The minimum wage can have major effects (revised)

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Last time I wrote about how in reality, the minimum wage in America is so low that it can’t even get the average person working full time earning it out of poverty.  It is low enough that some think it may be acting as a barrier to social mobility, a defining trait of the United States.  By considering what has happened in the past after wage increases, it will be clear that the only negative effects of increasing the minimum wage is on measurements of poverty.

While It seems obvious that increasing the minimum wage would decrease poverty (the wages increased, not the poverty level), there are those that argue it will have a negligible affect, since many poverty stricken people don’t work for the minimum wage.  Even though the increase can’t end poverty, as we will see, it can have an effect on it, and can therefore be an effective tool for addressing it.  Economic theory also predicts that with an increase in the price of labor the demand for labor would decrease, resulting in lost jobs.  This notion is not consistent with past results of minimum wage increases.

First, Consider Washington, the state with the highest minimum wage in the country at $9.32/hr., with future increases tied to the consumer price index.  Surely such an extreme example should support the assertion that increasing the minimum wage results in lost jobs.  In the 16 years since the law went into effect, Washington has been above the national average with respect to job growth.

Perhaps Washington was a fluke.  An even more extreme example can be found in San Francisco, which has gone to an inflation adjusting $10.74/hr., the highest minimum in the country at any level.  In addition it has laws requiring paid sick leave and health care spending.  What it doesn’t have is the predicted job loss. This can be seen in the following graph, which tracks the effect on the San Francisco restaurant industry, which employs the largest amount of minimum wage employees.

2023116010_t670As can be seen, it tracks the surrounding counties quite well, showing no large deviation, except perhaps a small increase of hiring after the addition of paid sick leave. Since San Francisco’s minimum wage laws don’t bind the surrounding counties, it is clear that the increased minimum wage, along with other benefits, have not resulted in job losses.  If two of the most extreme cases of minimum wage increases have not resulted in less jobs, there is little support to think that lesser hourly rates would result in any significant losses.

There are less surprising results for the economy, government spending, and businesses.  In this letter from the Chicago FED the effects of a $1.75 hike in the minimum wage are analyzed.  It finds that such an increase could lead to an increase in aggregate household spending, even after accounting for spending that was lost to increased costs.  Additional research also estimates that an increase in the minimum wage could result in a decrease in government spending for the SNP program (food stamps).   A growing collection of research shows that businesses that pay a higher wages receive less theft, higher productivity, and increased worker retention.

Having seen that increasing the minimum wage won’t harm society, we consider the economic outcomes of the workers themselves.  Research by Dube provides insight into how such increases have affected workers in the past.  Tracking the effects of the minimum wage on the distribution of family income from 1990 to 2012, he finds that the coefficient on the elasticity of the poverty rate is a statistically significant -.24.  Also statistically significant (at the 1% level) is the -.32 and -.96 coefficients on the poverty gap and gap squared terms, measures of how poor the poorest families are.  This provides evidence that “…minimum wage increases do not reduce poverty by merely pushing some families above the poverty line, but rather by increasing incomes substantially and further below the poverty line.”  More concisely, increasing the minimum wage decreases the portion of the population in poverty, as well as the depth of poverty.

Increasing the minimum wage is one of the most effective tools the federal government has to fight poverty.  The minimum wage should be increased to at least the same $10.10 an hour earned by federal contractors.  Past experience has shown that this will not result in the job loss that is threatened by businesses.  It is time for the United States to take the steps needed to guarantee that a full time worker makes a wage they can live on.

 

8 thoughts on “The minimum wage can have major effects (revised)

  1. josimon

    I agree that there needs to be a change with our minimum wage. However, even though some areas have shown that a minimum wage does not cause job losses, I still believe there would be negative consequences. I believe that the negatives would out way the positives in many aspects. A $1.00 increase in the minimum wage will not significantly change a person’s life. There is more weight effecting the businesses themselves if this were instilled, which is why our government has not followed through with increases because of this.

  2. psseo

    Nice post and I agree with your opinion to raise minimum wage. I don’t think that increase of minimum wage induce serious decrease of jobs. As you explained well, I believe minumum wage will surely contribute to decrease of poverty and also decrease of other social costs and problems related with poverty.

  3. tyuan@umich.edu'tyuan

    I agree that increasing the minimum wage will cause some bad effects in certain areas especially for small firms. More people near poverty line will lose their jobs since those companies cannot afford to hire those people.

  4. haozhao

    I think the true meaning of minimum wage is to help poor instead of rich. But increasing minimum wage will definitely hurt poor people, loss your job is worse than loss a few bucks per hour.

  5. agolicz

    Fascinating post, I appreciated the insights you gleaned from the Chicago FED’s findings. I’m not entirely convinced by the data the San Francisco example, however, because at the same time that the county enacted its employment policies it also experienced tremendous growth from silicon valley investment. In order to better discern whether there was any potential (positive or negative) causal effect of the employment policies on restaurant employment, we’d probably need to separate out the effects of the increase in tech wealth in the area. I mean, maybe the employment policies have a very small negative effect that was masked by the dramatic boom in this area from tech investment? (more high paid engineers -> more disposable income -> more money spent on restaurants -> higher employment in the San Fran restaurant industry)

  6. gaochen

    I agree with you that increasing minimum wage is an effective way to help the poor. However, I don’t know if a slightly improvement on minimum wage could effect the life of the poor or not. The government should come up with other solutions to help poor people get out of the trouble.

  7. sekoch

    One thing that concerns me about the increase (and of the data people are using to support it) is that a $10 minimum wage in San Francisco is completely different than a $10 minimum wage in rural Michigan. San Francisco, one of the most expensive cities to live in, so a $10 wage likely is much less than what is actually relevant to that area. In rural areas, however, a $3 wage increase could really hurt small businesses that aren’t able to sustain high prices like those in San Francisco. This key distinction is important to consider and could really be detrimental to lower-cost areas if the government implements a national wage increase.

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