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?
On Jan. 1, 18 U.S. states raised their minimum wages. All of them already had rates above the federal floor of $7.25 an hour. Wal-Mart, the largest private employer in the U.S., announced the same month that it would increase starting pay to $11 an hour, noting that many of its 4,700 U.S. stores are in states that already require that. Thirty two countries report either hourly or annual minimum-wage data to the Organization for Economic Cooperation and Development. When converted to an OECD index of purchasing power parity, the U.S. federal rate, ranked 12th-highest in 2016, behind the U.K.’s (now 7.83 pounds an hour for adults, or $10.50) and Australia’s (A$18.29 or $14.30). 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.
New Zealand established the first minimum wage in 1894. In 1938, the U.S. Congress passed a law setting the federal minimum wage at 25 cents an hour. It took until 2014 for high-wage Germany to adopt its first minimum wage, then about $9. That same year, Swiss voters rejected a proposal to establish the world’s highest — $25 an hour. Through the 1990s, many studies concluded that higher wage floors lead to fewer jobs. But after a flurry of U.S. states began setting minimums higher than the federal rate, researchers had more ways to study the effects of wage hikes on adjacent communities. A landmark 1993 report compared employment at fast-food outlets in New Jersey and Pennsylvania one year after New Jersey raised its hourly minimum wage from the federal rate of $4.25 to $5.05 while Pennsylvania kept the federal rate. Relative to stores in Pennsylvania, New Jersey fast-food restaurants increased employment by 13 percent. In 2014, the Congressional Budget Office released an analysis with mixed results. It found that adopting a $10.10 minimum wage nationwide would lift 900,000 people out of poverty while eliminating 500,000 low-income jobs. That same year, President Barack Obama set a $10.10 minimum wage for federal contractors and called on mayors and governors to “give America a raise.” By 2018, 29 states had minimum wages higher than the federal rate, and more than three dozen U.S. cities had minimums above their states’ rates.
Minimum-wage enthusiasts point to McDonald’s Corp reports that raising the minimum wage reduced employee turnover and improved service speed. Proponents also note that people use bigger paychecks to buy more stuff. And taxpayers could save, they argue, since full-time minimum wage workers wouldn’t rely as much on public assistance programs like food stamps to make ends meet. Opponents say someone has to bear the cost of higher wages — that pesky free-lunch conundrum. They argue hikes result in fewer jobs, and this falls hardest on the low-skilled and working poor. And they say it’s unfair to have one rate nationwide, given the wide cost-of-living disparities between regions in the U.S. Studies continue to come away with different conclusions. In 2017, a University of Washington paper found that after Seattle raised its minimum to as much as $13 in 2016, the number of hours worked by low-wage workers was cut by about 9 percent, while a University of California at Berkeley study found that wages in Seattle’s food services industry rose without causing any change in employment. Meanwhile, the debate around the federal floor is becoming more and more academic, since not many Americans work for $7.25 an hour these days. In 2016, just 2.7 percent of the country’s 79.9 million hourly workers earned that amount.
The Reference Shelf
- The U.S. Department of Labor explains how the minimum wage came to be in 1938, and economists David Neumark and William Wascher explore its history and evidence for and against it.
- The CBO’s 2014 predictions of the economic impact of a $10.10 minimum wage.
- The Center for Economic Policy and Research’s argument for raising the wage and the Cato Institute’s arguments against.
- The Bureau of Labor Statistics report on the demographic and socioeconomic characteristics of low-wage American workers in 2016.
Lorraine Woellert contributed to the original version of this article.
First published Feb. 25, 2014
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