Overcoming the Shallow Minimum-Wage Debate

20 Apr 2016 2:04 PM | Mike Lillich (Administrator)

By Oren Levin-Waldman

First published online in the Yonkers Tribune.

As more and more states pass legislation raising their minimum wages to $15.00 an hour, one might think that we will see greater pressure on the federal government to follow suit. And yet, what we are more likely to see is a rehash of the same debate that has unfortunately gotten us nowhere. Those on the right will no doubt claim that increasing the minimum wage will harm low skilled workers as employment opportunities for them will be diminished. And those on the left will harp on the necessity of raising the minimum wage in order to help the working poor.

It is true that the competitive market model predicts adverse employment consequences due to an increase in the minimum wage. Actually, the model says that either there will be lower employment or productivity will increase. Productivity will either increase because employers invest in their workers’ human capital, in which case they will be more productive or employers will substitute more technology for workers. The problem with this model is that it is nothing more than a theoretical construct with inconclusive data to back it up.

Consider that from 1981 when the Federal Minimum Wage Study Commission released its report until about 2000 that there was a consensus that a 10 percent increase in the minimum wage would result in a 1-3 percent reduction in employment among teenagers. But the same report also noted that the employment consequences would be considerably less among adults. Since 2000 numerous studies have shown that minimum wage increases affect different groups in the labor market differently.

What the current data demonstrates is that the minimum wage debate is anything but settled. At best the data is ambiguous, which should pave the way for policy experimentation. In a book titled What Does the Minimum Wage Do? economists Dale Belman and Paul Wolfson did a meta-analysis of the studies on the minimum wage and concluded that there was no basis to conclude that the minimum wage had adverse employment consequences. On the contrary, on the whole, the benefits of the minimum wage were most likely greater than the costs.

This does not mean that there isn’t a tipping point — a point beyond which we would see employment consequences — only that we don’t know what that tipping point is. A couple of years ago the median hourly wage for full time workers was about $14.90 an hour based on data from the Current Population Survey (CPS). It may be closer to $16.90 now. If we assume that the tipping point is between those two points, then a $15.00 an hour minimum is below that point and there should be no adverse employment effects.

Still, the political right is strident in the claim that these increases will cost jobs. But what exactly does that mean? Will jobs be less because employers fire workers to compensate for higher labor costs? Or will fewer low-wage jobs be created in the future? The two are not the same. Of course, a higher minimum wage that attracts people into the labor market could result in lower employment because there would then be more workers chasing after the same number of jobs.

For the business community, the issue is the shock of raising the minimum wage to even $10.00 in the first year, let alone $15.00 by 2020. But perhaps the real issue is that economic models, far from being self-evident truths, are merely bases upon which different groups can cloak their self-interest and effectively make political arguments. Each group in the minimum wage debate will use the model, as well as rely on the data, that best supports its respective interests. But at least the political right appeals to a model.

The political left doesn’t so much reject the model of competitive markets, as it says so what? To them, the model is irrelevant. All that matters is that businesses are profiting off the backs of their workers and the current minimum wage of $7.25 is insufficient to support themselves, let alone their families. It is a matter of fairness: people who work full time should earn a liveable wage. Of course, they aren’t completely wrong, but the argument has limited political appeal. Rather than arguing for the minimum wage on the basis of class warfare, why not argue that there are indeed positive welfare effects?

In other words, if minimum wage supporters would couch their arguments in the language of economics and demonstrate that there will be benefits for the middle class, they would actually succeed in the art of triangulation, which President Bill Clinton perfected so well. And that was coopting the opposition. Here is the argument that supporters of the minimum wage should be making, but are not: The minimum wage should be raised because as the statutory wage increases, so too will the wages of those workers earning in wage ranges above. This will have spillover effects, which will work their way up the income distribution.

As wages increase, the wage stagnation that the country has witnessed for the last four decades will be arrested. Moreover, as wages rise through the distribution, workers will have greater purchasing power and the demand for aggregate goods and services will increase, thereby leading to more job creation. Even if we focus on the old arguments for the minimum wage and accept that there may even be some job loss in the short-term, it is well accepted that in the long-term more spending in the economy due to greater purchasing power will lead to macroeconomic benefits. Lastly, an increase in the minimum wage will narrow the gap between the top and the bottom, thereby resulting in slightly lower wage inequality.

The minimum wage is important because it speaks to the importance of labor market institutions that serve to bolster wages, and the main reason wages have been stagnant is because these institutions have been in decline. Those who oppose the minimum wage will continue to cloak their selfish interests in the language of the competitive market model claiming to speak the larger public interest of saving jobs for low-wage workers.

The real public interest lies in rising wages, and jobs that allow for people to live independent lives and not need to rely on the government for subsidies and other handouts. The argument of the political left for a $15.00 an hour minimum would also be stronger if it called attention to the $152.8 billion the nation spends on subsidies for low wage workers, and that $15.00 an hour is the point where we would see less of a need for those subsidies. The political right always speaks the language of personal responsibility and self-sufficiency. Here might be an opportunity for the left to actually speak the same language.

Just published: Wage Policy, Income Distribution, and Democratic Theory:



Oren M. Levin-Waldman, Ph.D., is professor at the Graduate School for Public Affairs and Administration at Metropolitan College of New York, Research Scholar at the Binzagr Institute for Sustainable Prosperity, as well as part-time faculty member in the Milano School for International Affairs, Management, and Urban Policy at the New School. Direct email to: olevin-waldman@metropolitan.edu

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