When I was an undergraduate in the late 1980s, the economics of the minimum wage was settled—in economics and elsewhere. The New York Times editorial board published its daily opinion on January 14, 1987 with this headline: “The Right Minimum Wage: $0.00.”
The Times devoted its editorial that day to the minimum wage because the late Senator Edward Kennedy (D-MA), who had recently been made chair of the Senate’s Labor Committee, was being pressured by labor unions to push for an increase of the federal minimum wage by one dollar: from $3.35/hr to $4.35/hr.
Advocates for a minimum wage above $0.00 all make the same argument—an argument intended to appeal to our most humane instincts. According to proponents of the minimum wage generally, as well as its regular increase, the current minimum wage is insufficient to allow a working American to support a family. And increases, whether to $4.35 or $15.00, are essential to make sure that low-wage earners—who tend to be young, inexperienced, less well-educated individuals who lack advantageous social connections—can make ends meet.
Yet that day the NYT editorial board summarized the settled question regarding the minimum wage like this, arguing that any minimum wage at all has the ironic effect of harming the very individuals such laws intend to help:
there’s a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market. A far better way to help them would be to subsidize their wages or—better yet—help them acquire the skills needed to earn more on their own.
Just before the onset of the pandemic, the editorial board of the Times opined again on the minimum wage. This time, it came to a very different conclusion. On December 30, 2019, the headline read, “Double the Federal Minimum Wage.”
The Times is not the only prominent voice to reverse itself during this period. 2008 economics Nobel laureate Paul Krugman changed his mind, too. As late as 1998, Krugman wrote that raising the minimum wage “reduces the quantity of labor demanded, and hence leads to unemployment.” Yet in a 2014 interview with Business Insider, Krugman states, “we can raise these wages without losing a lot of jobs.”
Why? Why have Krugman and the NYT reversed themselves?
This question is especially curious since introductory economics textbooks have not overhauled the story they tell regarding the minimum wage, and it is the same story the Times editorial board was telling way back in 1987: minimum wages, despite good intentions, harm the very people they are intended to help. The Times got it right the first time: The right minimum was $0.00 in 1987, and it still is now.
A Lesson from Econ 101
When I introduce the minimum wage in an introductory economics class, I tell the following story. Even if you are very tired or really crave the taste of your favorite Starbucks drink, you would never pay $20 for it if the drink is not worth $20 to you. You would keep your $20 in your pocket and reserve it for things that are worth more than $20 to you. Otherwise, it is a losing proposition.
The same is true for employers when deciding whether to hire a person for one hour. Because employers are not charitable organizations, sensible employers will hire only the workers who are “worth it” considering the wage being paid. If you are a worker who can create sufficient value in that hour that your employer can turn around and sell to customers for more than your wage, you will keep your job, because you have demonstrated yourself worthy of your wage. More simply, your employer will be thrilled to pay you $10/hr if she can sell the fruits of your labor for more than $10. But an employer will never pay you $10/hr if you create less than ten dollars’ worth of value. That is a losing proposition for your employer.
Economists, then, are nearly completely agreed that a legally mandated minimum wage that is set higher than the current market-determined wage will have both benefits and costs. The benefits will accrue to the already productive workers who can earn their keep at the new legal minimum. People who can create $15 worth of value will keep all their hours at both $10 and $12.50 wages, and they get a raise.
But consider the consequences for a young, inexperienced worker—with few connections and little resume-building job experience—who can currently create only $11 worth of value in an hour. Such a person is employable at a mutually agreed upon market-determined wage of $10, but unemployable at a legally enforced minimum of $12.50. Ironically, then, the people who bear the primary costs of a minimum wage higher than the market-determined one are the very people minimum wage advocates claim to help: less productive workers who are young, inexperienced, and lack influential connections.
While increased unemployment among low-skilled workers is the main adverse consequence of the minimum wage, it is not the most sinister. Attempts to declare any “minimum wage” above the one determined by the market will increase the number of job seekers—since an increase in the minimum wage increases the incentive to look for such employment—while the least productive workers are being let go. When more people begin chasing fewer jobs, employers can afford to discriminate in hiring along any lines they care to. Similarly, the incentives grow stronger for employers and low-skilled workers to strike “black market” deals in the labor market. Reducing the number of lawful jobs via the minimum wage will simply drive many jobs underground, thereby increasing the number of unlawful jobs.
Again, this is settled science in economics. A 2015 Economic Policy Institute survey of economists revealed that nearly 75 percent of American economists oppose a $15 federal minimum wage, with the majority concurring that it would lead to more youth unemployment, more adult unemployment, and fewer jobs overall.
