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Battling economists: The minimum wage debate

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The Obama Administration is pushing for a rise in the federal minimum wage from $7.25 to $10.10 an hour, arguing that "Raising the minimum wage nationwide will increase earnings for millions of workers, and boost the bottom lines of businesses across the country."

Where do economists come down on this issue?

Two often quoted studies of the effect of raising the minimum wage were done in the 1990s, and they reached opposite conclusions. A 1994 study by economists David Card and Alan Krueger compared employment data in fast food restaurants in New Jersey and nearby Pennsylvania before and after New Jersey's minimum wage was increased, while Pennsylvania's minimum wage was not . Card and Krueger's conclusion, "We find no indication that the rise in the minimum wage reduced employment."

The Card-Krueger study contradicted the results obtained by a 1992 study by economists David Neumark and William Wascher who used a much larger data set of state minimum wages and state employment relative to state population levels for the years 1973-1989. The large amount of data made many assumptions and complex statistical analysis necessary, but Neumark and Wascher conclude that their data show that higher minimum wages reduce employment for teenagers and young adults.

When the Card-Krueger study appeared, Neumark and Wascher set to work on a rebuttal. They reworked the Card-Krueger analysis, substituting actual pay roll employment counts for the data used by Card-Krueger, which had been gathered in a survey of fast food restaurants asking managers about employment at their restaurants. Nuemark and Wascher conclude that their data and analysis overturned the Card-Krueger conclusion that an increase in the minimum wage had no negative effect on jobs.

What about opinions from economists in general about the effects of the minimum wage on jobs? Well it turns out that economists are more evenly split than one might expect for anyone who has studied Economics 101 and knows a little about supply and demand curves. In response to the question, "Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment," 34 percent of an expert panel of economists at prestigious universities agreed with the statement. But almost as many disagreed, 32 percent.

What about the quote from that we opened with, that an increase in the minimum wage nationwide will increase earnings for millions of workers, and boost the bottom lines of businesses across the country?

The second part of that quote is most probably wrong. It is hard to see how increasing the costs of labor to businesses can boost their bottom line. The argument apparently rests on the premise that increasing wages of those earning the minimum will cause those workers to be more productive. It is possible that with an increase in their wage some of these workers will feel more appreciated, become more enthusiastic as they carry out their work and thus become more productive. But even if this were the case, it is hard to fathom how productivity could jump by enough to offset the full proposed 39 percent increase in the minimum hourly wage.

And then one has to wonder why employers haven't figured out via experience that paying their workers more will increase their productivity by enough to offset the higher wage costs. Do they really have to be prodded by government to figure that out?

The other possible route to increased productivity would be that workers would invest more in their skills and learning if only they were being paid more, or that employers would train their workers up if they had to pay their workers more. But again, one has to wonder why it takes an increase in the minimum wage for both workers and their employers to realize that more training will pay off in higher wages and bigger profits.

Don't get me wrong. I'm for a federal minimum wage, and one that is higher than the present $7.25 per hour, which in real terms is lower than in all the years between 1962-1980. I'm for a minimum wage in the sense that as a rich democratic industrially advanced nation we should have a wage minimum that is socially acceptable, one that as a society we believe no one should have to work below. But it has to be at a level that is based on the reality of economics, one that is not so high that it has a large negative impact on employment. But with unemployment still at 6.7 percent, now may not be a good time to put it back to its late 1960s peak of just over $10 per hour.

Note: Card and Krueger; and Neumark and Wascher have written books on the minimum wage. And Neumark and Wascher, along with a third economist, J.M. Ian Salas, have a new 2013 paper titled "Revisiting the Minimum Wage Debate: Throwing Out the Baby with the Bathwater?" So if you want to know more, there is certainly plenty to read.