Whether minimum wages help or hurt economic growth remains a contentious topic, and Barack Obama’s promise last night during his State of the Union address to raise America’s lowest wages will add fuel to the debate. Obama asked Congress to raise the federal US minimum wage to $9 an hour (from the current $7.25) by 2015, and to adjust it thereafter with inflation. The White House claims the change will help low-income families without dampening employment or putting too much stress on businesses. But there are many who vehemently disagree.
Opponents of higher minimum wages argue that making employees more expensive deters businesses from hiring. David Neumark, an economist whose research is often cited by opponents of wage increases, suggests that the benefits of greater minimum wages often go to teenagers from higher-income families working part-time jobs. According to this logic, the suburban 17-year old flipping burgers after school for pocket money would be the main recipient of Obama’s wage hike, rather than the “family with two kids that earns the minimum wage,” touted by the president as the benefactor of his suggested policy change. One study shows that 34% of minimum-wage workers belong to families with incomes three times above the poverty line; only 17% of the country’s lowest-wage earners live in families below the line.
This research also indicates that minimum wage increases not only accrue to those who don’t need them the most, but actually reduce employment among these unintended beneficiaries. One study looking at the effects of New York state’s 2004-2006 minimum wage increase (from $5.15 to $6.75) found that employment among 16 to 29-year olds fell 26% in that period.
But a study conducted by the Massachusetts Budget and Policy Center reports more nuanced findings. Young people may be laid off in greater droves than their older counterparts after wage hikes, but overall, low-wage sectors see more growth than higher-paid sectors in the wake of these increases.
So increases in minimum wage might actually stimulate job growth in low-wage sectors, overall. States with larger minimum wage increases saw smaller drops in employment during the Great Recession, according to this research.
Some people claim that businesses just assume the loss of increased wages, and keep on hiring anyway (though fewer teenagers). Or that the costs of higher minimum wages are merely passed on to consumers.
Regarding the first possibility, reduced corporate profits might not be such a bad thing given that they’re at an all-time high. Regarding the second, hiking consumer prices is only really an option if demand is high. Currently, it’s not, and a lowest-wage increases might even increase overall demand. After all, a thousand people each earning $10,000 per year will create more demand in the economy than a single person who earns $10 million.
But there’s always the possibility that businesses will just ship more work overseas, right? That, however, is less likely to happen than ever before, because in the past ten years, the United States has had the slowest minimum wage growth of any OECD country, other than Turkey and Spain (where wages have decreased).
However, reports The Economist, the gap between academic economists who believe higher minimum wages have detrimental effects and those who don’t is narrowing. Supposedly, more of them are coming around to the idea that if higher minimum wages are shown to reduce employment in some US states, it’s because of differences between the states, and not because of the minimum wage itself. (Even Neumark is softening his opposition.) The report notes that Britain’s minimum wage prompted fears of reduced employment before it was passed into law in 1999, but not only did it do nothing to reduce employment; it had the effect of increasing wages not only for the lowest paid but also for the entire bottom half of British earners, thereby reducing income inequality.