Rasing Minimum Wage Won’t Hurt Employment

So much of conservative economic analysis comes down to, “I kind of paid attention to the lectures that term I got a C in Econ 101.” It is certainly true that you can understand a lot of what is going on in the economy by understanding some simple economic theory. But you can also go very wrong with this if your understanding is too limited. This is what we get from a lot of libertarian leaning people.

Let’s consider the minimum wage. A very simple understanding of it indicates that if you raise the minimum wage, it will result in fewer jobs as employers drop marginal employees. But it doesn’t work this simply. First, minimum wage employees do some of the most basic (and important) work at a company. Most companies could survive for a month or two without a CEO; they can’t survive without the janitorial staff.

Much more important is the issue of company profits. A common myth among conservatives is that if a company’s taxes are raised, the company will simply pass on the cost to the customer. Belief in this myth belies a shocking level of ignorance about not only how companies operate but also how markets themselves work. Undoubtedly, some increased costs will be passed on. But much of the increased costs will just have to be absorbed—profits will decrease and the company will be forced to become more efficient.

The same goes on with the minimum wage. The fact is that most companies paying minimum wage could afford to pay more. What’s more, if the minimum wage were less, most of them would pay that lesser amount. Now, is it true that raising the minimum wage never causes people to be laid off? Not at all. It is just that the increased pay also increases the demand in the economy more generally. Remember: the economy is nothing so much as one very big feedback loop and your spending is my income. Really, the economy is only slightly less complex than existence itself.

But as Travis Waldron reported last year, this isn’t just a theoretical calculation, Studies: Increasing The Minimum Wage During Times Of High Unemployment Doesn’t Hurt Job Growth. He discusses five papers that were summarized by researchers at the Center for American Progress that showed that increasing the minimum wage doesn’t slow job growth—even during periods of high unemployment. They write:

A significant body of academic research has found that raising the minimum wage does not result in job losses even during hard economic times. There are at least five different academic studies focusing on increases to the minimum wage—including increases ranging from 7 percent to 12.3 percent made during periods of high unemployment—that find an increase in the minimum wage has no significant effect on employment levels. The results are likely because the boost in demand and reduction in turnover provided by a minimum wage counteracts the higher wage costs.

In other words: what I just said but with data. Interestingly, Freakonomics has reported on research in Indonesia that found that raising the minimum wage actually increased employment, primarily by moving workers from the black market to the legal (tax paying) market. They also note that this same thing would not likely happen in an advanced economy. Nonetheless, it shows that the economics are more complex than the simpleminded conservative refrain that paying people a living wage will destroy us all.

Last year, Democrats in the House wanted to raise the minimum wage to $10 per hour. This would have put it at the level that it was in 1968 (adjusted for inflation). Obama called for $9 per hour in his State of the Union address. I can see why. The conservatives are flipping out even at that level. Of course, the conservatives would be flipping out if he had suggested raising the minimum wage from $7.25 to $7.26. In fact, Paul Krugman reported back in 2009 that conservatives wanted to cut the minimum wage. This is, by the way, a really bad idea. (Of course it’s a bad idea; it’s a conservative idea!)

There aren’t many policy ideas that are not harmful and that do unquestioned good. Raising the minimum wage is one of these few policies. The business community will freak out, of course. But they will manage fine, just like they always do. And it might even increase inflation a little and that’s very good for business. Let’s raise the minimum wage now!

Afterword

Note that raising the minimum wage even up to $9 per hour is a 24% increase. This is not optimal. Think of your rent. You like it a lot better if your landlord raises the rent by 10% every year than 100% every ten years—even though it is much cheaper if he does the latter. This is because the rare but significant increase is a shock. The same goes for businesses. The problem is that conservatives drag their feet on the minimum wage and thus require big increases whenever Congress gets around to it.

What we should do is just raise the minimum wage every year by the rate of inflation. Business owners would like that a lot more, even though they would actually pay more. In addition, if Congress found that the minimum wage was getting too high, it would be an easy matter to cut it back.

After Afterword

This is via Greg Sargent. Here is video of Ted Kennedy giving his “When does the greed stop?” speech at a Senate the last time the minimum wage was raised. It is 7 minutes of wonderful:

Update (17 February 2013 7:54 pm)

From Mike Konczal interview of economist Arindrajit Dube:

We could disagree about the level of the minimum wage, but it seems like a no-brainer to me that no matter what level we pick, we should have a relatively smooth adjustment process. A natural adjustment process is tying the rate of cost of living increases, like many items including Social Security payments. It makes a lot of sense. Daniel Hammermesh—a well-known labor economist who in general is not in favor of high minimum wages—has nonetheless come out supporting indexation.
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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

0 thoughts on “Rasing Minimum Wage Won’t Hurt Employment

  1. Sometimes I flip through books when I begin to read them, just to know if I’ll be interested in later segments. I was flipping around Sam Pizigatti’s "The Rich Don’t Always Win" (basically a history of how we went from the Gilded Age to the New Deal and back again in 100 years) and there was a cute idea near the end; restoring high-income marginal tax rates and adjusting the brackets to the minimum wage.

    So, you figure what 40 x 52 x the minimum wage is, then use a multiplier. Let’s say, 20 for an example. 40 x 52 x 7.25 x 20 = 301,600. So one tax bracket would go up after $301,600. You could use multipliers of 5, 10, 50, whatever, for different brackets. The idea is to give rich people an "incentive" to keep the minimum wage at a reasonable level, because that lowers their tax burden. Like many good ideas, merely an appealing fantasy at this juncture.

    We’ll see how serious Obama is about raising the minimum wage (my guess is not much, but I don’t know how his people calculate which issues to stand firm on.) It was a sort of low-comedy thrill to watch Boehner squirm when the subject came up. The brownish liquid he kept sipping was probably Coke, but I like to think he needed whiskey to get through the whole speech. (And with all those fake-applause moments, if I was stuck there watching the back of someone’s head, I’d want something soothing, myself.)

  2. @JMF – That’s great! I am constantly amazed at the good ideas that are out there. This, of course, is the problem with the modern conservative movement: they are afraid of any good ideas because they may turn out to be liberal.

    From what I’m reading, the Democrats want to push the minimum wage and use it as a tool in the 2014 elections. Hopefully, the Democrats can get congress back by 2016 and then actually do something about the minimum wage. As long as the Republicans are in control of the house, nothing will be done because, you know, it is a good idea that is popular.

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