Minimum Wage Revisited: Why Policymakers Shouldn’t Be Afraid To Raise the Wage

Sep 23, 2019 | Economics, Politics


In recent months, an old policy conversation about how to raise wages has reemerged on the national level. The federal minimum wage has remained at $7.25 per hour since July 2009 and has been the focus of advocacy group efforts, such as the Fight for 15 campaign. This group, along with others such as the Economic Policy Institute, advocate for a higher minimum wage as a way to fight income inequality and poverty.  These efforts have found success at the local level, beginning with the passage of $15 per hour minimum wage legislation in Seattle in 2015. Since then, there has been little movement at the state or federal level.

However, the situation began to change following the 2018 midterms, as high-profile politicians, such as Bernie Sanders and Alexandria Ocasio-Cortez, have been vocal about the need to raise the minimum wage. More recently, several candidates for the Democratic presidential nomination have declared their support for a minimum wage increase at the federal level. Minimum wage increases have consistently proved popular with voters, some of whom have even approved of them via ballot initiatives, as occurred in Arkansas and Missouri

This movement is encouraging, as the minimum wage is an economically sound policy and should be expanded. A higher minimum wage can combat wage inequality and poverty, putting more money in the pockets of some of the nation’s poorest citizens. A 2014 Congressional Budget Office report found that an increase in the federal minimum wage would move roughly 900,000 people above the poverty line, a meaningful decrease in the number of Americans living in poverty. 

Providing poor families with greater income is one of the most straightforward ways to move them above the poverty line, as access to cash (as opposed to non-cash benefits) is critical for participation in the modern economy. Moreover, the relative simplicity and popularity of the minimum wage also make it easy to market to voters, and thus well-suited for political campaigns. 

Given the opposition that hikes in the minimum wage garner from conservative politicians and the business community, it is worth revisiting some of the most common arguments against them. In general, there are four main arguments put forth by those who believe the minimum wage is poor policy: 

  1. Unemployment will increase as a result of minimum wage hikes.
  2. Minimum wage hikes increase prices for consumers.
  3. Workers making minimum wage will be replaced by technology at a more rapid pace.
  4. There is no ‘objectively’ correct minimum wage level.
raise the minimum wage protest / Fight for $15.
Image Source: PBS News Hour.

The idea that increasing the minimum wage will decrease employment, thereby canceling out any potential benefits to low-wage workers, is the most commonly cited reason for opposition. This effect is what the classical economic model of the labor market would predict, and it was the consensus of most economists until the 1990s. However, numerous studies since then have demonstrated that job loss following a minimum wage increase is generally negligible, or even positive, as economists David Card and Alan Krueger found in one of the most well-known studies on the subject. Generally speaking, what the data have shown is not what standard economic models would predict, and this has led to a significant shift in the consensus among economists about the benefits of the minimum wage.

Of course, there have been studies that found an increase in unemployment following a minimum wage hike, such as a 2017 paper from economists at the University of Washington examining the effects of the city’s minimum wage increase. However, the existence of studies that found a negligible or nonexistent relationship between the minimum wage and employment strongly suggests that the classical model, upon which minimum wage opponents rely, is vastly oversimplified. Additionally, even studies whose findings are in line with standard economic theory tend to be controversial. In contrast to the University of Washington paper, economists at the University of California, Berkeley, studied Seattle’s minimum wage increase and found no detectable decrease in employment among food service workers, the group most likely to be negatively impacted.  

Another argument is that increasing the minimum wage will drastically increase costs for consumers. Businesses can, of course, respond to increased labor costs by raising prices on the goods they produce, thereby passing these costs along to consumers.  However, it is extremely unlikely that prices would increase drastically, if at all. Past minimum wage increases have not resulted in dramatic price hikes, and one study estimated that if Walmart were to pass 100% of the cost of a $12 per hour minimum wage hike on to consumers, this would only result in an average increased cost of $0.46 per shopping trip. Another found no increase in the price of supermarket food as a result of Seattle’s minimum wage increase. The authors suggest that the increase would be particularly beneficial to low-income workers, who would experience higher wages and be able to afford a better diet.

A related argument is that businesses will respond to the increase in labor costs by replacing human workers with machines, such as automated checkouts at grocery stores. The truth is that businesses are always looking for ways to reduce costs, and will replace workers with machines wherever possible, whether or not the minimum wage is increased. However, even in cases where it may be cost-effective to automate jobs currently performed by humans, customers often prefer human interaction. For example, grocery stores have made automated checkout lines standard but still rely heavily on human cashiers, because many customers prefer human interaction and frequently have trouble with machines.

A final argument against the minimum wage is that the assignment of a particular minimum wage, such as $7.25 per hour, is arbitrary. In the words of one conservative economist, minimum wage laws are “never based on sound economic analysis.” This is incorrect, as a significant amount of research has been done on the sensitivity of employment rates to various minimum wage levels. For example, in an op-ed for the New York Times, economist Alan Krueger argues that a $12 minimum wage at the federal level would be most appropriate, based on research that finds no significant effect on employment at this level. Policymakers can and do rely on this research when deciding at what level the minimum wage should be set, and the timeline on which it should be phased in. It is true that there is no objective indicator of how high the minimum wage should be that all economists would agree on. However, this does not mean that minimum wages are devoid of economic reasoning.

Despite the arguments of opponents, increases in the minimum wage, far from being arbitrary and economically unsound, have the potential to benefit large numbers of low-income Americans. Research has shown that fears of significant increases in unemployment or prices are largely exaggerated, along with the idea that workers will be automated out of their jobs. 

Earlier this year, the House of Representatives passed a bill that would raise the federal minimum wage to $15 per hour by 2024. Although this is encouraging, opposition from the majority-Republican Senate and President Trump makes it unlikely that the bill will be signed into law. In the absence of federal action, movement at the state level is still possible and should be encouraged. Both Maryland and New Jersey have passed legislation that would raise the state minimum wage to $15 per hour, and other states should follow their lead. Those that do not are missing out on a politically popular and economically sound method of benefiting some of their poorest residents. 

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