The problem with large increases in the minimum wage

Charles Lane writes at the Washington Post:

Meanwhile, in California, Democratic Gov. Jerry Brown and the state’s labor leaders have announced legislationto raise the state’s minimum wage from $10 to $15 per hour; it’s likely to pass the Democratic-majority legislature.

Whatever else might be said about this plan, it does not represent an exercise in evidence-based policymaking.

To the contrary: There’s a total lack of evidence that the potential benefits would outweigh potential costs — and ample reason to worry they would not.

 The basic trade-off, per Economics 101, is that the increased earnings that a higher minimum wage gives workers at the low end of the income scale might be offset by pricing those workers out of jobs they could have had at less than the new, higher minimum wage.

If this was not true, you’d simply set the minimum wage at $100 an hour.

That view has been modified, a bit, in recent years to reflect research by Alan Krueger and David Card suggesting that employment effects of moderate increases in the minimum wage — the kind typically enacted by Congress — can be neutral or slightly positive, due in part to greater employee retention and higher productivity.

The key word there is “moderate.” California’s increase is huge, or, in the Brooklynese of that proponent of “15 bucks an hour,” Sen. Bernie Sanders (I-Vt.), “Yuuuge.”

So yes moderate increases can be done without a large impact on jobs.

By 2022, when fully phased in (small firms with fewer than 25 workers would have until 2023 to comply), the California minimum wage would represent 69 percent of the median hourly wage in the state, assuming 2.2 percent annual growth from the current median of roughly $19 per hour.

That 69 percent ratio would be all but unprecedented, in U.S. terms and internationally.

That 69% is very close to what we have in NZ – 67%.

Other industrial democracies with statutory minimum wages typically set theirs at half the national median wage, too.

Dube, generally a supporter of minimum wages, recommended that states use 50 percent of the median as their benchmark in the United States.

So the NZ minimum wage is already considerably more than most countries.

Comments (28)

Login to comment or vote

Add a Comment