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Helpful, Harmful, or Hype? 5 Economists Weigh in on Obama's Minimum Wage Proposal

Jordan Weissmann

If a meteor ever smashes into the earth, leaving the planet a dark lifeless wreck, there will still be two economists walking down a desolate post-apocalyptic Connecticut Avenue arguing about whether minimum wage laws kill jobs. As David Neumark, J.M. Ian Salas, and William Wascher document in a recent paper, the debate has been with us since at least 1913, when the U.S. Department of Labor was created. And it's probably not going anywhere soon.

Of course, Obama's proposal to up the minimum wage to $9 and index it to the cost of living has the issue is back in the news. And so, rather than rehash the entire history of the debate (for a somewhat detailed, if left-leaning, retelling, here's the EPI), I reached out to some of the country's leading labor economists for their takes. The key observations are underlined.

This Will Kill Jobs for the Lowest-Skilled Americans

Along with his frequent co-author, Federal Reserve Board economist William Wascher, David Neumark of the University of California, Irvine, is widely thought of as the leading conservative voice on the effects of minimum wage laws. The pair produced one of the seminal modern studies on the topic in 1992, arguing that a 10 percent increase in the minimum wage could reduce young adult employment by up to 2 percent. They've also argued those job losses make the minimum wage an ineffective tool for fighting poverty and produced an enormous survey of the available research some consider a touchstone.  

The problem of low-wage work that President Obama's proposal is intended to address is real, ongoing, and serious. But simply mandating that employers pay a higher wage is not an effective solution, because a higher wage floor reduces employment among low-skilled workers.

A White House "fact sheet" claims that the proposed wage hike would not reduce employment, referring to studies that "built on earlier research and confirmed that higher wages do not reduce employment." But only a highly selective cherry-picking of favorable studies can lead to the interpretation of the evidence pushed by the White House staff. Moreover, the fact sheet relies most heavily on the only study it cites directly -- a 2010 paper in the Review of Economics and Statistics, which asserts that there are "no detectable employment losses from the kind of minimum wage increases we have seen in the United States." This is a provocative claim, if true. In a new study, however, Ian Salas (UC Irvine), William Wascher (Federal Reserve Board) and I subject this study to rigorous empirical testing. We conclude that its claims are unfounded, and that the evidence continues to point to disemployment effects of the minimum wage. This conclusion is consistent with a large body of economic research on the minimum wage that William Wascher and I have surveyed, most of which shows that minimum wages reduce employment for the least-skilled workers whom the President's proposal is intended to help.

It Will Reduce Poverty and Have Little Effect on Unemployment

Arindrajit Dube, a professor at the University of Massachusetts Amherst, co-authored the paper cited by the White House. He and his collaborators have used sophisticated data comparing the border regions of states with different minimum wages to advance the argument that, no, the laws don't hurt employment.

Indexing It Is Smart 

Daniel Hamermesh, of the University of Texas at Austin, is one of the country's better known labor economists (and a favorite here at The Atlantic), who probably qualifies as a moderate on the issue. His book Labor Demand devotes a 10-page-section to minimum wage laws specifically.

It's a Perfect Pairing With Immigration Reform

In 1994, David Card, a Professor at University of California, Berkeley, and Alan Krueger, now the President's top economic adviser, produced one of the most influential papers of the 1990s arguing that minimum wage laws weren't really job killers. The duo looked at what happened to employment at fast food restaurants on the Pennsylvania-New Jersey border after the latter upped its minimum wage. Ultimately, they found no affects. The study led to an extended academic showdown with Neumark and Wascher.  

But Don't Expect It to Ease Inequality 

So how is that you can raise the minimum wage and not reduce jobs? Barry Hirsch of Georgia State University has offered one potential answer. When the federal minimum wage went up in 2007, he and his co-authors found that business owners in Georgia and Alabama just made their employees work harder to justify the expense. (They also upped prices and saw profits fall a bit). 

A $9/hr minimum wage is very much in line with historical experience here in the United States, as well as wages (when compared against say the median wage) in other developed countries. I think careful research on the topic has found that for this range of minimum wage increase, the almost unmistakable conclusion is that there will be little in the way of job losses, while the wages of low-end workers will get a boost. At the same time, turnover rates will most certainly fall in low wage sectors such as restaurants. And most importantly, research even by critics of minimum wages actually suggest that minimum wages reduce poverty and raise family incomes at the bottom end. Overall, a raise of this magnitude is simply (almost) keeping up with costs of living faced by low-income workers.

In fact, David Neumark's own recent work from 2011 (with Bill Wascher) suggests that on average, for 21-44 year olds (the broadest group they studied), a 10% increase in minimum wages reduces poverty by around 3%. They do not report these average effects, but are available for anyone to calculate (and were confirmed in my personal communication with him).

Raising the minimum wage will kill off a few jobs and is a slightly harmful idea. Not a disaster, because it affects relatively few people; and a smaller number will benefit. But it is a job-killing bill. There are better things to do.

On the other hand, the proposal to tie the minimum wage to the cost-of-living is nearly excellent (except we should tie it to average wages, not to the cost-of-living). Doing this would end the repeated fighting over the minimum wage that distracts attention from other labor issues that are so very much more important. It would be a great saving of political energy not to have to debate the minimum wage year after year. I'd even be willing to see it increased to $9 next year if in addition it were indexed as I propose.

It seems to me that the proposal meshes well with initiatives on immigration. The inflow of low skilled undocumented workers has been slowed a lot, and there is an attempt to move more and more hiring to "above the table". In that context a higher minimum wage makes some sense: we can decide that we don't want to allow so many low skilled workers to immigrate -- and so many very low productivity jobs to be created -- and maintain that with a higher minimum wage.

In addition, my reading of the evidence since the early 1990s is that apart from one or two "outliers", none of the serious literature has found big disemployment effects of minimum wages. Of course if the minimum was raised really high -- and enforced -- it would likely be a problem. But at reasonable levels the minimum has negligible effects on overall employment, and can make an important contribution to raising earnings and helping out workers on the lowest rung of the ladder, who have really suffered in the US over the past decades.

An increase in the minimum wage to $9 by the end of 2015, then indexed to inflation, is a reasonable proposal, albeit one with costs as well as benefits. It will modestly slow the creation of low wage jobs and businesses built around low wage work in ways difficult to measure. Our economy and those in other countries have handled minimum wages at this (real) level reasonably well in the past. A higher minimum wage will bolster the incomes of low wage workers, strengthen their attachment to jobs, and increase the dignity of work. It will reduce poverty, but not by much, the link between household income and individual workers' wages being relatively weak. A higher minimum wage will reduce earnings inequality, but only moderately. Over the last decade, increases in inequality have been due mainly to large losses in traditional middle class jobs and growth of earnings at the top of the distribution. Employment and earnings toward the bottom of the distribution have held up reasonably well. Minimum wage increases do little to restore or stem losses of employment and earnings in traditional middle-class jobs, these losses resulting primarily from technological change, globalization, and, to a lesser extent, declining private sector unionization.

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