Does raising the minimum wage really help workers?

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(MoneyWatch) Is President Obama's call this week to raise the minimum wage a good idea, or is there a better way to help low-income workers?

An increase in the minimum wage raises the income of those who are employed, but it also raises the cost of hiring unskilled labor and can potentially reduce the number of people hired by businesses. So there are winners and losers from this policy. Those who remain employed and receive higher incomes are better off, and those who would be employed if not for the increase in the minimum wage are worse off.

Overall, the impact on workers is uncertain: Does the gain for those who remain employed more than offset the loss to those who cannot find work?

By contrast, if the employment effects turn out to be small, then we can be much more certain that an increase in the minimum wage is a net positive for the households we are trying to help.

What does research on this issue tell us about the minimum wage's employment effects? It depends on which set of research studies you believe. One set of studies -- the most cited is by the University of California, Berkeley's David Card and Princeton University's Alan Krueger, who is also head of the White House Council of Economic Advisers -- finds that increasing the minimum wage does not have significant effects on employment.

Other studies reach the opposite conclusion, notably the work of David Neumark and William Wascher. They claim that workers are made worse off overall when the minimum wage goes up. More recent work such as this paper by University of Massachusetts economist Arin Dube tends to support the view that the minimum wage has minimal employment effects and is beneficial to workers, but the debate on this issue is far from over. (There's a nice summary of the empirical work on this issue, including a full set of citations to the work mentioned above, at the beginning of this paper by economist John Schmitt.)

Since the employment effects of the minimum wage appear to be small, but there is enough counter-evidence to raise questions about this conclusion, an obvious question is whether there is a better way to raise the incomes of low-income workers, one that does not raise these questions.

In fact there is: the Earned Income Tax Credit, a solution that finds support among both liberals and conservatives (Milton Friedman, for example, was a strong supporter of "negative income tax" policies). Democrats favor the EITC because of its ability to lift families out of poverty, and conservatives like its incentives for people to work relative to traditional poverty assistance programs.

So why not increase the EITC instead of increasing the minimum wage? For two reasons. First, and most important, any program that would increase spending and increase the federal debt has little chance in this political environment. An increase in the minimum wage -- which does not involve federal payments -- is more attractive to politicians. Second, the EITC has high administrative costs, while the administrative costs of mandating a minimum wage are very low. As economist Brad DeLong of UC Berkeley says: "The EITC is a good program, but it is a costly program to administer, and it is administered imperfectly to say the least. The minimum wage, on the other hand, is nearly self-enforcing: its administrative costs are nearly nil, for workers (legal workers, at least) have a very strong incentive to drop a dime on bosses who violate it. From a government-administrative and error-rate perspective, it's a very cost-effective program."

Thus, although the EITC has better economic properties and has worked well in practice, the chances of it being expanded on a scale that an increase in the minimum wage would achieve are very low. The same is true for most other government-funded, government-administered poverty reduction programs, there's little chance of expansion in the current budget and political environment.

That leaves the minimum wage as the only realistic option for those who want to increase the income of households at the bottom of the income distribution. It may not be the best approach, but if the recent work suggesting that an increase in the minimum wage does not have significant employment effects is correct, it's an approach that can work.

[megansoon]

I think it will be a great help for those who really needs some extra cash on there basic needs. In break with most retailers, Costco's CEO states he supports President Obama's call to boost the <a href="http://personalmoneynetwork.com/moneyblog/2013/03/12/costco-minimum-wage/>minimum wage</a>. But while the President wishes to raise it to $9 an hour, Costco would let it go even higher, to $10.10 an hour.

[hypnotoad72]

This article is more interesting:

http://www.realitybase.org/journal/2009/3/10/the-american-dream-died-in-february-1973.html

About wages not keeping up with inflation, while Americans - the ones who still have jobs - are being more productive.

Never mind illegals being used to drive down wages, Americans training their own H1B replacements, and everything else...

[THEW55]

Raising the minimum wage will cause the cost of living to increase for all of us. When the minimum wages go up buisnesses will not absorb that cost, they pass that cost on to the consumer by giving us higher prices for products or smaller portions. After the smoke clears the minimum wage employees are right back to not being able to afford a living and wanting a higher minmum wage. Let's bring costs down instead of raising wages.

[hypnotoad72]

For 30 years, we've seen costs (for many things) go down.

That's brought down wages as well.

Meanwhile, college costs skyrocket - for jobs whose wages also go down.

If you still don't think the system is broken, then read this cut'n'paste:

Why would it? Let's recap:

CEOs, who made 40x their average workers in 1980 used offshoring, cutting product and material quality, illegals, etc, etc, as means to make their "profits rise. In 2012, it's 1000x that their average worker...

If CEOs weren't so greedy, and stomping down on even you and your livelihood, none of this would be an issue.

See my main response above, with a link going to an article showing neat charts and graphs, for more... though anybody could find any number of articles on this issue, and related tangents...


Happy researching. You won't like what you find.

[Meg003]

Wages would go up if the government deported illegal alien workers. There is an unending flow of unskilled laborers. Studies have shown than removing the illegal workforce raises wages for the remaining workers. Every other nation protects their citizens from the damaging effects of uncontrolled immigration while our government makes excuses.

