Published September 12, 2016.
In the Fall 2013 issue of the Review, Alan Manning, a professor of economics at the London School of Economics, weighed the pros and cons of raising the minimum wage. With the issue now on the front burner in the presidential campaign, Manning brings the debate up to date.
The U.S. federal minimum wage has been stuck at $7.25 for nine years, in which time it has fallen in value by about 10 percent in inflation-adjusted terms. And that’s a serious hit to an already modest income, if that is what you are paid. But not all minimum-wage workers have fared so badly; some 30 states, along with some 30 cities and counties, have raised their own minimums to make up for the perceived failure of the federal minimum wage to generate an adequate standard of living, or at least to rise in line with inflation or average private-sector wages.
Now, of course, the campaign to raise minimum wages has spilled over into national politics. The Democratic primary campaign saw Bernie Sanders arguing for a move to a $15 federal minimum, as against Hillary Clinton’s proposal for a $12 minimum. We do not yet know whether Clinton will go higher than the $12 figure in an effort to pull in votes from the left. And there is even more uncertainty about what, if anything, Donald Trump will counter with.
Some of Trump’s past remarks suggested that he does not believe in any federally mandated minimum at all, but more recent statements seem to indicate support for raising the minimum wage to $10. Although most discussion focuses on the number, the timescale is also important — those arguing for higher minimum wages typically argue for phased increases. There are strongly held views on all sides, and passions often run high.
But that begs the question: what should be the level of the minimum wage and why?
For economists, the answer generally turns on weighing the benefits to low-paid workers who remain employed against the costs to workers who are priced out of the market. Few people, though, are on the streets campaigning on these grounds. The argument that inspires advocates is more commonly based around the idea of a “living wage” — a wage that would allow workers to have what would be regarded as a decent standard of living. These two approaches to setting the level of the minimum wage are rather different — and can be in conflict.
On the economists’ side, there is a large academic literature examining the impact of the minimum wage on unemployment. The conclusions are controversial, but the balance of opinion has shifted to the view that minimum wages set at moderate levels do not have a discernible impact on employment. But what is a “moderate” level? Economists look to past experience in the United States and other countries for benchmarks.
The current level of the federal minimum is certainly very low compared to the past in the United States. In real terms, the current federal minimum is about 25 percent lower than at its peak in 1968. It is even lower as a percentage of median earnings; it would take an increase to $10 an hour to restore the percentage enjoyed by low-wage workers in 1968.
But would such an increase be irresponsible? Unlikely, at least judging by the experience of other countries. A $10 minimum in the United States would represent about 50 percent of median hourly earnings. The United Kingdom, for its part, currently has a national minimum wage that is about 55 percent of median earnings, and the consensus is that this has had no adverse effect on the availability of jobs. Germany introduced the national minimum wage in 2015 at a roughly similar level — and here, too, the emerging consensus is that it has not cost jobs. If an increase in the minimum wage were phased in over several years, then $12 would be roughly equivalent to the British and German levels.
But minimum wages at these levels are unlikely to satisfy those who have been behind the “fight for 15.” They argue that a minimum wage of $10 or $12 would not assure minimum-wage workers and their families a decent standard of living. They start at the other end of the calculation, defining an acceptable level of income and then figuring out what hourly minimum wage would get workers from here to there.
These calculations are inevitably somewhat loose. The minimum wage is an hourly rate and, on its own, tells us little about the real household income of a minimum wage worker. That depends on how many hours are worked at the minimum wage, how many other adults are in the household, how much they earn, how many dependents they have and what part of the country they live in. So the living wage number that forms the basis of campaigns is typically an average across workers in very different household circumstances. It follows that, even if the minimum wage was set at somebody’s idea of the living wage number, we would still have some workers with household incomes below the level that is deemed acceptable.
These two approaches to setting minimum wages, one based on how much the labor market will bear and the other based on how much income people need to live decently, will only converge by accident — market economies don’t necessarily tend to generate a minimum level of income to everybody who works. But just because these two ideas are very different does not mean that they are necessarily in conflict all the time. And now may well be one of those times in which they are not so very different.
Almost all rich Western economies are struggling with stagnant or declining living standards for much of the population. The turn to populism of both left and right reflects the dissatisfaction of many with the political establishment, which is seen as having mismanaged the economy (or manipulated market outcomes to favor the interests of the powerful).
In this climate, politicians are eager to find justifications for raising the minimum. Where once there was caution about raising the minimum wage too high and too fast lest it anger business interests and/or destroy jobs, there is now a desire to experiment with minimums somewhat higher than we have experienced in other times and places. For example, earlier this year the UK introduced a 10 percent increase for workers over the age of 25, together with a target to raise it by another 10 percent by 2020.
Of course, this new policy momentum is something of a leap into the unknown, but that does not mean proponents are necessarily mistaken. We have continually been pleasantly surprised that minimum wages once considered likely to be too high have turned out to have little impact on employment. What it does mean, though, is that it will be important to review the impacts of these new higher minimum wages objectively.
This is, in fact, being done. Most of the cities thinking about higher minimum wages have commissioned serious studies on the likely impact, and will study the actual impact as soon as we have enough data to reach an informed judgment (which may be some years).
But this take-baby-steps-before-you-leap approach appeals more to academic economists than to those fired up by enduring inequality and pessimistic about the prospects of redistributing income in ways with less potential impact on market efficiency. So don’t be surprised if the debate continues to shed more heat than light in the years to come.