The minimum wage law is a constantly debated issue amongst economists and politicians, and there have been multiple pieces of research on the topic for and against this measure. In light of the work of US-based economists David Card and Alan Krueger, who recently won the Nobel Prize in economics, this article provides a brief analysis of this issue.
The Federal minimum wage historically
The federal minimum wage was implemented in 1938 under the Fair Labor Standards Act, setting it at 40 cents per hour. The purpose of the minimum wage as a price floor was to stabilize the post-depression economy and protect the workers in the labor force who lacked sufficient bargaining power to secure a raise, while also creating a minimum standard of living. Since then, it has increased 22 times up to 7.25$ today. In detail, during the period between the 1940s-1960s, wage increases progressed along with productivity growth and inflation, as depicted in the graph below. However, after the 1970s, it started stagnating and inflation eroded a big proportion of the purchasing power of people. To put things into perspective, the minimum wage in 2019 had 17% less purchasing power than it did 10 years ago. It can thus be logically inferred that the minimum wage has a significant impact on the around 400000 workers who earn it, and the 17 million Americans who earn below that.
The effects of raising it
Typically, one of the first things that students are taught in economics courses is that price floors cause supply to exceed demand, a.k.a. a surplus, or in this case, unemployment. Employers will demand fewer workers and people will enter the labor force as the opportunity cost of leisure has increased. This theory was the central element in the debate for the minimum wage for decades, accompanied by this chart.
In the paper first published in 1993, on the other hand, Alan Krueger and David Card defied that conventional wisdom. They examined unemployment in the case of an increase from $4.25 to $5.05 in New Jersey’s minimum wage and surveyed more than 400 restaurants in New Jersey and Pennsylvania. They concluded that employment did not decrease in New Jersey and supported that the minimum wage did not hurt jobs. After that, many countries also adopted minimum wage policies, and this study led to a new focus on empirical data instead of theory.
How much is too much?
The truth is that the effect of a minimum wage policy depends on the sector, whether labor can be replaced by machines, the profit margins, and many other factors that are hard to quantify in an analysis. For instance, the effect on states that have higher standards of living might be minimal like New York, but very important in states like Alabama. It needs to be noted though that after a certain point, raising it will eventually cause unemployment. The Congressional Budget Office (CBO) estimated 1.4 million jobs would be lost from the federal minimum wage increase to $15 in 2025. Is 15$ too much, or will it still have the effects mentioned by Alan Krueger and David Card? Employers can nevertheless still absorb these costs in alternative ways, such as reducing fringe benefits or even raising the prices of their products, which are often not accounted for in these types of research. Moreover, the four-year time period in which this measure will be implemented does indeed give employers time to react and balance out this situation.
Democrats are firmly defending this increase, and some Republicans support this policy too, but not at 15$ an hour (they insist that 10$ is a more reasonable level). These types of measures are generally popular in the political sphere as people tend to support them. Especially in a climate of intense political polarization, “popularism” (the essence that Democrats should talk about popular issues and avoid the unpopular ones in order to gain support), and intense debates, this economic policy is mostly being used as a political tool, rather than a measure to increase the wellbeing of its citizens.