Out of date on the minimum wage
John Schmitt Jared Bernstein
June 5, 1996

Opinion pieces and speeches by EPI staff and associates.

THIS PIECE ORIGINALLY APPEARED IN THE WASHINGTON POST ON JUNE 5, 1996.

Out of date on the minimum wage

by John Schmitt and Jared Bernstein

In three recent pieces on this page, James Glassman has inveighed against the proposal to increase the minimum wage from $4.25 to $5.15, most recently claiming that the evidence is "clearly on the side of those who opposed the increase," [op-ed, May 28, 1996]. Unfortunately, his arguments (and those of other opponents) have been based on outdated information and a simplistic analysis of how the low-wage labor market functions.

A growing number of new studies of the impact of a minimum-wage increase take on the conventional wisdom and find that in contemporary labor markets, a modest increase would neither lead to job loss nor be "wasted" on middle-income teenagers.

The degree to which Glassman is out of date on the issue is best seen in his April 9 op-ed column, "Raise the Minimum Wage? No." Here he cites William Baumol and Alan Blinder's useful introductory economics text as evidence that the minimum wage hurts the very people that it is intended to help. But Glassman had to dust off the 1979 edition of their text to prove his point. In the 1994 edition, the authors incorporate new findings and note that "the undesirable effects of the minimum-wage laws are far less serious than previously was widely believed." Alan Blinder himself has recently argued that introductory theories on the minimum wage are too elementary" and noted that the next edition of his text "will be even more agnostic on the issue. Economists of the caliber of Baumol and Blinder have endeavored to elevate the debate beyond primer-level analysis to the complexities of the real world.
Opponents of a minimum-wage hike, on the other hand, consistently ignore the two central findings of the new research: (1) The economic evidence of the last 10 years convincingly demonstrates that moderate increases in the minimum wage have little or no adverse effect on the employment of low-wage workers; and (2) raising the minimum wage -- which stands near a 40-year low in terms of buying power -- would provide much needed help to our most disadvantaged workers and their families.

On the first count, Glassman's own assessment flows from what he sees as a fundamental economic fact: "if you raise the price of something (in this case labor), then demand for it (in this case by employers) will fall." While this kind of thinking is helpful if we're studying the market for, say, tomatoes, it is less useful for the labor market. When they hire workers employers face a whole set of problems that never present themselves to buyers of other commodities. Take the typical tomato consumer. As long as he or she is willing to pay the market price, the consumer has no difficulty "recruiting" tomatoes at the supermarket; spends no money "training" them to perform; wastes no effort "motivating" them into the salad or sauce; and has no fear that they will "quit" to work with a neighbor cooking up a tastier dish.

Employers, even those in the low-wage labor market, however, must confront these problems daily. In this more complicated world, raising the price of labor has effects that go far beyond the simple textbook model. When the minimum wage rises, employers' recruiting costs decline, since more workers will present themselves for work at the higher wage. Training costs fall, since higher wages reduce turnover. Employee morale and loyalty improve, with a resulting boost in productivity. All else held constant, raising the price of labor would reduce demand for it. But the whole point is that all else is not constant.

On the second count, opponents mistakenly trivialize the benefits for low-wage workers. Three-quarters of the workers in the affected range ($4.25-$5.14) are adults, generally from lower-income families. Fully 60 percent of the gains from an increase to $5.15 would go to families in the bottom 40 percent of the income scale. While raising the minimum wage won't close the widening "wage gap," it is an important first step.

Given this more realistic view of the labor market, it is no surprise that the vast majority of recent research on increases in state and federal minimum wage has found no drop in employment. Opponents, such as Glassman, stubbornly choose to ignore this fast-growing body of work, but the evidence has convinced many economists that moderate increases in the minimum wage would improve the living standards of low-wage workers. One hundred and one economists, including three Nobel prize winners and four other past presidents of the American Economic Association, signed the letter last October supporting an increase in the minimum wage to $5.15. Thank goodness these. economists recognize that the real world is more complex than Economics 101.

[ POSTED TO VIEWPOINTS ON JANUARY 11, 2000 ]

John Schmitt and Jared Bernstein are economists at the Economic Policy Institute. They both specialize in labor markets and are co-authors of The State of Working America 1998-99.