Blog Post

Blogs review: The Minimum Wage debate

What’s at stake: In his State of the Union Address, US President Barack Obama resurrected a pledge to raise the minimum wage he had made during the 2008 campaign. In an effort to fight inequality, alleviate poverty and make work more attractive President Obama proposed proposed a $9 federal minimum wage, indexed to inflation. This has generated a lot of writings in the blogosphere, with the main issues revolving around the classic questions of the employment effect of the minimum wage as well as its efficacy as a means of redistribution.

By: and Date: March 4, 2013 Global Economics & Governance Tags & Topics

What’s at stake: In his State of the Union Address, US President Barack Obama resurrected a pledge to raise the minimum wage he had made during the 2008 campaign. In an effort to fight inequality, alleviate poverty and make work more attractive President Obama proposed proposed a $9 federal minimum wage, indexed to inflation. This has generated a lot of writings in the blogosphere, with the main issues revolving around the classic questions of the employment effect of the minimum wage as well as its efficacy as a means of redistribution.

A historical perspective on the minimum wage

Arindrajit Dube (whose paper was quoted in Obama’s SoU) writes that in 1968 the minimum wage was around 50 percent of the average production-worker wage. If that were true today, that minimum wage would be around $10 an hour. So from that perspective, raising it to $9 is well within, indeed under, the historical norm. Another way to think about this is looking at other countries. There are many countries in the developed world that have a minimum wage that is as, or even more, generous than 50 percent of average wages. Another way to think about this is to consider what the purchasing power of the minimum wage. The 1968 minimum wage, adjusted for inflation, today would be somewhere between $9.25 and $10.50 depending on what CPI index you use. Again what the Obama administration is proposing is safely below this. Dube also notes that 9 states already have an indexed cost-of-living increase for the minimum wage.

In a 2012 column, The Economist reports that New Zealand pioneered the first national pay floor in 1894. America’s federal minimum wage dates from 1938.

Source: The Berkeley Blog [HT Ilan Tojerow]

The macroeconomic argument for a minimum wage

Jared Bernstein writes that the share of workers picked up in the “sweep,” i.e., the area between the current and the proposed new minimum wage has, historically, been less than 10% of the workforce

Source: John Schmitt (2013) [HT Jared Bernstein]

Christina Romer writes that if an increase in the minimum wage successfully redistributed some income to the poor, it could increase overall consumer spending — which could stimulate employment and output growth. But the effects would probably be small. The president’s proposal would raise annual income by $3,500 for a full-time minimum-wage worker. A recent analysis found that 13 million workers earn less than $9 an hour. If they were all working full time at the current minimum — and a majority are not — the income increase from the higher minimum wage would be only about $50 billion. Even assuming that all of that higher income was redistributed from the wealthiest families, the difference in spending behavior between low-income and high-income consumers is likely to translate into only about an additional $10 billion to $20 billion in consumer purchases. That’s not much in a $15 trillion economy.

Source: Jappelli and Pistaferri (2012) [HT Owen Zidar]

Complicated employment effects

Edward Glaesner writes that Alan Krueger, now chairman of the Council of Economic Advisers, and David Card, of the University of California at Berkeley, are responsible for the research that reopened the debate on the efficiency costs of the minimum wage. They compared fast-food workers in New Jersey and Pennsylvania and found little decline in employment after New Jersey raised its minimum wage in 1992. Their 1997 book brings together five years of their serious scholarship, which suggests that at low levels an increase in minimum wage does little to discourage employment. For a useful presentation of the most recent evidence that generalize the Krueger-Card methodology, you can read this interview with Arindrajit Dube.

Gary Becker sends us to a recent paper by Neumark, Salas and Wascher (2013) supports the allegation that a higher minimum wage had negative employment impact on vulnerable groups like teenagers. Studies by French economists Guy Laroque and Bernard Salanie also support the view that minimum wages reduces the employment of women and young people. Stephen Gordon that the US evidence of harmless employment effects is not confirmed when looking at Canadian data, which offers more province (State)-level variation. He cites a 2005 study by Morley Gunderson that reviews evidence supporting above-consensus employment elasticities with regard to minimum wages, suggesting a 10% increase in the minimum wage would lead to a 3-6% reduction in employment of teens.

Imperfect competition and the minimum wage

Christina Romer writes that one argument for a minimum wage is that there sometimes isn’t enough competition among employers. In our nation’s history, there have been company towns where one employer truly dominated the local economy. As a result, that employer could affect the going wage for the entire area. In such a situation, a minimum wage can not only make workers better off but can also lead to more efficient levels of production and employment. But I suspect that few people, including economists, find this argument compelling today. Company towns are largely a thing of the past in this country; even Wal-Mart Stores, the nation’s largest employer, faces substantial competition for workers in most places. And many employers paying the minimum wage are small businesses that clearly face strong competition for workers.

Daniel Kuehn argues that if employment relationships create rents, these must be divided between employer and employee by means of a bargaining solution. If workers are in a weak bargaining position, a minimum wage can support their position in the struggle for rent capture.

