Friday, February 7, 2014

The Minimum Wage: It's Time For a Raise

President Obama laid out several policy proposals in the State of the Union last week—something that can’t be said for the Republican response delivered by Representative Cathy McMorris Rodgers (R-WA).  While it’s no secret that Republicans oppose the President’s agenda in general, one particular proposal threw the usual suspects on the right into a tizzy: raising the minimum wage.

The President announced he would be increasing the minimum wage for federal contractors by executive order, and asked Congress to raise the federal minimum for everyone else to $10.10 per hour.  Predictably, Republican leaders are opposed.  What’s less known is that so are a majority of economists.

So is raising the minimum wage good politics, and more importantly, good economics?  I believe the answer is yes, on both fronts.

First, the politics.  Democrats want to make the minimum wage a central component of their 2014 campaign strategy, and with good reason: raising the minimum wage is popular in America with about three-quarters of the country in favor.  That includes 58 percent of Republicans and, perhaps surprisingly, even Fox News’ Bill O’Reilly.
Whether Democrats will succeed in this endeavor has yet to be seen.  But at the very least, having this conversation allows liberals to confront the infamous “What’s The Matter With Kansas” problem—the tendency for working-class white Americans to vote for Republicans whose public policies work against their economic interests.  If Democrats can make the minimum wage a major issue and get state-level minimum wage proposals on the ballot in key battleground states, it would give them some ammunition to counter the inevitable attacks on the new health care law.

Naturally, Republican leaders were quick to voice their opposition.  Shortly after President Obama spoke, House Speaker John Boehner (R-OH) objected to raising the minimum wage, arguing that it would increase unemployment.  “When you raise the cost of something you get less of it…the very people the president purports to help are the ones who are going to be hurt by this.”
Which brings me to the economics.

The classic Econ 101 argument is that employers pay workers their “marginal product,” the value of their contribution to the goods or services produced.  Any policy that forces employers to pay more than that leads to unemployment because it increases the cost of production.  Yet the weight of the economic evidence since 2000 points to little or no employment response to modest increases in the minimum wage. Why?

Part of what’s missing from the Econ 101 story is that, while there’s some correlation between workers’ pay and the value of their work, low-wage workers are not really paid their exact marginal product.  As Jared Bernstein points out, low-wage labor markets may contain poor quality jobs, at least from the perspective of compensation, but that does not imply that the workers themselves are ubiquitously low quality.  On the contrary, low-wage workers have become older and more educated over time yet still receive the same paltry wages they’ve always received; they simply lack the bargaining power to be paid decently for their work.  It’s no wonder, then, why we don't see many workers laid off when their hourly pay goes up a few bucks.

Beyond that, employers do not have to reduce employment in response to higher production costs; they often can, and do, offset those costs in other ways.  One way is to pass some of the costs on to consumers in the form of higher prices.  Employers can also cut wages for higher-paid workers, increase their firm’s productivity by improving operational efficiency, or, in the case of large employers, simply accept lower profits.  Paradoxically, a higher minimum wage may even save some employers money in the long term because it reduces costs associated with higher turnover and vacancies by making minimum wage jobs more desirable. 
Now, you could argue that there are studies that show the minimum wage does in fact cost jobs.  But you would be ignoring the consensus of the most recent wave of economic research.  Besides, there are plenty of states and localities with minimum wages higher than the federal minimum.  If there were a problem with widespread job losses among low-wage workers, we would probably know by now.

You might also say that most minimum wage workers are teenagers working part-time or summer jobs who have their families to support them.  But that’s not right either.  According to the Economic Policy Institute, nearly 88 percent of minimum wage workers are at least 20 years old and more than a third are at least 40.  The average minimum wage worker also earns half of his or her family’s total income.

The good news is that Democrats are finally starting to make these arguments and daring Republicans to fight back.  And in an election year with the Senate on the line, their timing couldn’t have been better.               

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