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?
In November, four U.S. states — Arizona, Colorado, Maine and Washington — voted to increase their minimum wages. All of them already had rates above the federal floor. Twenty eight countries report minimum-wage data to the OECD. (The first to establish one was New Zealand, in 1894.) The U.S. federal rate, $7.25 an hour, is 12th-highest in real dollars, behind the U.K.’s (now about $11), and Australia’s (about $15). More telling: When minimum wages are measured as a share of average wages, the U.S. ranks at the bottom of the list at 25 percent, behind Mexico, Spain and Greece. High-wage Germany adopted its first minimum wage, about $9, in July 2014. Swiss voters rejected a proposal in 2014 to establish 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?
The U.S. federal minimum wage has been raised 22 times since Congress created it in 1938 at 25 cents an hour, with the most recent vote 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, or $11.10 in 2016 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. The Congressional Budget Office released a mixed-bag analysis in 2014 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. 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 a year later Obama set a $10.10 minimum wage for federal contractors and called on mayors and governors to “give America a raise.” By 2016, 29 states and more than a dozen U.S. cities had minimum wages higher than the federal rate.
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. 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, the debate is becoming more and more academic. Not many Americans work for $7.25 an hour these days. In 2015, just 3.3 percent of the country’s 78.2 million hourly workers earned that amount.
The Reference Shelf
- 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 report on the demographic and socioeconomic characteristics of low-wage American workers in 2015.
- A Bloomberg Politics graphic on November’s state ballot measure votes on the minimum wage, recreational marijuana use and gun measures.
Lorraine Woellert contributed to the original version of this article.
First published Feb. 25, 2014
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