January 29, 2014

Misunderstanding the Minimum Wage

In his State of the Union address last night, President Obama called for raising the minimum wage to $10.10 by 2015, reiterating a theme from a speech last December. Moreover, the President said he would bypass Congress by executive order to do just that for federal contract workers.

This seemed like a good time to address questions and concerns that many have by reviewing the most recent evidence regarding the minimum wage. My review indicates that arguments against raising the minimum wage aren't supported by the evidence and that the benefits from doing so seem to outweigh the costs.

First, some historical perspective. The minimum wage today in real terms (controlling for inflation, which is necessary when comparing dollar amounts over time) is less than it was at its peak in 1968 ($10.77), but greater than it was when first implemented in 1938 ($4.08).

Below I provide a brief summary (with extensive quotes) of a review done last December by Laura D. Tyson, a Professor of Business Administration and Economics at the University of California, Berkeley, and a former chair of the Council of Economic Advisers for President Clinton. Another excellent review making many of the same points can be found in the January 24, 2014 issue of CQ Researcher (gated).

The evidence:
  • Raising the minimum wage won't increase unemployment. According to Tyson, "The weight of the evidence consistently finds no significant effects on employment when the minimum wage increases in reasonable increments."
  • Raising the minimum wage will result in only a marginal increase in prices for consumers. Indeed, much of the increase in wages would lower employee turnover, consequently reducing costs to the employer. Tyson states that
a phased-in increase in the federal minimum wage to $10.10 an hour is not likely to affect business costs or prices significantly. On average, even the costs of fast-food restaurants would increase by less than 3 percent, and a price increase of a few cents on their products could offset a significant share of their higher labor costs. According to a recent estimate, McDonald’s could cover about half of its higher labor costs by raising the price of a Big Mac by about 1.25 percent, or 5 cents.
  • The majority of minimum wage workers are not teenagers. Tyson states that the majority are older (average age is 35), females, working full-time:
According to recent research by the Economic Policy Institute, about 30 million workers would benefit from the proposed increase in the minimum wage to $10.10 an hour. Of these workers, 88 percent would be at least 20 years old with an average age of 35; 55 percent would be working full time; 56 percent of them would be female, and more than 28 percent of them would be parents.
An excellent first-hand journalistic account of a woman trying to live on a minimum wage job is Nickel and Dimed, by Barbara Ehrenreich. I'd strongly encourage you to read it.
  • Raising the minimum wage would reduce reliance on public assistance (welfare) programs. Not only would the number of people in poverty be reduced, but the effectiveness of the Earned Income Tax Credit would be enhanced.
Recent research finds that an increase in the minimum wage is a powerful policy tool for reducing poverty, with a 10 percent increase cutting the poverty rate by 2 percent .
  • Raising the minimum wage would boost the economy.
Using very different methodologies, two recent studies confirm that an increase in the minimum wage to the $10 range would lift spending, gross domestic product and job creation.
  • The public supports raising the minimum wage. Although Tyson refers to a recent poll, you should check out the most recent numbers yourself.


  1. Obama mentions only a wage increase for federally contracted workers. Would the private sector (or at least those sectors that may perform similar duties as the federally contracted workers) increase their own wages in order to avoid a labor shift? Or does the private sector already pay out more money than may otherwise be made by the federal contract workers?

    1. A good question. I think that Obama is acting unilaterally to (a) move off the status quo--something that, as you know, is improbable in our current Congress; and (b) to put pressure on (a future) Congress to raise it for everyone else. I read a study (you might check chapter 8 of "Unequal Democracy" by Bartels) that discussed the issue you're talking about. In any event, you might also try looking at some of the studies mentioned in here: http://www.raisetheminimumwage.com/pages/job-loss.