
Big Savings for Ending Prevailing WageMy statistical models show that repealing state prevailing wage laws save taxpayers money.
Re-Thinking Economic Development A large share of the most mobile families—perhaps half—no longer need to live near where they work.
Money Illusion and InflationPrice fluctuation could cause inflation to last longer, but it didn’t cause the inflation, it simply extends the pain.View archives