Minimum Wages

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There’s no such thing as a free lunch. Or is there? For more than a century, politicians have been passing minimum wage laws and opponents have warned of their hidden costs. The argument still rages from Washington to London to Berlin: Does a minimum wage lead to better lives or fewer jobs, more prosperity or less? Or to put it in free-lunch terms, can you safely ignore the downside of higher labor costs as if there’s no law of supply and demand? The answer, after decades of data mining by economists, is a tentative and surprising maybe. Lunch anyone?

 

The Situation

Twenty six countries report minimum-wage data to the OECD. (The first to establish one was New Zealand, in 1894.) The U.S. rate, $7.25 an hour, is 12th-highest in real dollars, behind the U.K.’s (established in 1998 and now about $10.40), and Australia’s ($15.20). More telling: When measured as a share of average wages, the U.S. ranks 24th, at 37 percent, ahead of only the Czech Republic and Estonia. High-wage Germany adopted its first minimum wage, $11.60. Britain enacted a 3 percent increase. Swiss voters in May rejected a proposal to enact the world’s highest, $25 an hour. While the details are different, the argument is the same: Do wage floors help or hurt the economy? In his 2013 State of the Union address, President Barack Obama challenged Congress to boost the federal minimum to $10.10. Capitol Hill Republicans didn’t take the bait, so this year Obama set a $10.10 minimum wage for federal contractors and called on mayors and governors “give America a raise.” Voters in four states did; 26 states and at least 7 U.S. cities will have minimum wages higher than the federal rate starting Jan. 1, 2015. The Congressional Budget Office released a mixed-bag analysis that found that adopting a $10.10 minimum wage nationwide would lift 900,000 people out of poverty while eliminating 500,000 low-income jobs.

Sources: National Conference of State Legislatures, state and local government labor departments
Sources: National Conference of State Legislatures, state and local government labor departments

The Background

The U.S. federal minimum wage has been raised 22 times since Congress created it in 1938 at 25 cents an hour, most recently in 2007. Economists have been quarrelling about it all along. What no one disputes is that the buying power of the wage has eroded. Adjusted for inflation, the value peaked in February 1968 when it was $1.60, about $10.70 in today’s dollars. Some studies conclude that higher wage floors lead to fewer jobs. That was the consensus until the 1990s, when a flurry of new state minimums exceeding the federal rate (the higher rate always applies) gave researchers more ways to study the effects of wage hikes on adjacent communities. A landmark 1994 report compared employment at fast-food outlets in New Jersey and Pennsylvania two years after New Jersey raised its hourly minimum wage from $4.25 to $5.05. Job prospects improved for low-wage workers in New Jersey.

Sources: U.S. Department of Labor; Inflation Calculator: Bureau of Labor Statistics
Sources: U.S. Department of Labor; Inflation Calculator: Bureau of Labor Statistics

The Argument

Minimum-wage enthusiasts contend that workers aren’t the only beneficiaries. They say companies that rely on low-skilled labor, such as Wal-Mart and McDonald’s, enjoy lower turnover and increased consumer spending as people use bigger paychecks to buy more stuff. Fewer workers would need food stamps and other aid to make ends meet. Maybe. Somewhere along the line, someone has to bear the cost of higher wages — that pesky free-lunch conundrum. A substantial burden would fall on the low-skilled and working poor if they had fewer jobs available to them. Wage mandates nibble at corporate profits, increase prices, or both, things no one wants in a sluggish economy. The minimum wage is an inefficient tool for poverty relief because so many of its beneficiaries, such as teenagers and part-timers, aren’t poor. While economists squabble over who picks up the check — assuming there is one — the debate is becoming more and more academic. Not many Americans work for $7.25 an hour these days. In 2012, fewer than 4 percent of the country’s 144 million workers earned that amount.

The Reference Shelf

  • Bloomberg Rankings has international minimum wage statistics, including comparisons of minimum wages to median wages in 25 countries.
  • Bloomberg Businessweek recaps the history, politics and economics of the U.S. minimum wage.
  • Two economists, David Neumark and William Wascher, review the history of the U.S. minimum wage and evidence pro and con.
  • The CBO’s predictions of the economic impact of a $10.10 minimum wage.
  • The Center for Economic Policy and Research’s argument for raising the wage.
  • The Bureau of Labor Statistics reported on the demographic and socioeconomic characteristics of low-wage American workers in 2012.

First Published Feb. 25, 2014

To contact the writer of this QuickTake:

Lorraine Woellert in Washington at lwoellert@bloomberg.net

To contact the editor responsible for this QuickTake:

Jonathan I. Landman at jlandman4@bloomberg.net