The EITC as a substitute or complement to the minimum wage

Christina Romer writes that we could do so much better if we were willing to spend some money. If a higher minimum wage were the only anti-poverty initiative available, I would support it. It helps some low-income workers, and the costs in terms of employment and inefficiency are likely small. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time. And pre-kindergarten education, which the president proposes to make universal, has been shown in rigorous studies to strengthen families and reduce poverty and crime. Greg Mankiw agrees with her analysis.

Arindrajit Dube writes that research by Berkeley economist Jesse Rothstein shows that roughly 27 cents on the dollar from the EITC is passed on to employers. So there’s some leakage there. And for some people, the presence of EITC acts as a multiplier for a hike in the minimum wage. So as a result, when thinking in terms of efficacy, these two policies may complement each other. They may go together. David Lee and Emmanuel Saez have also theorized that, when employers capture part of an EITC, a minimum wage is a good compliment.

Paul Krugman writes that the complementarity of the two measures is actually Econ 101, but done right: given a second-best world in which you use imperfect tools to help deserving workers, two tools together can produce a better outcome than either one on its own.

Jared Bernstein writes that those who solely depend on the redistribution through the tax and transfer code are implicitly calling for Congress to ratchet up these measures year after year.  That’s not going to happen, so every few years we need to raise the wage floor so as to be certain that low-wage workers get a slightly larger share of the pre-tax growth they’re helping to create (and if we index the wage floor, as the President proposes, we won’t have to keep revisiting it). Mark Thoma makes a similar point and fears that opponents of the minimum wage on the right will team up with well-meaning Democrats to say yes, we agree, the EITC is much, much better way to help the poor and use it as an excuse to block minimum wage legislation. Then, when it comes time to fund the EITC, we’ll here that it’s a good idea, but with the budget the way it is, we just can’t afford it right now.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The abandonment of counter-cyclical fiscal policy

What’s at stake: The reluctance to use fiscal policy as a stabilizing tool in the current deflationary environment has been puzzling to many and a number of authors are now putting forward possible explanations.

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: May 30, 2016
Read article More on this topic

Blog Post

Uuriintuya Batsaikhan
Pia Hüttl

The benefits and drawbacks of TTIP

What’s at stake: Since the recent leak of documents on TTIP (Transatlantic Trade and Investment Partnership) negotiations, there has been renewed interest in the trade deal. This blog review looks at studies on the estimated impacts of TTIP on growth, labour markets and social conditions. We also summarise its impact on countries outside the deal, and look at the debates surrounding its counterpart, the TPP (Trans-Pacific Partnership).

By: Uuriintuya Batsaikhan and Pia Hüttl Topic: Global Economics & Governance Date: May 23, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Regulation and growth

What’s at stake: A heated debate took place this week on the blogosphere on the link between regulation and growth following an op-ed by John Cochrane claiming the US economy could be five times richer if regulations were scrapped.

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: May 16, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The economics of crime and punishment

What’s at stake: The Senate announced this week revisions to a sentencing reform bill – the Sentencing Reform and Corrections Act – that would lower mandatory minimums for some low-level drug crimes.

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: May 2, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Understanding HM Treasury’s Brexit analysis

What’s at stake: The UK will hold a referendum on its membership of the EU on June 23rd 2016. Her Majesty’s Treasury released an assessment of the impact of Brexit finding that the economy would be between 3 and 7% smaller in 2030 if the UK left the EU than it would be if it stayed in.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: April 25, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Trade deficits and jobs at the ZLB

What’s at stake: In the populist narrative against globalization, trade deficits are seen as costing jobs. While this mercantilist view of the world is hard to square in normal times, a number of authors have suggested that the intellectual basis for that view is stronger in a liquidity trap.

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: April 4, 2016
Read article More by this author

Blog Post

Jérémie Cohen-Setton

The procyclicality of TFP growth

What’s at stake: The argument that total factor productivity (TFP) is procyclical has been getting a lot of airtime over the past few weeks as it was central to understanding the recent controversy over the economic impact of Sanders. But it also speaks to the question of the current TFP slowdown and to the issue of a clean separation between cycles and trends.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance, Global Economics & Governance Date: March 29, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The trade-backlash explanation of Trump & Sanders

What’s at stake: The success of presidential candidates Donald Trump and Bernie Sanders has had bloggers wondered whether the backlash against globalization is eventually getting political traction.

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: March 21, 2016
Read article More on this topic

Blog Post

Pia Hüttl
Alvaro Leandro

Helicopter drops reloaded

What’s at stake: Central banks have recently been scaling up their unconventional monetary policy measures. Discussions about helicopter money seem to be getting ever louder. We review the theoretical discussions, the effectiveness of tax-rebates and legal and political complications

By: Pia Hüttl and Alvaro Leandro Topic: European Macroeconomics & Governance Date: March 14, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The elimination of high denomination notes

What’s at stake: As high-denomination notes (HDNs) make it easier to transact crime, finance terrorism, and evade taxes, a number of commentators have called for their elimination.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: March 7, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The Sanders controversy

What’s at stake: A recent study claiming that Sanders policies would produce 5.3 percent growth a year over the next decade has been at the center of this week’s discussions in the blogosphere.

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: February 29, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The impotency of central banks

What’s at stake: The negative market reaction to the latest efforts to provide further monetary stimulus has generated an important discussion on whether central banks have lost credibility in their abilities to fight downside risks and shore up economies.

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: February 22, 2016
Load more posts