President Joe Biden and Congressional Democrats have voiced interest in raising the minimum wage from $7.25 per hour to $15.00 per hour. Polling suggests that two-thirds of Americans are in favor, but economists are divided.1 Those in favor claim that Americans should "receive the pay and dignity they deserve,"2 and that "minimum wages of up to 60% of the median wage, or 80% of the median in low-wage regions, have negligible employment effects."1 By that measure, and given that the median hourly earnings of a full-time employee in 2020 was $24.603, the U.S. could support a minimum wage of $14.76. Economists who oppose raising the federal minimum wage to $15 point out that many states would be put under tremendous strain, as evidenced by their current median income levels; in fact, "in 30 states, the median hourly wage is less than $19."4 Lastly, many economists remain undecided, at least in part because there have been so few historical examples of minimum wage increases of this magnitude that there aren't enough robust studies based on large amounts of data.
So what is the right way to think about a minimum wage hike? There are at least two productive lines of questioning:
- Is a $15 per hour minimum wage the best way to achieve the stated goals of those who support it?
- Does the value system that leads to supporting the minimum wage as a mechanism for public good hold up to scrutiny?
Although the second question is terribly interesting, we need only answer the first to understand how bad a $15 per hour federal minimum wage would be.
Is a $15 per hour minimum wage the best way to achieve the goals of those who support it?
The first question to ask is: what precisely is the goal? According to Joe Biden's own platform, the goal is to "ensure that workers receive the pay and dignity they deserve" as part of a broader effort to "grow a stronger, more inclusive middle class."2 Presumably he would agree that a policy that meaningfully increased the income of a maximal number of below-middle-class workers, preferably those at or below the poverty line, would be considered a success, all else equal. Now, at what cost? It's not a stretch to assume that he would accept a reasonable, but not existential, blow to the profits of large corporations and wealthy individuals.
By this standard, the policy simply does not stand up to scrutiny for the following reasons:
Wealth will likely be transferred from the lowest earners to the middle-class.
Minimum wage skeptics make the theoretical point that making it illegal to pay a worker some amount of money doesn't automatically increase the value of their work to their employers. It is possible (but conspiratorial and unlikely) that all current minimum-wage earners are doing work that is worth $15 per hour for the somehow-suppressed wage of $7.25 per hour. Assuming that is not the case, then we can predict that making it illegal to work for $7.25 per hour will simply put many of those currently working for that amount out of a job, either because their employers will go out of business or because their employers will be forced to innovate by, for instance, investing in an automated replacement for minimum wage tasks. Ironically, such low-skill or low-experience workers are those a minimum wage hike is purportedly trying to help.
Finding evidence to support this hypothesis is not difficult. As Michael Strain details in a piece for Bloomberg, study of minimum wage hikes in Seattle indicate that we can expect a $15 per hour federal minimum wage to precipitate "significant declines in employment opportunities" for the low-skilled, low-experience population of the work force.
Using detailed government data, a team of economists estimated that [Seattle's] second wage increase to $13 reduced hours worked in the low-wage labor market by around 9%. Wages increased by less than hours decreased, so the hike to $13 reduced the earnings of low-wage workers by an average of $125 per month. In a subsequent paper, these economists found that the gains from the wage hike accrued to more experienced workers.4
The Congressional Budget Office agrees that this phenomenon would likely generalize to the United States as a whole, resulting in increased wages for millions of middle-class Americans at the expense of the least-well-off.
The CBO estimates that joblessness would increase by 1.3 million if the national hourly wage floor were hiked to $15... The same CBO report that found this policy would eliminate over one million jobs also concluded that at least 17 million workers would see their weekly earnings increase. Most of those gains would go to families with incomes above the poverty line.4
Other studies suggest that this economically regressive effect applies at the employer-level, too. In 2020 The Economist detailed results from a study in Israel that found, "firms with relatively low profits disproportionately employed minimum-wage workers, meaning those firms ultimately bore the greatest burden of mandated higher wages," thus concluding that, among the business owners who bore the brunt of minimum wage hikes, the poorest business owners bore the highest burden.5
Places most in need will be put in the most precarious positions, while places most well-suited to this policy are already moving to implement it.
Mississippi tops the list of states ranked by rate of poverty, so it should arguably be most poised to benefit from a policy aimed at aleviating poverty. However, a federal minimum wage of $15 per hour would set Mississippi's minimum wage at 100% of its current median wage.1 In nation-wide terms, that would be like arguing for a $25 per hour federal minimum wage, which no reasonable economist would do. How this could possibly be beneficial for Mississippians is anyone's guess. I would anticipate huge job losses for the lower-class there.
Simultaneously, wealthier states are already implementing nearly-$15 per hour minimum wages. (In 2020 California's was $13, Washington's was above $13, and New York's was $12.50.6) Seen this way, an extreme federal minimum wage hike starts to look like sheer punishment for the least-well-off in the least-well-off places at little-to-no effect on the most-well-off places.
This observation should also prompt the question: if there is not yet enough political will to raise the minimum wage to $15 per hour in the most progressive, highest-minimum-wage states, then why would that political will spontaneously arise with the addition of the states with the lowset minimum wages?
There isn't enough evidence yet to refute the aforementioned claims of the skeptics, but there may be in due course as the early-adopting states take risks.
As the Seattle papers make clear, a great deal can be learned from studying outcomes in the places that do raise their minimum wages, of which there are an increasing number. In 2021, many states will be implementing minimum wage increases, including Virginia, which is "raising its wage floor this year by 31%, from $7.25 an hour to $9.50, as part of its plan to increase it to $12 by 2023."7 Because it is a state and not just a city, studying Virginia should yield interesting evidence that can be used to make predictions about what would happen to the nationa as a whole. Given that there is plenty of reason to be skeptical in the first place, we should wait for that evidence.
There are much better mechanisms for bolstering the incomes of the lowest earners at a reasonable cost to the well-off.
Such mechanisms include, but are not limited to, the earned-income tax credit and Universal Basic Income. There is simply no good reason to try to solve this problem this way.
In closing, here are two crucial points from two great economists. The first, from a recent post by Tyler Cowen, points out that all of this analysis rests precariously on a body of research that risks having been compromised by the very political forces that should be interested in accurate and unbiased research:
I am sorry to speak in such terms, but the reality is that an allied cabal of activists and left-wing economists have combined on social media to insist on a particular approach to minimum wage economics and to bully those who disagree.8
The second, from Thomas Sowell, reminds us that the real minimum wage is never the government-enforced minimum wage:
Unfortunately, the real minimum wage is always zero, regardless of the laws, and that is the wage that many workers receive in the wake of the creation or escalation of a government-mandated minimum wage, because they lose their jobs or fail to find jobs when they enter the labor force. Making it illegal to pay less than a given amount does not make a worker’s productivity worth that amount—and, if it is not, that worker is unlikely to be employed.9
- What would a $15 minimum wage mean for America’s economy?, The Economist
- The Biden Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions, Biden Harris
- Usual Weekly Earnings of Wage and Salary Workers Fourth Quarter 2020, Bureau of Labor Statistics
- $15 Minimum Wage Subverts Biden Recovery Plan, Bloomberg
- A study suggests that higher minimum wages hit poorer bosses’ pockets, The Economist
- State Minimum Wage Laws, U.S. Department of Labor
- Nearly half of America's states are increasing their minimum wages in 2021, The Economist
- Federal Minimum Wage of $15?, Tyler Cowen (Marginal Revolution)
- Basic Economics: A Citizen's Guide to the Economy, Thomas Sowell