During most of the 20th century, wages in the United States were set
not just by employers but by a mix of market and institutional
mechanisms. Supply and demand were important factors; collective
bargaining and minimum wage laws also played a key role. Under
Presidents Franklin D. Roosevelt and Richard M. Nixon, we even
implemented more direct forms of wage controls.
These direct interventions, however, were temporary, and unions have
become rare in most parts of the United States — virtually disappearing
from the private sector. This leaves minimum wage policies as one of the
few institutional levers for setting a wage standard. But while we can
set a wage floor using policy, should we? Or should we leave it to the
market and deal with any adverse consequences, like poverty and
inequality, using other policies, like tax credits and transfers? These
longstanding questions take on a particular urgency as wage inequality
continues to grow, and as we consider specific proposals to raise the
federal minimum wage — currently near a record low — and to index future
increases to the cost of living.
The idea of fairness has been at the heart of wage standards since
their inception. This is evident in the very name of the legislation
that established the minimum wage in 1938, the Fair Labor Standards Act.
When Roosevelt sent the bill to Congress, he sent along a message
declaring that America should be able to provide its working men and
women “a fair day’s pay for a fair day’s work.” And he tapped into a
popular sentiment years earlier when he declared, “No business which
depends for existence on paying less than living wages to its workers
has any right to continue in this country.”
This type of concern for fairness actually runs deep in the human psyche. There is a widespread
sense
that it is unfair of employers to take advantage of workers who may
have little recourse but to work at very low wages. For example, the
economists
Colin F. Camerer and
Ernst Fehr
have documented in numerous experimental studies that the preference
for fairness in transactions is strong: individuals are often willing to
sacrifice their own payoffs to punish those who are seen as acting
unfairly, and such punishments activate reward-related
neural circuits. People also strongly support
banning transactions they see as exploitative of others — even if they think such a ban would entail some economic costs.
Of course, if most minimum wage workers were middle-class teenagers,
many of us might shrug off concerns about their wages, since they are
taken care of in other ways. But in reality, the low-wage work force has
become older and more educated over time. In
1979,
among low-wage workers earning no more than $10 an hour (adjusted for
inflation), 26 percent were teenagers between 16 and 19, and 25 percent
had at least some college experience. By 2011, the teenage composition
had fallen to 12 percent, while over 43 percent of low-wage workers had
spent at least some time in college. Even among those earning no more
than the federal minimum wage of $7.25 in 2011, less than a
quarter were teenagers.
Support for increasing the minimum wage stretches across the
political spectrum. As Larry M. Bartels, a political scientist at
Vanderbilt, shows in his book “
Unequal Democracy,”
support in surveys for increasing the minimum wage averaged between 60
and 70 percent between 1965 and 1975. As the minimum wage eroded
relative to other wages and the cost of living, and inequality soared,
Mr. Bartels found that the level of support rose to about 80 percent. He
also demonstrates that reminding the respondents about possible
negative consequences like job losses or price increases does not
substantially diminish their support.
These patterns show up in recent survey data as well, as over
three-quarters of Americans, including a solid majority of Republicans,
say they support raising the minimum wage to either
$9 or
$10.10
an hour. It is therefore not a surprise that when they have been given a
choice, voters in red and blue states alike have consistently
supported, by wide margins, initiatives to raise the minimum wage. In
2004,
71 percent of Florida voters opted to raise and inflation-index the minimum wage, which today stands at $7.79 per hour. That same year
, 68 percent
of Nevadans voted to raise and index their minimum wage, which is now
$8.25 for employees without health benefits. Since 1998, 10 states have
put minimum wage increases on the ballot; voters have approved them
every time.
But the popularity of minimum wages has not translated into
legislative success on the federal level. Interest group pressure —
especially from the restaurant lobby — has been one factor. Ironically,
the very popularity of minimum wages may also have contributed to the
failure to automatically index the minimum wage to inflation: Democratic
legislators often prefer to increase the wage themselves since it
allows them to win more political points. While 11 states currently
index the minimum wage, only one, Vermont, did so legislatively; the
rest were through ballot measures.
