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Why economists are skeptical about a $15 minimum wage

Backers of a $15 minimum wage rally in January at the Oregon State Capitol in Salem. Lawmakers later passed a bill raising Oregon’s minimum to $14.75 in Portland, $13.50 in its suburbs and $12.50 in rural areas by 2022.
Backers of a $15 minimum wage rally in January at the Oregon State Capitol in Salem. Lawmakers later passed a bill raising Oregon’s minimum to $14.75 in Portland, $13.50 in its suburbs and $12.50 in rural areas by 2022. Statesman-Journal via AP

There is remarkable agreement among economists on two effects of a minimum wage:

(1) As long as it stays within the inflation-adjusted range it has been in for most of the last 75 years, it has little negative effect on the number of jobs; and

(2) It is a mediocre tool to reduce poverty or income inequality.

Over recent years, a campaign has developed to boost the federal minimum wage to $15 an hour. That level has been set in some municipalities and will be phased in by 2022 throughout California. There is even a formal organization, Fight for $15, leading the effort. Bernie Sanders has made a $15 minimum the cornerstone of his presidential campaign, one that has great popular appeal among many Democrats, forcing Hillary Clinton to scramble for a response.

But is a $15-an-hour minimum wage a sound idea? And would it fulfill the benefits advanced by its supporters? I am hesitant to speak for other economists. Few have spoken publicly on these specifics, but I venture that most would say no and no.

The current minimum of $7.25, in effect since mid-2009, is somewhat below the inflation-adjusted average over the past 60 years of $7.97. It is down 22 percent from the average of the 1960s and 1970s, when a more sympathetic Congress upped it frequently. But a boost to $15 would put it well above any other point since a federal minimum was first instituted in the late 1930s. It would be into levels at which many economists would expect to see significant job losses. Exactly how many jobs would be lost is not something, however, on which there is much agreement.

Some sampling of economists’ views on the minimum wage are available through a poll conducted by the Booth School of Business at the University of Chicago. In 2013, it questioned economists about the effects of a $9 minimum wage, and in September 2015 about a phased-in $15 minimum.

In the 2015 poll, 26 percent of the panel agreed that level will cause a “substantially lower” employment level than the status quo. Some 24 percent disagreed, and 38 percent bravely decided they were uncertain.

Richard Thaler, a distinguished pioneer in behavioral economics, asserts, “Empirical evidence suggests the effects on employment would be modest.” That is a view widely held by many as long as increases are small, but Nobel Prize winner Eric Maskin probably also speaks for many in noting, “The increase (to $15) is so big that I’m not sure previous studies tell us very much.”

One comment in the 2013 poll illustrates a key consideration. Caroline Hoxby, a Stanford economist who focuses on education issues, particularly those affecting poor and minority communities, commented, “Unemployment among low-skilled workers is already high by historic standards, indicating that wages are already too high for market-clearing.” Hoxby is not conservative within economics or in her politics. But she is African-American, and it is minority youths whose job prospects are harmed by a higher minimum wage. This is an issue that many “Fight for $15” champions ignore.

Job losses from a higher minimum are not across the board. They are higher for low-education members of minority communities than for whites and those with higher education. And they are higher in sectors that compete with imports and where the substitution of workers with machines is easiest, such as manufacturing. Job losses are less likely in service businesses such as supermarkets or restaurants.

The Los Angeles area’s garment industry has long survived competition from abroad better than other areas. But it reportedly already is seeing some employment losses even though the full $15/hour will not be reached for another six years.

Of course, effects on the number of jobs are not the only consideration. A higher minimum raises the income of many. Some of these are teens from middle-class households. But many others are low-income people, female more often than not, and often with children. For them, the boosted pay rate is a concrete benefit even if economists cavil over net effects on poverty.

Moreover, a minimum wage can correct for certain market failures, such as the monopoly power of employers in certain or geographic sectors. I laid out these considerations in a past column and still think they are important reasons to have a minimum. But there are always costs as well as benefits, and a level well above the historic range may well increase costs to the economy as a whole more than benefits.

On one such non-job consideration, economists seem to have a consensus. Advocates of $15 claim the higher wage will boost the overall national economy, increasing the value of total output, investment and spending. This is as dubious as presidential candidate Sen. Ted Cruz’s assertion that his proposed tax cuts will foment 5 percent annual growth. No one in the Booth School poll supports this.

Economists skeptical about the efficacy of a minimum wage as a poverty-reduction tool or one to reduce income inequality often assert that the Earned Income Tax Credit, available to low-wage working people, is a much more effective alternative. Conservative elected officials often cite their reservations about the minimum but ignore the call for a larger tax credit.

Even though economists have doubts about the wisdom of a much higher minimum, the fact remains that income for many households has been, at best, stagnant over the past decade or two and that most of the increase in national income over that period has gone to a small fraction of the population.

St. Paul economist and writer Edward Lotterman can be reached at boise@edlotterman.com.

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