Why the Minimum Wage is such a Divisive Issue in the U.S.

On that November 8 evening, another important election outcome slipped in the door with Trump. Arizona, Colorado, Maine, and Washington all voted to raise the minimum wage by 2020, and South Dakota rejected a referendum to lower the minimum wage for workers under the age of 18. Barring two occasions, U.S. voters have always chosen to raise the minimum wage in state ballots over the past 20 years. On those two occasions, both in 1996, Congress had already increased it three months earlier. There are ten million working Americans living below the poverty line, so a popular mandate for bigger paychecks is natural. But as always, there’s a devil’s advocate position: are the working poor making their own situation worse by voting to hike up the minimum wage?

If you took a basic Econ 101 class, you’d probably say yes. The argument looks bulletproof: if your raise the price of something, people want less of it. So raising the minimum wage makes workers more expensive, and many poor workers would lose their jobs as employers scale back business. Those who keep their jobs earn more, but society loses out on goods and services that are no longer produced, and jobs that are no longer available. Letting the market decide the wage rate keeps things humming along efficiently, so supply of labor meets demand and everyone wins.

It’s a powerful lesson. It’s also wrong.

The canonical idea that a higher minimum wage reduces employment is over-simplified, and based on a supply-demand model you learn in day 1 of Econ 101 that is a stick-figure representation of a real economy. A plethora of research studies with real world data have yielded conflicting results, showing that a higher minimum wage reduces employment, or that it has no discernible effect on employment. Economists (who teach Econ 101, for that extra bit of irony) as a consequence, have no agreement on what actually happens.

The only thing that’s obvious is that this is a messy issue. Which side you land on depends on what you want to achieve, and how you measure success.

There are many conceivable gains from an increase to the current minimum wage the stick-figure model misses that explain why employment need not decline afterwards. The poor earn more, and then would most likely spend more as the poor spend a much higher fraction of their income than the wealthy. This may actually boost consumption, and therefore also employment. Better-paid workers work harder and don’t quit their jobs, thus becoming more skilled, again increasing economic growth and boosting employment further.

There are other possible knock-on benefits of a higher minimum wage beyond the realm of employment levels. Income inequality would decline, lessening political unrest and polarization (nothing demonstrates better than election night what can happen if you ignore income inequality for too long). There are also huge potential health benefits to the U.S. economy in particular. With a higher wage, the poor could invest in education and health, both of which pay off for society in the long run. A healthier workforce is more productive and can work for a longer fraction of their lives. The potential healthcare savings in the U.S. from a reduction in obesity rates alone are enormous. Healthy diets are priced out of the working class household budget. A higher minimum wage could change all that. The gains to the economy from an educated, well-trained workforce are obvious. However, educated citizens are not just valuable employees. They also produce non-monetary civic gains. They are safer drivers. They are less likely to commit crime. They keep their neighborhoods clean. And, they are healthier, feeding the virtuous cycle of health gains to the economy all over again.

Now, the hard part. The long run gains from a minimum wage hike come at a price, even if employment levels don’t change. Large industries that rely on cheap labor that they can’t replace with machines (e.g. the restaurant business) would have to take a lasting cut in profits. In the immediate aftermath, all firms would actually face new transition and restructuring costs if the wage increase is large enough to trigger necessary changes to their production process. In this vein, some economists argue that minimum wage hikes cause firms to reduce worker on-the-job training, which dampens future wage growth and defeats the purpose of a minimum wage hike altogether. But, as you’ve probably guessed by now, the evidence on this has come back mixed, and sometimes shows the exact opposite. In the long run however, “we are all dead”, and the pressure to report quarterly profits makes short-term decisions a priority for business. So the politics against a higher minimum wage relies on the the Econ 101 model; the simplicity and elegance of its free market message make it an effective instrument.

More irony: the U.S. minimum wage debate is fast becoming irrelevant in the larger scheme of things. Globalisation has made cheap labour abundantly available worldwide. Workers without college degrees have lost manufacturing jobs and been forced to accept lower wages (after accounting for inflation) for the ones they have. Firms are replacing industrial workers with machines at breakneck speed. Caught between the march of technological progress and offshoring, blue collar workers have few places left to turn. A Universal Basic Income (UBI) that guarantees a basic standard of living regardless of employment status may be closer than we think. But what of the human need to have dignity by earning a living? The digital age is bountiful, but takes no prisoners.

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