As a result of legislative inaction, inflation-adjusted minimum wages
in the United States have declined in both absolute and relative terms
for most of the past four decades. The high-water mark for the minimum
wage was 1968, when it stood at $10.60 an hour in today’s dollars, or 55
percent of the median full-time wage. In contrast, the current federal
minimum wage is $7.25 an hour, constituting 37 percent of the median
full-time wage. In other words, if we want to get the minimum wage back
to 55 percent of the median full-time wage, we would need to raise it to
$10.78 an hour.
International comparisons also show how out of line our current
policy is: the United States has the third lowest minimum wage relative
to the median of all Organization for Economic Cooperation and
Development countries. This erosion of the minimum wage has been an
important contributor to wage inequality, especially for women. While
there is some disagreement about exact magnitudes, the
evidence suggests that around
half
of the increase in inequality in the bottom half of the wage
distribution since 1979 was a result of falling real minimum wages. And
unlike inequality that stems from factors like technological change,
this growth in inequality was clearly avoidable. All we had to do to
prevent it was index the minimum wage to the cost of living.
The social benefits of minimum wages from reduced inequality have to
be weighed against possible costs. When it comes to minimum wages, the
primary concern is about jobs. The worry comes from basic supply and
demand: When labor is made more costly, employers will hire less of it.
It’s a valid concern, but what does the evidence show?
For the type of minimum wage increases we have implemented in the
United States, the best evidence shows that the impact on jobs is small,
although there is still a debate in the literature. There are estimates
that do suggest job losses — most prominently associated with work by
the economists David Neumark and William Wascher. Since the early
1990s, they have consistently
argued
that minimum wage increases lead to substantial job losses for low-wage
workers: a 10 percent increase in the minimum wage can be expected to
reduce jobs among a group like teenagers by between 1 and 3 percent. The
methodology pioneered by Mr. Neumark and Mr. Wascher has a critical
problem, however: it does not properly account for differences between
high- and low-minimum-wage states. Essentially, they make the
unrealistic assumption that low-wage employment trajectories are similar
in states as diverse as Texas and Massachusetts.
As my colleagues and I show in our
research,
the states raising minimum wages have had very different trajectories
when it comes to trends in demand conditions and business cycle
variability. In fact, low-wage employment was often already falling (or
growing more slowly) in the states raising the minimum wage — sometimes
years before the actual wage increase. Such divergence in trends between
the “treatment” and “control” groups is a telltale sign that the
control group is being constructed improperly — a major issue for
evaluating policies using nonexperimental evidence, otherwise known as
real life.
The good news is that today we have much better tools in our toolbox.
A particularly reliable methodology compares adjacent counties that are
right across the state border but that experience different minimum
wage shocks. Originally performed for a single case study of
Pennsylvania and New Jersey by the economists David Card and Alan B.
Krueger
in 1994 and then again
in 2000, this methodology has been substantially refined and expanded.
In my work with T. William Lester and Michael Reich, we use nearly
two decades’ worth of data and compare all bordering areas in the United
States to show that while higher minimum wages raise earnings of
low-wage workers, they do not have a detectable impact on employment.
Our estimates — published in 2010 in the
Review of Economics and Statistics
— suggest that a hypothetical 10 percent increase in the minimum wage
affects employment in the restaurant or retail industries, by much less
than 1 percent; the change is in fact statistically indistinguishable
from zero.
In my most
recent work
with Sylvia Allegretto, Ben Zipperer and Michael Reich, we confirm
these results using four data sets covering over two decades, other
low-wage groups like teenagers, and five different statistical
techniques, including an increasingly popular method that uses past
economic trends to construct a “synthetic” control group. And
other researchers have
independently reached the
same conclusion: minimum wage
effects on employment are
small.
