The Real Cost of Doubling the Minimum Wage
The New York Times’ editorial board recently added its voice to the chorus of calls for a $15 per hour federal minimum wage. The justifications include a grab-bag of unsupported claims including the notion that companies can simply pass along higher labor costs through prices—ignoring the effects that higher prices have on consumer purchases, which would then reduce the demand for the labor that produces those goods and services. The editorial also dismisses the possibility of firms substituting capital for labor through automation, ignoring the growing evidence that minimum wage increases lead to exactly such decisions.
But more importantly, the editorial relies on a highly selective reading of the research. It begins by citing a famous but small-sample study by David Card and Alan Krueger that found no increase in unemployment from a well-anticipated increase in the minimum wage in one state. That paper was challenged shortly after its publication nearly three decades ago, with numerous prominent economists pointing out serious shortcomings. Its results are still at odds with much of the mainstream literature. The editorial also cites a more recent paper comparing counties on either side of the Pennsylvania–New York border. These types of border–county designs have been shown to be problematic because of workers’ ability to relocate their place of work without moving from their home address, and because of spillover effects that affect economic conditions in the allegedly unaffected areas. The comparison, therefore, does not offer the necessary evidence to measure the impact of the minimum wage.
The truth is that the literature is far less sanguine on the effects of the minimum wage. The types of minimum wage increases seen until recently were relatively small and phased in over several years. Their effects were unlikely to be seen in the data using the models favored by most researchers in this earlier era—not because they weren’t there, but because the models themselves were ill-suited to the task. As an analogy, imagine measuring the water level in a pool—employment—using a yardstick. Then throw a brick in the water—the minimum wage increase—and measure the level again. The yardstick is imprecise, the brick is small relative to the size of the pool, and the water is sloshing around. Perhaps the measured level is lower, perhaps it’s higher. Throw in another brick and measure again, comparing with the water-level measurement after the first brick, not the original water level. Again, the difference may be small—possibly even in the “wrong” direction. Continue throwing in bricks and measuring the level, comparing that measurement only with that after the previous brick. In essence, that’s how the models used in much of the literature that failed to find disemployment effects worked. There’s never much of an impact from each individual, small brick, and so one might conclude, like that previous research, that water is not displaced by bricks and, therefore, a massive $15 per hour boulder won’t make a splash.
What’s more, the Times’ editorial ignores the best piece of evidence on very high minimum wages: the work of the Seattle Minimum Wage Project. Seattle increased its minimum wage to $15 (and beyond). Even though the city’s economy was booming and the surrounding areas were not particularly low-wage themselves, these researchers showed that low-skill workers lost work, especially those with less experience. A thorough literature review by economist Jeffrey Clemens showed that much of the research on this topic finds negative impacts on aspects of employment beyond just the existence of work, including benefits and the nature of the job itself.
Further, such high wages are likely to lead to rampant noncompliance. Recent research by Clemens and Michael Strain has shown that the new wave of high minimum wages has led to an increase in evasion. On the one hand, this mitigates the negative employment effects, but it is worrisome because pushing those marginal workers out of the legal workforce strips them of important legal protections. They are also ineligible for unemployment insurance and social security, potentially leading to precarious situations if times turn sour.
After all its cheerleading, the Times’ editorial does sound a note of caution, recognizing that a $15 per hour minimum wage would be astronomically high in some areas. In 2018, 19 states had median wages for hourly workers at or below $15 per hour, and the rural areas of many high-wage states like California and New York have similarly low wage rates. A minimum wage that impacts half or more of the workforce is beyond unprecedented, even in countries with comparatively high minimum wages. Even applying the equivalent of France’s minimum wage—about 60 percent of the median—to those areas would set it at well below that level. When it comes to labor market policy, France, with its high unemployment rates, is hardly the country to emulate.
The Times’ solution is to include exemptions for lower-wage areas, giving lie to the notion of a federal wage increase. After arguing that opponents of the minimum wage are “never entirely sincere” and that the evidence suggests negligible impacts from higher minimum wages, it immediately turns to concerns about … reduced employment in the very places in which, according to the Times, “millions of workers are being left behind.” This admission is disingenuous. It reveals the editorial as hollow, its authors showing a callous willingness to experiment on the working lives of the economically vulnerable, even as they acknowledge the very real potential for negative impacts on employment.
Contrary to the claims of the Times’ editorial board, the minimum wage remains a well-intentioned but wrong-headed policy for the very real problems of poverty and economic mobility. We are in an era of nearly unparalleled economic expansion. The Times notes that “job growth remains strong,” implicitly taking this as evidence that an unprecedented and staggeringly large increase in the minimum wage would not harm economic activity. This growth has certainly allowed firms to absorb the costs of labor market regulations, which are by no means limited to higher minimum wages. But if and when the economy slows, firms will have few levers to offset lost revenues other than layoffs. And while the sorts of jobs that pay the minimum wage are rarely pleasant, being employed is far more preferable to being unemployed—or, worse, unemployable at prevailing rates.
Jonathan Meer is a professor of economics at Texas A&M University, where he is also the Private Enterprise Research Center Professor and a research associate of the National Bureau of Economic Research.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.
Photo by Joe Raedle/Getty Images