December 8, 2013
Raise the Federal Minimum Wage (But Not Too Far)
Raise the Federal Minimum Wage (But Not Too Far)—Posner
Minimum-wage laws are a traditional bête noire of free-market economists because a government-mandated wage floor interferes with freedom of contract between employers and employees. Moreover, a law that increases wages is expected to reduce employment, because the marginal product of some workers, though equal to or above the free-market wage, may be below the minimum wage.
Despite this, there is very little evidence that minimum wage laws have a significant disemployment effect. Studies have found, for example, that when one state raises its minimum wage, and an adjacent state does not, a comparison of employment in adjacent counties consisting of one in one state and one in the other state reveals no drop in employment in the county located in the state that increased its minimum wage.
One reason the federal minimum wage seems not to have a significant disemployment effect is that it has been falling in real terms for many years. In current (2013) dollars it was $10.60 in 1968; today it is $7.25. That is a poverty-level wage, as it translates into an annual income (assuming a worker works 50 40-hour weeks in a year) of only $14,500. And I am not aware that the real (that is, inflation-adjusted) reduction in the minimum wage resulted in increased employment.
With the federal minimum wage so low, it strains credulity to think that increasing it would cause significant disemployment (though this depends of course on how much it's increased—I'll come back to that critical issue shortly). Many persons who can't command a wage higher than the federal minimum will prefer not to work, but instead to live on public benefits, engage in petty crime, switch to household work, engage in protracted search for better employment (and not work during the search), or even beg. An increase in the minimum wage will increase their incentive to seek productive work. In addition, forced to pay a higher wage, employers may invest more in their workers' human capital—may give them better training, for example, to make them more productive and thus worth their higher wage to the employer. If the percentage increase in the minimum wage exceeds the percentage drop in employment that results from that increase, the aggregate income of persons at the bottom of the income distribution will rise, reducing inequality of income—a growing phenomenon, and serious social problem, in the United States. Notice too that to the extent that the minimum wage deflects workers to dependence on public benefits, or to crime, it imposes costs on the society at large that may offset the costs resulting from any disemployment caused by an increase in the mininum wage, provided that disemployment effect is modest.
That proviso is critical, and a reminder that at some level an increase in the minimum wage is bound to produce significant disemployment effects, causing some businesses to shrink and others to automate. There is much talk about increasing the minimum wage to $10 or $13 an hour. It seems both imprudent and unnecessary to consider such steep, sudden jumps. I would favor increasing the federal minimum wage by 20 percent, to $8.70 an hour. That would yield a minimum-wage worker an annual income (assuming he or she worked 2000 hours per year) of $17,400—still very modest; but if he disemployment effect proves to be slight, as I would guess it would be, a furher increase could be considered. At the very least, the 20 percent increase would yield valuable information on the elasticity of unemployment to changes in the minimum wage.
If the disemployment effect of a 20 percent increase in the federal minimum wage were slight, the redistributive effect of the increase would in my opinion justify it as a measure for reducing the growing inequality of income in the United States.
Minimum Wages, Employment, and Inequality-Becker
President Obama recently lamented the growth in inequality in the United States, and called, among other things, for an increase in the federal minimum wage from its present level of $7.25. The problem is that a much higher federal minimum would raise unemployment, and widen inequality among young persons with few skills.
Many factors contributed to the large growth in inequality since 1980. One is the large widening of the gap in earnings between more educated and skilled workers compared to less educated workers with few skills. I have written about this force several times (e.g., see my blog, "Contrived Inequality and Equality", 2/11/13), and will concentrate here on the large decline in employment of younger workers.
A depressing statistic is that the fraction of healthy younger men who are not in school, not working, and not looking for work has risen at a rapid rate during the past 25 years. For example, about one third of black men and one eighth of white men in their mid 20s to early 30s were not working or looking for work even prior to the Great Recession. These percentages are considerably higher for younger men without much education or skills.
So many of these men are not in the labor force partly because real wages of unskilled males have fallen appreciably during the past 30 years. Many decide not to look for jobs with low pay. Also relevant (as stressed in studies by my colleague Derek Neal) is that many younger men, especially black men, are in prison, on parole, or on bail, and they either cannot work, or have trouble getting jobs. Others realize that they can do almost as well financially by not working through collecting food stamps, Medicaid if they get sick, unemployment compensation, and housing benefits.
The present federal minimum wage is not an important contributor to these high propensities to be of out of the labor force for men beyond their teens. However, an increase in the federal minimum to $10.10 an hour, as proposed in a bill by Senator Tom Harkin, and even more the increases of the minimum to $12 an hour and $15 an hour proposed by others, would greatly worsen the employment prospects of the already highly vulnerable group of younger men with limited education and skills.
Economists generally, although not universally, agree that high minimum wages reduces the employment of younger persons with little skills because that prices some of them out of the fast food and other competitive sectors that employ these individuals. Any reasonable model of competitive behavior implies that higher minimum wages induce firms to reduce their employment of low skilled workers. The magnitude of the effect on employment depends on the size of the increase in the minimum- an increase to over $10 an hour is a big increase- and how the new wage compares to average wages- $10 is about half the average wage in the American economy.
Valuable perspective comes from the French experience, for the French minimum wage of almost $13 an hour has been one of the highest in the developed world. It is no coincidence that the unemployment rate of French youth is over 25%, and it is said to be over 40% for young Moslem males. A study by Abowd, et al, "Minimum Wages and Employment in France and the United States", 2009 shows that even before the financial crisis hit, the high French minimum wage was appreciably impacting the employment of young French men and women. They did not find much affect of the much lower American minimum on employment, although others have shown that even the relatively low American minimum wage prices some teenagers out of the labor market since they do not add enough value to employers.
The president advocated a higher minimum wage as a way to reduce inequality in earnings. It might reduce overall earnings inequality, particularly if the percentage reduction in employment of those workers affected by the new minimum was smaller than the percentage increase in their wage. However, the inequality in earnings among low skilled workers would increase, not decrease, since some of these workers would get much better pay, while others would be unable to find work at the higher minimum wages.
Minimum wages are usually popular because people count the effect on the earnings of those who then get higher pay, while they neglect the negative effect on the employment of other skilled workers. This is a particularly bad time to have a large increase in the American minimum wage since unemployment rates are still high, especially for younger workers, and many of them have given up looking for jobs. A large hike in the minimum would make economically vulnerable groups even more vulnerable.