David Card and Alan Krueger: Myth and Measurement
How, then, have we arrived at a national debate over whether there should be a federal minimum wage of $15 dollars? The economics has not changed. The laws of demand and supply are like the law of gravity. You may choose to deny their veracity, but you will be sorry if you do.
Yet populists from both major parties have put forth plans to raise the federal minimum wage. Democrats have included a phased-in $15 minimum wage hike in a recent COVID-19 relief bill. And Republican Senators Tom Cotton (AR) and Mitt Romney (UT) proposed a more modest increase to $10 as a compromise.
To understand this shift outside the economics profession, it is helpful to examine a critical episode within the profession. In 1993, economists David Card and the late Alan Krueger published a landmark study about the minimum wage using what economists refer to as a “natural experiment” in two neighboring states, Pennsylvania and New Jersey. On April 1, 1992, New Jersey raised its minimum wage from $4.25 to $5.05, while Pennsylvania did not. If New Jersey and Pennsylvania are thought to be similar enough otherwise, that allows researchers to examine the outcomes in both states and to treat Pennsylvania as the “control” group—where the minimum wage did not change—while New Jersey functions as the “experimental” group that increased its minimum wage. If New Jersey’s changes in employment proved statistically significantly different from Pennsylvania’s, then such changes must be ascribed to the “treatment” of changing the New Jersey minimum wage.
Card and Krueger’s approach was straightforward. They looked for employment change where they thought they were most likely to find it: the fast-food industry in eastern Pennsylvania and in New Jersey. Here, they believed, were the jobs that—according to economic theory—should be most disrupted by minimum-wage changes.
Card and Krueger surveyed about 400 fast-food managers to inquire about changes in employment before and after April 1. Their stunning finding: New Jersey fast-food restaurants increased their employment levels by 13 percent, apparently contradicting the “Econ 101” theory of the minimum wage.
This was a shot heard ’round the world. One academic paper gave all the evidence needed to abandon economic theory in the pursuit of social justice. For many, this finding legitimized the fight for higher minimum wages. When Bill Clinton appointed Robert Reich as Secretary of Labor, Reich hired Krueger in 1994 as his chief economist. Administrators like economists who deliver the desired answer.
Within the profession, though, the Card and Krueger finding gave rise to scrutiny of their methods. After all, Card and Krueger could not find the predicted effect of increasing the minimum wage!
Did Card and Krueger Get It Right?
Ensuing research has cast doubt on whether Card and Krueger got it right. First, Card and Krueger used surveys of managers regarding their employment levels, rather than something carefully documented, such as employment records. If managers honestly misremembered what happened, or if they (understandably) underreported unemployment to make themselves not look like bad guys, then the data are suspect. Second, Card and Krueger asked only about employment—not about the number of hours worked. Third, the authors conducted their “before” survey a few weeks before April 1, 1992, but NJ employers had two years to adjust employment levels, because the new law was enacted in 1990. Card and Krueger probably missed any employment changes because they had already happened.
The counterintuitive finding of Card and Krueger led to two decades of renewed empirical interest in the minimum wage. While the evidence remains mixed, a new meta-study published by the National Bureau of Economic Research—which first published the Card and Krueger finding—affirms the conventional wisdom: minimum wages have a negative impact on employment, and young and less educated workers are affected most. This result makes sense: Most Americans in minimum-wage jobs are young. And even when the predicted adverse effects on employment cannot be easily identified in specific cases, there are probably other negative effects on workers, such as less generous non-wage benefits or less pleasant and safe working environments.
Minimum Wages Affect People, Not Just “Employment”
The Congressional Budget Office estimates that a $15 minimum wage would eliminate 1.4 million jobs—with a “silver lining” of moving 900,000 people out of poverty.
Real people, with names, are affected by such changes. A century ago, an elevator operator named Willie Lyons testified before the U.S. Supreme Court that she had been displaced by a Washington, DC minimum wage law. According to the court’s 5-4 majority decision, which struck down the law because it violated Ms. Lyons’s Fourteenth Amendment Due Process to voluntarily contract, “The wages . . . were the best she was able to obtain for any work she was capable of performing, and the enforcement of the order, she alleges, deprived her of such employment and wages. She further averred that she could not secure any other position at which she could make a living, with as good physical and moral surroundings.”
Though the court would reverse itself fourteen years later, we need to remember that real people like Willie Lyons—who need the work most—are the likely casualties of arbitrary minimum wage laws that deny the irrefutable laws of supply and demand.