[hypnotoad72]

No, they would not.

Corporations used illegals to drive down wages.

They also use lobbyists to get special perks and privs from government.

Corporations have artificially devalued the market.

What makes you think they'd act ethically to bring wages back up afterward?

Indeed, for Obama, Romney, and everyone else whining that we need more people skilled in x and y fields, such as in IT, those fields too still see wage stagnation or worse...

[Tommy34684]

MLB thru the owner of the Rays said the Tampa area cannot afford a professional baseball team. What do you think that says about discretionary income? What do you think that says about poor pay levels for the average working man and woman? We have teachers, firemen, policemen, doctors, nurses etc. no different than all parts of the country. Yet, historically the wages in this area are well below average and could sure use a boost to much more than $9 per hour minimum. It has to go up much higher because the employers will take the bump in pay to cover health care costs and whatever else they choose and the state will raise fees again and homeowners insurance yada yada.

[hypnotoad72]

Yup. We pay a pittance for real work and give heaven to some lowlifes who run around on a plot of grass all day.

It's ridiculous what our society places "value" on...

[sandiegopete]

The fact is the minimum wage law has little effect on employment of minimum wage earners. Those people are in jobs most other people don't want. It is not easy to fill a minimum wage job vacancy. You have to be prepared to accept an employee with very little in the way of job skills and/or potential reliability.

What an increase in the minimum wage usually does is incease pay up the line. And many states already have laws providing for a minimum wage higher than the federal minimum.

An overall wage increase will quite likely lead to price increases in some areas. That is what is called inflation. The Fed has been able to keep inflation down by keeping interest rates down. That has been at the cost of making it more difficult for companies that are unable to float equity offerings to expand. Bank loans are not available to businesses because the return on the loan does not provide enough net profit to cover the risk.

Will an increase in the minimum wage make it more difficult for the Fed to keep interest rates at the very low level they are now?

[hypnotoad72]

If people don't want the jobs, then the law of "supply and demand" means wages must go up and to the point people will take them.

Yet that hasn't happened and even the most placid janitor, who does the work no accountant would ever want to do, is treated like a human being...

Oh, the Fed has kept interest rates down for banks, but has that trickled to us? Look at your car payment, college student loan, or anything else. Nope. We don't get the benefit. Only the supply-side parasites do.

[wolfmagic2012]

DERR! A worthless article. Raise the minimum wage and watch the economy soar. You r's need to give up doubling-down on stupid before you have no electable party left.

[robert1129]

What in the world is this guy talking about? In the case of my nephew who earns minimum wage, any increase in his take home pay would help his family. It means new shoes, better food, being able to buy auto insurance and things like that.

[DrHamath]

I suggest reading the article again. I think you missed the point. The fourth sentence says exactly what you are saying.

"Those who remain employed and receive higher incomes are better off, and those who would be employed if not for the increase in the minimum wage are worse off. "

[PatrickUES]

OK this is ridiculous. It is a price floor. If Congress legislated a price floor on sandwiches, of say $10 per sandwich, then it would likely result in people eating fewer sandwiches. It could result in more people who work in midtown going to Cosi or Dishes. But it would DEFINITELY result in people buying fewer Big Macs - almost no Big Macs. And that is the issue - what is the effect on the labor equivalent of a Big Mac (you might say this would be the people who assemble Big Macs). The effect of a price floor of $X per hour is to render unemployable anyone whose labor is worth materially less than $X per hour. Other effects depend upon circumstances and are debatable. This effect is not, and this is the only issue.

[payasyougo]

The only thing raising the minimum wage does is increase contentment at that earnings level. Why stop at $9/hr. Why not just go right to $50/hr.

[hypnotoad72]

Why would it? Let's recap:

CEOs, who made 40x their average workers in 1980 used offshoring, cutting product and material quality, illegals, etc, etc, as means to make their "profits rise. In 2012, it's 1000x that their average worker...

If CEOs weren't so greedy, none of this would be an issue.

Are you a CEO? Do you want people to do more work for less money? Do you want us to buy you the whip in which to crack on us as well?

See my main response above, with a link going to an article showing neat charts and graphs, for more... though anybody could find any number of articles on this issue, and related tangents...

[stopkillingourwilderness]

Living wages would have not only prevented the global economic crisis but would have pulled us out of it far faster than the trillions handed to the folks who caused it. Look at Australia - living wages, socialized medicine, terrible droughts and fires, but no serious recession: Because the 99% are able to keep paying their bills, stimulating the economy and handling setbacks. You can still get rich there, plenty of people are, so pretending the system penalizes the rich is a big lie.

[hypnotoad72]

CEOs, who made 40x their average workers in 1980 used offshoring, cutting product and material quality, illegals, etc, etc, as means to make their "profits rise. In 2012, it's 1000x that their average worker...

[PatrickUES]

1) Really? Because the last minimum wage increase went into effect in 2009 and look what happened!
2) The crisis was merely the popping of another Fed credit bubble. Please go to the von mises website and research this.