July 31, 2012 by David K. Sutton
Only the ‘One Percent’ and their sympathizers oppose raising the minimum wage
I reported on Friday that over 100 House Democrats are proposing a raise in the minimum wage from $7.25 to $9.80 over the next 3 years, and then tie it to inflation after that. We know it polls high, so who could possibly be against raising the minimum wage? Could it be those noble and patriotic business owners? OK, maybe it’s not all of them but it’s safe to say most of the opposition to raising the minimum wage is comes from the “one percent” and their sympathizers in congress, otherwise known as the Republican Party.
Here are some facts in support of raising the minimum wage:
As a 1995 paper in the Journal of Economics Literature put it, “There is a long history of empirical studies attempting to pin down the effects of minimum wages, with limited success.” No one found significant employment losses when President Truman raised the minimum wage by 87% in 1950. When Congress raised the minimum wage by 28% in two steps in 1967, businesses predicted large employment losses and price increases. As the Wall Street Journal reported six months later, “Employment and prices show little effect from $1.40-an-hour guarantee.”
The buying power of the minimum wage reached its peak in 1968 at about $10, adjusting for inflation. The unemployment rate went from 3.8% in 1967 to 3.6% in 1968 to 3.5% in 1969. The next time the unemployment rate came close to those levels was after the minimum wage raises of 1996 and 1997. Business Week observed in 2001, “Many economists have backed away from the argument that minimum wage [laws] lead to fewer jobs.”
Increasing the minimum wage helps ensure employees are rewarded for their hard work and boosts the incomes of low-wage workers—something that is sorely needed to increase consumption and get the economy going. It reduces turnover and helps employers compete on a more level playing field, forcing firms away from a low-road, low-human capital investment model to one where workers stay attached to the workforce and employers make stronger investments in training. Taxpayers are better off because they have to bear fewer of the negative externalities from low-road employers—such as the costs of food stamps and Medicaid.
There is also a growing consensus among economists and academics that raising the minimum wage does not kill jobs even during periods of recession.
The first study, published in November 2010 in the Review of Economics and Statistics by Arindrajit Dube of the University of Massachusetts, Amherst; T. William Lester of the University of North Carolina, Chapel Hill; and Michael Reich of the University of California, Berkeley, compared all of the adjacent counties that touch a state border where there is a difference in the mandated minimum wage in each state. Overall, the authors found that minimum wage increases raise wages for low-wage workers but do not reduce employment. Critically, this paper also demonstrated how previous research detected an erroneous “disemployment” effect by failing to control for broad regional growth trends.
The second recent study, published in April in Industrial Relations by Sylvia A. Allegretto of the University of California, Berkeley; Arindrajit Dube; and Michael Reich, focused on state-level data. The authors replicated the models of researchers whose studies of teen employment found that increases in the minimum wage create job losses and are often cited by minimum wage opponents. (Teen employment is often viewed by minimum wage scholars as an indicator of the impact on the lowest-skilled workers.)
Again, however, when the authors added appropriate variables to control for regional differences—variables that previous researchers had omitted—they found that minimum wage increases do not reduce teen employment levels. Allegretto, Dube, and Reich specifically included an analysis of the effect of the minimum wage during the recessions of 1990–1991, 2001, and 2007–2009 and again found no impact on hours worked or employment levels.
This is really simple. It’s about getting more money into the hands of the people who are most likely to put it right back into the economy. If the money goes back into the economy the economy improves, reducing or eliminating any of the speculated downsides of increasing the minimum wage. There are probably limits to how far you can push this, but an 85 cent increase per calendar year over the next 3 years hardly seems radical to me.