The Economic Policy Institute has released a letter signed by 75 economists–including 7 winners of the Nobel (Memorial) Prize in economics–calling for the federal government to raise the national minimum wage from its current level of $7.25 to $10.10 by 2016. In this post I want to explain how this is possible, and why I remain wedded to the (literally) textbook discussion of minimum wages.
The obvious downside of raising the minimum wage is that it would cause unemployment among low-skilled workers, the very people allegedly being helped. Yet according to the EPI letter, the evidence shows that previous increases in the minimum wage have had “little or no negative effect on the employment of minimum wage workers, even during times of weakness in the labor market.”
If you want to see where these economists are coming from, try this survey article. It documents how the consensus through the 1990s used to be just what we all learned (and taught, for some of us) in Intro: Raising the minimum wage reduces the quantity demanded for low-skilled workers, thereby reducing job opportunities.
Yet from the 1990s onward, the literature began shifting. From today’s vantage point, the new consensus is apparently that modest increases in the minimum wage have little impact on employment. Hence, you have progressive economists clamoring for a hike, who say that the critics relying on “textbook economics” haven’t kept up with the cutting-edge literature.
I have several responses to these developments:
(1) Even among the studies that conclude a hike in the minimum wage will have little discernible impact, the outcome is couched as a “modest” hike. I have seen studies say things like “a 10 percent increase in the minimum wage will have such and such effect.” Yet disregarding price inflation through 2016, the EPI letter calls for a 39% increase! I could be mistaken, but I don’t think there exists a single academic study concluding that a 39% hike in the minimum wage would have no appreciable effect on employment. Thus, even if we stipulated all of the recent empirical studies as gospel, the 75 economists have no basis for their recommended policy. At best they should be arguing that, say, a hike from the current $7.25 to $8 per hour (and thereafter adjusted for price inflation) would not measurably hurt employment.