By Robert Hahn and Peter Passell
The minimum wage issue – a hardy perennial one dividing liberals and conservatives – is once again bubbling. In his State of the Union speech, President Obama called for a hike from $7.25 to $9.00 an hour, arguing that “in the wealthiest nation on Earth, no one who works full-time should have to live in poverty.” And this week Costco’s CEO Craig Jelinek upped the ante, calling for a $10 minimum – a bold move made only slightly less bold by the fact that Costco’s starting wage is $11.50.
The argument between those who say a higher minimum is only a matter of justice and those who counter that it would destroy jobs seems to have been caught in an endless loop ever since 1938, when New Dealers rammed through a minimum wage (25 cents an hour, or roughly $4 in today’s money). Indeed, the only folks who have apparently wavered in their opinion are the alleged experts (us economists). And that’s only because Washington’s rhetoric about raising the living standards of the working poor by other means has never rung more hollow.
Pros vs. Cons
Back up a moment: The case against minimum wages is pretty obvious, even to those who slept through Econ 101. If the legal minimum wage exceeds the wage determined by the supply and demand in a competitive market for labor, somebody who is willing to work won’t be able to find it.
But it isn’t quite that simple: If the labor market isn’t competitive, a hike in the minimum wage may actually increase hires. In fact, there’s real-world evidence that, in some instances, a raise in the minimum wage has created jobs. In a now-classic study, David Card and Alan Krueger (then, at Princeton) compared employment in the fast-food industry after New Jersey upped its minimum wage in 1992 and Pennsylvania, across the river, didn’t. Contrary to expectations, employment rose in New Jersey relative to Pennsylvania. Since then, a host of other studies comparing states have also found that higher minimums led to more employment – or not less, anyway.
The last word on the subject? No way. Indeed, the Card-Krueger result triggered a flood of rebuttals, some of which were based on respectable research. One distinguished economist, David Neumark (University of California, Irvine), has spent much of his career retracing Card-Krueger’s footsteps and coming to the opposite conclusion.
This Isn't About Poverty
So who’s right? Darned if we know. The answer probably varies with place and time since it depends on the competitiveness of the labor market. But it’s striking how far the conventional wisdom has drifted to the left on this issue. The Economist, which often defines the establishment view on economic policy, recently concluded that a “carefully imposed minimum wage ... can raise incomes at the bottom of the wage spectrum without much reducing employment.”