Here’s an unhappy observation about the minimum wage: Congress last increased the rate in stages in 2006, topping it out at $7.25 an hour in 2009, or $15,080 a year.
That amount, when adjusted for inflation, is actually lower than what a minimum-wage worker earned in 1968 and is too meager to offer anyone the chance to climb out of poverty, let alone afford basic goods and services.
About 10 states are now considering raising the rate, and Senator Tom Harkin, an Iowa Democrat, is proposing to increase the federal rate in three increments to $9.80 an hour in 2014. Many of the initiatives under consideration would smartly tie the minimum wage to the cost of living, meaning that those workers’ wages would finally keep up with inflation.
The past recession was brutal on jobs, household wealth and economic growth. But wages were hit hard, too. Real average hourly earnings have fallen below the level of 2009. Although wages often lag job growth after a recession, the pace of income gains this time around is far slower than in previous recoveries.
It’s also becoming clear that many Americans are being forced to take lower-paying jobs and that a low-wage bias is creeping into the economy, as Bloomberg economist Joseph Brusuelasrecently put it. In many cases, minimum-wage work is all that’s available, which may explain why such workers are older and better-educated than they were three decades ago. In 2010,nearly 44 percent of minimum-wage workers had either attended or graduated from college, up from 25.2 percent in 1979, according to the Center for Economic and Policy Research, a liberal think tank.
Raising the minimum wage won’t entirely solve the problem of anemic incomes, but it would help. Economists have long found that boosting the minimum wage can raise income levels for those earning just above the minimum. Employers, seeking to protect “wage ladders,” often bump up salaries for slightly higher-paid employees, too.
This is one of many reasons that critics, including business groups like the U.S. Chamber of Commerce, the National Restaurant Association and many Republicans, oppose minimum-wage increases. The argument is that it will hurt the very people it was meant to help by forcing employers to cut jobs, raise prices or both. They point to studies that minimum-wage increases hurt teenagers, because young workers typically get minimum-wage jobs, which become scarce when employers are forced to raise salaries.
But a wave of new economic research is disproving those arguments about job losses and youth employment. Previous studies tended not to control for regional economic trends that were already affecting employment levels, such as a manufacturing-dependent state that was shedding jobs. The new research looks at micro-level employment patterns for a more accurate employment picture.
The studies find minimum-wage increases even provide an economic boost, albeit a small one, as strapped workers immediately spend their raises. A 2011 paper by economists at the Federal Reserve Bank of Chicago found that a $1 minimum-wage increase lifts household income by about $250 and increases spending by about $700 a quarter in the following year. The spending increase is driven by a small number of households that primarily buy vehicles.
People working minimum wage make up such a tiny portion of the economy that you don’t see inflation (not that there aren’t lots of these people, but their economic impact is small). And the labor costs to businesses are so small that it doesn’t cause a drop in employment. Paradoxical, right? Only if you were expecting a 6th grade supply/demand graph to explain the real world.
Here is the seminal paper by Card and Krueger that rocked the economic world. As someone who writes condescendingly of “basics economics courses” I’m surprised you haven’t heard about it. The experiment has since been replicated dozens of times in different regions, sectors, etc. It hasn’t penetrated the mainstream media because cable news sucks at all science, even social science.
And there is a rebuttal study published less than two years later that takes better data and says the opposite. It was published at The National Bureau of Economic Research, the same place as Card and Kruger’s study.
Abstract: “We re-evaluate the evidence from Card and Krueger’s (1994) New Jersey-Pennsylvania minimum wage experiment, using new data based on actual payroll records from 230 Burger King, KFC, Wendy’s, and Roy Rogers restaurants in New Jersey and Pennsylvania. We compare results using these payroll data to those using CK’s data, which were collected by telephone surveys. We have two findings to report. First, the data collected by CK appear to indicate greater employment variation over the eight-month period between their surveys than do the payroll data. For example, in the full sample the standard deviation of employment change in CK’s data is three times as large as that in the payroll data. Second, estimates of the employment effect of the New Jersey minimum wage increase from the payroll data lead to the opposite conclusion from that reached by CK. For comparable sets of restaurants, differences-in-differences estimates using CK’s data imply that the New Jersey minimum wage increase (of 18.8 percent) resulted in an employment increase of 17.6 percent relative to the Pennsylvania control group, an elasticity of 0.93. In contrast, estimates based on the payroll data suggest that the New Jersey minimum wage increase led to a 4.6 percent decrease in employment in New Jersey relative to the Pennsylvania control group. This decrease is statistically significant at the five-percent level and implies an elasticity of employment with respect to the minimum wage of -0.24. ”
More accurate data led to a different result, and a predictable result based on simple “6th grade” supply/demand models. Card and Krueger used a phone survey, and the study I linked used payroll data.
People of reddit, just because there is one study that says one thing and a redditor claimed “it rocked the economics world” doesn’t amount to much. All peer-reviewed means is that the outcome is plausible. Not that it is true. Vaccines causing autism was peer reviewed.
Does it make any sense that raising the price of labour has no effect or increases demand for that labour? No, it doesn’t, that’s one of the reasons why companies go overseas to make cheap goods. Implying that anyone who realizes this has a 6th grade understanding of supply/demand is just a trolling tactic to make people who agree with I_Potato_People feel better.
It’s fine if there is more information that discredits previous thoughts, there may continue to be information that counters the study I linked or other reasons besides employment to have a minimum wage, but you don’t stop looking as soon as one redditor gives you an answer you are comfortable with.
Edit: A bunch changed for clarity and impact.