Minimum Wage Policy by Alex Gorski

Continuing the policy of posting material by Angry Bear readers, this post on minimum wage policy is by Alex Gorski.

The conventional Econ101 approach to the minimum wage, although archaic, is at least well understood and therefore easily used in policy debate. Conservatives use Econ101 to create a zero-sum game – one where marginal benefits to minimum wage earners are canceled by the job loss of other minimum wage earners, often as a disguise for their pro-business stance. Liberals, on the other hand, prefer to discredit Econ101 as they see minimum wage growth as a poverty-fighting tool and not a matter of economic efficiency. The problem highlighted by Kevin Drum is that there is evidence on both sides of the minimum wage debate. Usually, if there is evidence on both sides, then there is an answer somewhere in the middle – and if we can find that answer then it will be possible to set policy accordingly.

Many domestic studies find little evidence supporting the classic Econ101 employment reduction.

There is no evidence of job loss from the last minimum wage increase.
There is no evidence of job loss from the last minimum wage increase.

• A 1998 EPI study failed to find any systematic, significant job loss associated with the 1996-97 minimum wage increase. In fact, following the most recent increase in the minimum wage in 1996-97, the low-wage labor market performed better than it had in decades (e.g., lower unemployment rates, increased average hourly wages, increased family income, decreased poverty rates).

• Studies of the 1990-91 federal minimum wage increase, as well as studies by David Card and Alan Krueger of several state minimum wage increases, also found no measurable negative impact on employment.

• New economic models that look specifically at low-wage labor markets help explain why there is little evidence of job loss associated with minimum wage increases. These models recognize that employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.

• A recent Fiscal Policy Institute (FPI) study of state minimum wages found no evidence of negative employment effects on small businesses.

Context: The United States boasts the lowest industrialized minimum/average wage ratio at 31% [MAW Ratio]. Consequently, only 5%
of the US workforce earn below 7.25$ per hour, with only 1.4% earning minimum wage.

With so few workers earning minimum wage, the cost of marginal increases is minimal which can explain why employers have absorbed previous increases without employment reductions. So let’s raise the minimum wage marginally from 5.15$ to 5.25$! Anyone get fired? NO? Let’s raise it from 5.25$ to 5.35$! Anyone get fired? You get the point – we can raise the minimum wage for a while before employers would react with employment reduction. But Econ101 is out there somewhere. Continue to raise the minimum wage in increments of .10$ and eventually there will be an employment reduction, slow at first but with gradual acceleration. When will that happen? I have no idea, nor does anyone else.

The redeeming aspect of the record low [31%] MAW ratio in the United States is the opportunity it presents to solve the minimum wage debate once and for all. Instead of foolish conventional policy, increasing the Federal minimum wage to a nominal figure [7.25$ has been proposed], the US could use a strategy of measured increases based on the MAW ratio. The MAW ratio is at 31% [5.15/16.60] – why not increase it by 2% each year and measure the employment reduction effects? [ceteris paribus of course]

A possible strategy:

(Note from cactus… Unfortunately, I still don’t know how to post tables… my apologies to Alex Gorski here, but… the first column is year, the second column is Average Wage (3% growth), the third column is MAW ratio, and the fourth is the minimum wage.)

Year____Av Wage__MAW____Min Wage
2006____16.60____31%____5.15
2007____17.10____33%____5.64
2008____17.61____35%____6.16
2009____18.14____37%____6.71
2010____18.68____39%____7.29
2011____19.24____41%____7.89
2012____19.82____42%____8.32

As the aforementioned studies suggest, initially we will not see employment reductions. Eventually, Econ101 says we will begin to observe small employment reductions, at which point the MAW should be increased at a more measured pace. The optimal MAW ratio will be reached when the minimum wage has been increased to the point where further increases will result in unwanted employment reduction. The minimum wage would then be indexed to the optimal MAW ratio so that it grows at the same pace as overall wage growth.

Thoughts? Contact me at alex period gorski at gmail dot com.