Thursday, May 15, 2014

EC POLICY | Minimum-Wage Facts Change Opinions

The U.S. minimum wage has been
$7.25 per hour since 2009. President
Obama wants to raise it to $10.10.
Yesterday I posted some news about initiatives to promote a living wage and to calculate what such a wage is in different places.

That prompted a few comments about the impact of imposing a minimum wage. Won't that put many workers out of their jobs?

Economists’ views on this topic have changed over the years, as one would hope, in the face of research that contradicts the conventional view. The neoclassical supply-and-demand curve for labor helped guide economists in polls to agree with the idea that a minimum wage would perversely reduce the number of workers that employers would hire and therefore would increase poverty. The preferred alternative approach was a government-guaranteed minimum income.

However, David Card and Alan B. Krueger challenged this orthodoxy and have brought many of their  economist colleagues along with them. They used a higher minimum wage in New Jersey in 1992 to look at the impact of a minimum wage on fast-food chains in New Jersey compared with fast-food chains across the state line, not affected by the higher minimum wage.

They found that since all of the chains in New Jersey had to adhere to the same rise in the minimum wage, the net impact of the minimum wage on their employment was zero. However, to cover the higher cost of labor, the chains in New Jersey raised their prices by an average of 3 percent - not something that would be very noticeable or would induce consumers to travel to another state. They found similar results for California’s minimum wage increase in 1988 and the Federal minimum wage increase in 1990-91.

(For more extensive summaries of the cumulative evidence on the minimum wage, go to a recent report by the Center for Economic and Policy Research. For a summary edited by people on different sides of the issue, go to the wikipedia entry on the minimum wage.)

The debate is not over. My friend Michael Phillips in California argues that the chain-store situation differs from that of small delis. Exemptions, or delayed enforcement, for small businesses might be reasonable.

But meanwhile, the popular debate has been reframed by evidence of rising levels of income and wealth inequality in the United States, leading to a closer look at both ends of pay scales. A flood of information in the wake of the financial crisis of 2008 showing compensation out of line with executive performance have been stirring up public sentiments in the same way that they were by the Pecora Committee in 1933. These sentiments have led to the news yesterday that more than 75 percent of shares were voted against a generous Chipotle executive-compensation package.

The international front offers evidence that countries with more equal incomes are performing better. Europe’s economic stalwart, Germany, doesn't have wide disparities of earnings, and will have a minimum wage of $11.75/hour in 2015. Germany exempts from the minimum wage minors, interns, trainees, long-term unemployed people for their first six months at work and, at least for the first two years, temporary or seasonal workers.

Denmark, which has the most equal incomes of the OECD countries, has strong unions that have negotiated a minimum wage of $20/hour. It also rates as the happiest country in the world, according to the U.N. in 2013. It has a lower unemployment rate and a higher labor force participation rate than the United States.

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