While the evidence may not convince the most strident of critics, it
has shifted views among economists. A panel of 41 leading economists was
asked recently
by the University of Chicago’s Booth School of Business to weigh in on
President Obama’s proposal to increase the minimum wage and
automatically index it to inflation. A plurality, 47 percent, supported
the policy, and only 11 percent opposed it, while the rest were
uncertain or had no opinion. Only a third thought that the raise “would
make it noticeably harder for low-skilled workers to find employment.”
But how can minimum wages rise without causing job losses? For
starters, if the demand for burgers is not price sensitive, some of the
cost increase can be passed on to customers without substantially
reducing demand or jobs. Existing
research
suggests that if you raise the minimum wage by 10 percent, you can
expect the price of a $3 burger to rise by a few cents, which is enough
to absorb a sizable part of the wage increase.
Going beyond simple supply and demand, economic models are getting
better at incorporating frictions caused by the costs of finding jobs
and filling vacancies, which turn out to be quite important when
analyzing labor markets. There are good jobs and bad jobs at the low end
of the labor market, and movements between these lead to vacancies and
turnover. If McDonald’s is required to pay a higher wage, fewer of its
workers will leave to take other jobs. This means fewer vacancies at
McDonald’s, and it means other employers are more likely to fill their
job openings from the ranks of the unemployed — both of which can help
keep unemployment down. So while higher costs may dissuade some
employers from creating new positions, it also helps other employers
recruit and retain workers. Moderate increases in the minimum wage, in
other words, can reduce vacancies and turnover instead of killing jobs.
In a follow-up study using our bordering areas methodology, we provide
empirical evidence for this argument: while overall employment in
low-wage sectors does not change much following a minimum-wage increase,
worker
turnover falls sharply as workers stay with their jobs longer.
But even if minimum wage policies reduce inequality and improve the
functioning of low-wage labor markets, are there better alternatives
when it comes to helping low-income families?
In a forthcoming study commissioned by the Department of Labor, I
review the evidence using data from the past two decades and find clear
evidence that minimum wage raises have helped lift family incomes at the
bottom: a 10 percent increase in the minimum wage reduces poverty by
around 2 percent.
The minimum wage can also
increase
the efficacy of a policy that is sometimes pushed as a substitute: the
earned-income tax credit. This encourages more people to seek work, but
can push wages
down;
a minimum wage ameliorates this. Of course, many families under the
poverty line simply have no workers, making any work-based policy of
limited help. This is why raising and indexing the minimum wage is just a
part of the portfolio of policies we need to enact to ensure a decent
living standard.
What are actual policy options when it comes to raising the minimum
wage? At the federal level, the legislation proposed by Senator Tom
Harkin, Democrat of Iowa, and Representative George Miller, Democrat of
California, would raise the minimum wage to $10.10 an hour, and index it
to future cost of living increases. This is a sensible target that
would be likely to put the minimum wage right around 50 percent of the
median wage for full-time workers — close to the international standard
and our own norm during the 1960s and ’70s. Indexation is critical — it
replaces politics with economics as the adjustment mechanism and makes
changes predictable. This is why even economists
opposed to higher minimum wages support indexation.
Other policies can complement the federal minimum wage in building
higher wage standards. City and state minimum wages play an important
role in ensuring that places with higher costs of living have similarly
higher wage standards. A number of cities have instituted “living wage”
ordinances covering public sector workers and private city contractors.
The most expansive of these ordinances cover major airports, like in the
metropolitan areas of San Francisco, Los Angeles and most recently
Seattle. Fast food workers in urban centers are beginning to organize
and push for substantially higher voluntary wage standards at major
chains. Together with a sensible federal minimum wage, these local
initiatives can help rebuild wage standards and reduce inequality in a
way that reflects our internal sense of fairness.
Arindrajit Dube is an associate professor of economics at the University of Massachusetts, Amherst, and a research fellow at IZA.
