Government Boosts Minimum Wage to $7.25 Per Hour? Outrageous!

Perhaps my many awful jobs during high school and college give me a bias, but I've never understood how anyone could object to raising the minimum wage. Every couple of years, the state and federal forces insist that employers give five million or so janitors, fry cooks and housekeepers a few extra bucks every week, while business interests get up in arms about regulation, and government control, and employment. Actually, this time around there must be bigger issues to debate, because there's not much of a fuss. But those who look at the facts realize it doesn't matter much to the overall economy.

Economists on the far left and far right are eternally eager to fight over two issues: rent control and the minimum wage. The arguments are easy to understand: one side contends that government imposition of minimums or maximums distort the market, while the other insists they are necessary to get young people started working, or to save the less fortunate from exploitation. (I would insert a picture of Statler and Waldorf to represent the complaining business interests, but could not get clearance on short notice.)

This week, however, the U.S government prevails, with an increase in the federal minimum wage to $7.25 per hour, from the $6.55 legislated a year ago. There has been a minimum wage in place since 1938, which reached a dollar in the middle 1950s.

When men landed on the moon in 1969 and I was washing dishes in a faux-colonial restaurant in Washington Crossing, Penn., it was about $1.75. But I managed to hit the peak: inflation adjusted, the minimum wage has been falling since the late 1960s, albeit with a recent recovery, shown in the first graph below (thanks to Oregon State University).

The second graph, also from OSU, compares the annual rate of earning the minimum wage to the poverty level since its establishment in 1959. Minimum wages have never been sufficient to raise a family out of poverty if only one member of the family works, reports OSU.

As you might imagine, people working at or below minimum wage tend to be young, female, undereducated, and concentrated in the southeast.

Economists have carefully scrutinized the macro-effectiveness of imposing a minimum wage. For example, one economist at the Fed has led or participated in 10 studies of the minimum wage since 2000. Search the topic on the site of the National Bureau of Economic Research, and back come 1,200 results.

This week's social justice, however, draws little notice from the usual critics. The Wall Street Journal noted it only as an upcoming news release for the week, while in the NY Times it only rated a question in the EconoQuiz.

Marilyn Geewax, the excellent economics editor at National Public Radio, has studied the topic for years. I called her at NPR headquarters. It turns out that a cousin of hers taught me a course in business school.

"Has anyone demonstrably measured a high in the unemployment rate from an increase in the minimum wage?" she asked. "No," she answered. The opposite? I inquired: "No, they don't show that it helps much either."

However, the federal minimum wage is also a benchmark for the wages of many other workers. In addition to the roughly five million workers that earned less than $7.25 per hour before this increase, Marilyn notes, there are another 10 million that will get raises as a result. Actually, some people just get raises, while others will get more pay for more work -- to make up for those not hired.

She writes:

[When the minimum wage] goes up, it raises the floor under all low-wage workers. That shift would affect another 10.5 million workers or so, according to the Department of Labor.

Even some conservative economists concede that studies show that modest wage hikes generally have statistically insignificant impacts on employment nationwide. But they add that for the least-skilled workers, such as teenagers, it will matter. Economist David Neumark of the University of California, Irvine, estimates that this year's wage increase will eliminate about 300,000 jobs for people between the ages of 16 and 24.

"Given the situation we're in now [with very high unemployment], raising the minimum wage just seems like a particularly bad idea," Neumark said.

Marilyn's article on the NPR website includes a vigorous discussion along the conservative-liberal lines of the minimum wage debate.