New minimum wage hikes help more people than they harm

On Jan. 1, the legal minimum wage increased in no less than 19 states.

In 12 states, this was due to new legislation or ballot initiatives, while in 7 others, it was due to automatic increases based on indexation. After the changes, some 29 states have minimum wages higher than the federal level.

{mosads}Some of the increases are extremely small. Ohio’s cost-of-living adjustment is a mere 0.6 percent, for example.

Others are remarkably large, with Arizona’s 24 percent increase and Maine’s 20 percent increase leading the way.

Among the wage hikers, Massachusetts and Washington, D.C. have ended up with the highest levels of pay at $11 an hour, each. Missouri has the lowest level at $7.70 per hour.

For anyone who has taken an introductory economics class, the effects of an increased minimum wage seem easy to predict. A minimum wage is a price floor.

If set too high, it should lead to a situation of excess supply. More people are willing to work at the higher, regulated wage than at the equilibrium wage set by the free market, but fewer employers offer jobs. Result — higher wages for some, unemployment for others.

However, at least since Alan Krueger and David Card’s pioneering study of the effects of wage increases on fast food workers in New Jersey and Pennsylvania, published in 1994, there has been an increasing body of evidence suggesting that increased minimum wages do not result in increased unemployment.

How could that be? Is our basic understanding of supply and demand — the fundamental mechanism of the free market — wrong?

The answer is that life is just not that simple. Even those who believe that increasing the minimum wage can be counterproductive agree that there are a number of crucial issues left out by what you might have learned (and what I personally have on occasion taught) in introductory economics.

For starters, the model assumes that companies cannot raise the prices of goods and services they sell due to competition. However, in the fast food industry, for example, there is scope for price increases.

Employers can shift some of the increased wage costs onto customers who value a Big Mac over a Whopper, or vice versa.

Additionally, worker behavior may be affected by changing wages. Better paid workers may be less likely to quit.

This lowers the number of people “between jobs”, which lowers the unemployment rate. In addition, better paid workers may work harder, stay on the job longer, and end up more productive. This would at least partially compensate employers for higher wages.

Finally, workers may look at their job choices a little differently. They may make a little more effort to find a job that suits them. Some may also be swayed to look for a job when they might have simply not worked.

All of these factors might explain why the discussion in Economics 101 is not totally accurate. This should not prevent you from taking the course, but it should put some caution into the minds of economics professors.

Are minimum wage hikes good tools for alleviating poverty and improving the lives of working families?

They will certainly increase wages for some of the poorest working families. The increases will probably spill over to wages that are slightly above the minimum, so the impact on incomes will be more widespread than just those making the minimum.

Regarding job growth, it is fairly safe to say that the small cost-of-living adjustments will not generate significant unemployment; Nor are they likely to harm job growth over time.

The very largest increases carry more risk. To firmly predict that job growth will not be affected would be well beyond what the research can tell us, especially for the largest minimum wage increases put into effect.

It is also fair to point out that some of those who benefit from minimum wage increases may not actually be poor. In some cases, wages for teenagers may rise.

Not all of these teenage workers will be from poor families. Moreover, some workers may be the second income earners for families who are not poor.

Honestly, increasing the minimum wage is probably not the ideal way to combat poverty. The Earned Income Tax Credit (EITC), which provides a refundable tax credit for poor families is a better tool.

It is only available to low-income families, while the minimum wage affects a mixture of income levels. The EITC provides payments that are adjusted to a family’s financial needs, since it takes into account the number and age of dependent children.

The EITC has historically enjoyed substantial bipartisan support, but that has not prevented it from falling victim to toxic partisanship. The new Congress, with its large portion of members who are ideologically opposed to any Government action, seems extremely unlikely to expand the EITC.

In political terms, increasing the minimum wage has two simple virtues — it can be done at the state or municipal level, and it does not cost the government anything. Simple but powerful virtues!

To my mind, these are the economic and policy considerations, but I feel compelled to put matters into elementary terms. Try to imagine what it would be like to actually live on $7.50 an hour, even in some of the cheaper places in the U.S.

Not only is the federal minimum wage far below what one would need to live a decent existence, it is below any meaningful definition of poverty I can think of.  The absurdity of the situation is even more apparent when one considers that many workers earning the minimum wage qualify for food stamps.

What sense does it make to set a minimum wage so low that the government has to pay for people to nourish themselves adequately?

In these gloomy times, not much makes sense in our country. In an ideal world, there would be better solutions than raising the minimum wage, but raising it will assist many poor families.

It could make a big difference to a lot of people who truly need a break. It is not a panacea. It is not an adequate solution on its own. It might hurt some, but relatively few compared to the number it would help. 

Evan Kraft is a professor of economics at American University who specializes in the economics of transition, monetary policy and banking issues. Kraft served as director of the Research Department and adviser to the governor of the Croatian National Bank.

The views expressed by contributors are their own and not the views of The Hill.