On the minimum wage, wishful thinking must not take the place of economic analysis
This weekend the Fergus Falls Daily Journal carried an opinion piece by its editorial board titled ‘Minimum wage increase good for economy’. The board wrote
There are multiple benefits for the minimum wage increase including allowing people to afford housing, purchase everyday essentials, and reducing the federal deficit through less spending on public assistance programs. Businesses could see the benefit too, as they are putting more money in the hands of those that readily spend it.
Sadly, both economic theory and the empirical evidence suggest that this is so much wishful thinking.
None of these alleged benefits will accrue if employers simply react to the rising price of labor by buying less of it. If, in that case, your wage drops to $0, it is hard to see how your ability to afford housing and purchase everyday essentials will be enhanced. Neither is turfing people out of low paid work and onto welfare going to improve the federal deficit.
This is what happens as a result of minimum wage hikes. In 2008, economists David Neumark and William L. Wascher surveyed two decades of research into the effects of minimum-wage laws. They found that “minimum wages reduce employment opportunities for less-skilled workers … (that) a higher minimum wage tends to reduce rather than to increase the earnings of the lowest-skilled individuals … (that) minimum wages do not, on net, reduce poverty … (and that) minimum wages appear to have adverse longer-run effects on wages and earnings.” In 2014, along with economist J.M. Ian Salas, they examined the subsequent literature and concluded “that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.”
We all want to see higher wages. They’re are the best way of guaranteeing a good standard of living. But, to be sustainable, they need to come from higher productivity, not the wave of some magic legislative wand. The policies that would encourage higher wages would focus on increasing the quality of labor, education, the quantity of capital it has to work with, investment, and the quality of the capital itself, innovation. These policies do not fit on a placard quite so easily as “$15 now!” But they do have the virtue of actually working.
John Phelan is an economist at the Center of the American Experiment.