Benefits of Obama's Minimum Wage Hike Outweigh Costs

Minimum wage laws can make jobs more stable while raising wages.

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Chad Stone is chief economist at the Center on Budget and Policy Priorities.

The panel of roughly 40 economic experts that the University of Chicago's Booth School of Business surveys regularly on public policy issues has reached its verdict on President Obama's proposal to raise the minimum wage to $9 an hour:

The distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy.

When weighted by the confidence with which the experts held their opinion, 62 percent agreed with that statement while only 16 percent disagreed (with the rest undecided). That's true even though the panel was evenly divided over whether the increase would make it "noticeably harder for low-skilled workers to find employment.

[See a collection of political cartoons on the economy.]

Obviously, some of the panelists who agreed that the minimum wage increase would make it harder for low-skilled workers to find work still thought it was worth doing. You don't have to abandon basic principles of supply and demand in a competitive labor market to conclude that low-wage workers as a group could benefit from a minimum wage increase. If the employment effect is "noticeable" but relatively small compared with the size of the wage increase, aggregate wages among minimum wage workers would still rise. 

Problems could arise if a small group of people were likely to bear most of the burden of the higher unemployment. But if the burden of unemployment were spread relatively evenly (say, it takes a little longer, on average, to land a job because employers become a little pickier) the net gain might be spread relatively evenly as well. That likely would occur in real world low-wage labor markets, where there is a lot of turnover and churning.    

[Take the U.S. News Poll: Should the Minimum Wage Be Raised?]

But there may be no adverse impact on employment, or just a very modest one. In this interview, Arindrajit Dube, a leading minimum wage researcher, discusses his own finding of no adverse employment effects and explains why, in more realistic models of the low-wage labor market than the simple competitive supply and demand model, minimum wage laws can make jobs more stable while raising wages.

Center for Economic and Policy Research economist John Schmitt has a an illuminating analysis that summarizes the empirical research and discusses a range of adjustments that employers and workers make that help to explain why so much research finds that the minimum wage has little or no effect on employment. For example, workers may have an incentive to work harder to keep a job that pays more, reducing labor turnover; employers may organize work more efficiently and be less tolerant of shirking; and businesses may raise prices modestly. 

[Read the U.S. News Debate: Is Obama Turning the Economy Around?]

One common reaction to proposals to raise the minimum wage is that a better way to help low-wage workers would be to raise the Earned Income Tax Credit. In fact, the Earned Income Tax Credit and the minimum wage are better viewed as complementary policies than as substitutes. In the 1990s, my organization, the Center on Budget and Policy Priorities, labeled them the twin pillars of an effective make-work-pay strategy. That remains the case today. The Earned Income Tax Credit gets people into the labor force very effectively, but it would cost the federal government much more if it had to do the job alone. In addition, people typically receive the Earned Income Tax Credit just once a year—at tax time. The minimum wage does not entail large budget costs but, without the Earned Income Tax Credit, policymakers would have to raise it far above its historical level to provide the same level of support that it does in conjunction with the Earned Income Tax Credit—high enough that the grumpy concerns of critics might prove more convincing than they do now. 

The president's proposal will, if enacted, move the minimum wage closer to the top of its historical range in inflation-adjusted dollars but not outside the range of experience tested in existing minimum wage research. My reading of that research puts me with the majority of the Booth panel. It's a desirable policy.

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