Minimum Wage Myths
Chicago Tribune, July 28, 1998
Denver Post, June 12, 1998
Fort Lauderdale Sun Sentinel, June 15, 1998
Knight-Ridder/Tribune Media Services, June 1998
Old myths die hard-- and probably nowhere harder than in economics, where you really have to dig them out by the roots, or they come right back like weeds. Generations of economics students have been taught that raising the minimum wage will increase unemployment. It seems to make some sense: after all, if workers cost more, won't employers hire fewer of them? This argument is older than the twentieth century, and has been used against wage and benefit increases of all kinds, not to mention unions and collective bargaining.
And it will be dusted off and hauled out once again to oppose legislation to raise the minimum wage, now being considered by Congress. The trouble is, economists have not been able to find any employment losses attributable to increases in the minimum wage. The 1996-97 increase raised it from $4.25 to $5.15. A new study by the Economic Policy Institute used four different statistical methods to look for job loss, but found none. This joins a fairly long line of studies over the past two decades, including Princeton economists David Card and Alan Krueger's 1995 book "Myth and Measurement," which all point in the same direction.
The only real surprise is that anyone should be surprised. Most economists know, or ought to know, that the level of unemployment in the US is overwhelmingly determined by the Federal Reserve. We have a 4.3% unemployment rate today because the Fed has allowed it to drop that far. Until about three years ago, the Fed had believed that 6% was the lowest we could go without accelerating inflation. Chairman Greenspan and his friends would therefore tend to raise interest rates, thereby slowing down the economy and throwing people out of work, if the unemployment rate dropped below six percent.
That particular myth was destroyed by events, and for a variety of reasons-- e.g. falling inflation, the fear of setting off a crash in our over-valued stock market-- the Fed has not found another viable excuse to raise interest rates. So we have the lowest unemployment rate in 28 years. Now back to the theory. Some economists would say that if we raised the minimum wage high enough, it actually would cause unemployment. It is difficult to imagine the current legislation, which raises the minimum wage another dollar-- to $6.15 by the beginning of the year 2000-- having such an effect. In terms of real purchasing power, that $6.15 would buy a lot less than the minimum wage could buy in 1968.
But what if we decided that people who work full time should earn enough to keep their families out of poverty? Would this minimum wage-- more than $7.50 an hour-- raise our unemployment rate?
The answer is still no. The overall rate of unemployment is still determined by the Federal Reserve's interest rate policy. Over the long run, with rising minimum wages we would see a shift in the composition of jobs. There would be fewer low-paying, low productivity jobs, such as those in the fast food industry. But our economy would actually replace them with higher-productivity, higher paying jobs. We would all be better off. The last minimum wage hike helped almost ten million workers. Contrary to another myth, 71 percent of these were adults. That raise was far too little, and so is this one. Productivity has risen more than 50% since 1968. There is no excuse for a nation as rich as this one not to share the gains of economic growth with those who need it the most. But a dollar is better than nothing, and it would be a shame to see this raise defeated by an old, worn out myth.