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Wednesday, Jan 4, 2012 3:30 PM UTC

The bogus case against the minimum wage hike

The action in eight states will help 1 million workers and won't cause job loss

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Topics: U.S. Economy,

The bogus case against the minimum wage hike (Credit: iStockphoto/Alexey Stiop)

Eight states and one city (San Francisco) raised their minimum wage this week, providing a pay raise to just over 1 million workers. In the face of this good news, the opponents of the minimum wage are warning of serious job loss. They are likely to be proved wrong, yet again.

A simple Econ 101 story argues that a higher minimum wage will lead to fewer jobs for teenagers and other workers at the bottom rungs of the labor market. However, at this point a large body of research shows that increases in the minimum wage at the national, state and even local levels have not cost jobs. That may sound counterintuitive; after all, economists always say that when the price rises, demand falls. This should mean that with a higher minimum wage, employers will want fewer workers.

The real story, however, is somewhat more complex. Employers not only care about the wages they pay, they also care about workers’ productivity, and the rise in the pay by itself may cause workers to be more productive.

There are two reasons why this could be true. The first is simply that workers may feel better about their jobs and take them more seriously if they are paid a higher wage. In effect, the higher minimum wage will make the workers getting paid the minimum better workers. Economists call this effect an “efficiency wage” and there is a substantial body of empirical research to support it.

The other way in which a minimum-wage hike could increase productivity is by reducing turnover. Turnover imposes substantial costs even for the least skilled positions. It requires managers’ time to review applications and interview applicants. In addition, once a new worker is hired, they will require some on-the-job training and supervision. If a higher minimum wage persuades workers to stay at their job longer, many employers will more than offset the higher wage costs by reduced turnover costs. Recent research has demonstrated just this kind of strong connection between a higher minimum wage and lower turnover.

Even if a higher minimum wage did lead to some fall in employment, low-wage workers would almost certainly still be much better off with a higher minimum wage. This is apparent from considering the nature of low-wage work.

As noted before, these jobs tend to be high turnover jobs that workers do not hold for long periods of time. In this context, any job loss associated with a higher minimum wage is unlikely to take the form of workers being laid off from their jobs. More typically it would mean that there will be fewer jobs available so that workers spend more time between jobs.

The issue of job loss is then transformed into a situation where a typical low-wage worker is employed for fewer hours per week or per year, but gets more money for each hour worked. The question is then the relative size of these effects.

Critics of the minimum wage typically argue that a 10 percent increase in the minimum wage would reduce employment of minimum-wage workers by 1-2 percent.

That hardly seems like a bad deal for most workers. Minimum-wage workers will put in 1-2 percent fewer hours over the course of a year, but they will still end up with 8-9 percent more in their paychecks for the year.

It’s also worth noting that most workers who benefit from a minimum wage hike are not teenagers. About 70 percent of the workers who received an increase as a result of the last minimum-wage increase were 20 or older, according to this study.

Higher minimum wages are a simple and effective mechanism for helping the lowest-paid workers. It is also important to remember this is not new ground. In the prosperous decades immediately following World War II, the minimum wage was actually higher than it is today. Adjusting for inflation, the minimum wage would have to rise to about $9 an hour to reach its peak level in 1968. If the minimum wage had kept pace with productivity growth over the last three decades — as it did in the three decades after World War II — the rate would be over $15 today.

Despite criticisms from vocal business opponents, polls consistently show that Democrats, Independents and Republicans all voice support for the minimum wage. This makes sense.  Higher minimum wages are about rewarding work and making it possible for workers to earn enough to support a family, with a minimum of government bureaucracy.

Dean Baker is a co-director and John Schmitt is a senior economist at the Center for Economic and Policy Research More Dean Baker and John Schmitt.

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