Job Gains in Texas and Losses in Caifornia and Florida

Minimum Wage: The Tradeoff

Feb 19, 2013 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Labor, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 442 Views    No Comments

Should you support a $9.00 minimum wage?

Expressed in a Boston Fed report, the competing arguments on both sides are persuasive. Proponents emphasize the additional spending that will be created, the minimal, if any, job losses, and their support for low wage workers. Meanwhile, opponents of a higher minimum wage cite jobs lost, higher business costs and price increases.

But who is right?

Some say that it all depends on which study you cite. Here are two that disagree:

During 2004 Santa Fe, NM increased its minimum wage by 65% to $8.50 for all businesses employing more than 25 people. Looking at the impact, researchers concluded that unemployment appreciably rose, the number of hours worked decreased, and demand for unskilled workers declined.

By contrast, a 1992 study co-authored by Alan Kreuger, chair of the President’s Council of Economic Advisers, concluded a New Jersey 80 cent minimum wage increase to $5.05 was primarily beneficial. Surveying 410 fast-food establishments like Wendy’s and Burger King, they found that employment was stable and non-wage benefits were unaffected or even improved. As for prices, yes, they did rise but only by 3% with little impact.

Where does this leave us?

Economists who support the traditional view against the hike might draw a floor (please see below) to show a shortage of jobs or fringe benefits while those for the increase could cite a minimal demand elasticity for labor that means little response to price change.

Instead though, it made sense to me to listen to the Neumark/Wascher paper that summarizes many of the existing studies and concludes that the preponderance of evidence supports the traditional view. However, even more crucially, their final sentence is the perfect advice: “But given that the weight of the evidence points to disemployment effects, the wisdom of pursuing higher minimum wages hinges on the tradeoffs between the effects of minimum wages on different workers and other economic agents, and on whether other policies present more favorable tradeoffs.”

In other words, because your decision about a $9.00 minimum wage touches countless variables, as always, it all comes down to tradeoffs.

The excess supply of worker hours reflects the jobs losses that opponents of the minimum wage hike predict.

The excess supply of worker hours reflects the job losses that opponents of the minimum wage hike predict.

 

 

From 2012, this minimum wage "map" does not include January 1, 2013 cost of living increases (COLAs) in 10 states.

From 2012, this minimum wage “map” from the NY Times does not include January 1, 2013 cost of living increases (COLAs) in 10 states.

Sources and Resources: A perfect example of the minimum wage battle and a summary of many of the pro and con studies in the US and beyond, this 124 page paper from David Neumark and William Wascher is a superb minimum wage reference while the Boston Fed report I cite is much briefer. To gain insight into the President’s thinking, this PBS talk with Alan Kreuger is excellent. Finally, here is the Santa Fe paper for the con side and the Kreuger/Card paper for the pros.

 

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