The modern debate about the effectiveness of minimum wage policies began in 1992 inside fast food restaurants in Pennsylvania and New Jersey.
Before then, a legislated floor for compensation was championed by progressives but mostly dismissed as counterproductive by traditional economic theory. The standard thinking of economics followed the golden rule of supply and demand: If government forces an increase in the price of labor, the result will be a reduction in the use of labor. That default view was made more complicated following a natural experiment.
In April 1992, the state of New Jersey enacted its own minimum wage increase, while Pennsylvania remained at the same level as the federal minimum wage — then less than $5, now $7.25. A year later, influential economists David Card and Alan B. Krueger published a landmark paper that showed contrary to standard economic theory, the amount of fast food workers in New Jersey actually increased following the minimum wage hike, and Pennsylvania’s workforce declined. Two mainstream economists showed the exact opposite of what traditional economists would have predicted did happen.
Interesting as the findings were, that paper never did settle the debate. The research had many complicating factors and other examples have proved thorny. Results from the 2014 legislation that set a $15 minimum wage in Seattle are similarly mixed. Experienced low-wage workers fared well, but overall hours reduced so many saw overall take-home declines.
No surprise then that the issue of the minimum wage has become a political one. One of the Biden administration’s most identifiably progressive policy objectives is to establish a $15 federal minimum wage — more than doubling the wage in both rural Lancaster County Pennsylvania and in Arlington, Virginia, where the cost of living is far higher. Cost of living matters quite a bit. An analysis in 2015 projected that New York City would need a minimum wage of $39 per hour to be livable, quite a bit higher than even in other cities, like Baltimore.
Though President Joe Biden shared this weekend he doubted the $15 minimum wage change would survive this current federal stimulus bill negotiations, he pledged to continue the effort. The latest assessment from the nonpartisan Congressional Budget Office estimates that the $15 level would cost 1.4 million jobs while also lifting 900,000 people outside of poverty. The CBO previously looked the policy in 2019.
Even though most tech firms primarily employ high-wage workers, those that want to brandish their progressive ideals align themselves with efforts to raise the minimum wage, like a 2017 campaign in Philadelphia. In 2019, the effort to increase that city’s minimum wage, which is part of Pennsylvania’s federal minimum of $7.25 per hour, passed as a ballot measure — but it remains the lowest of any big city. Big companies have made their own stances, like when Bank of America announced in 2019 a $20 minimum wage.
That a debate as important as this one remains undecided may feel unfulfilling. But our understanding has advanced. Few, if any, mainstream economists today would argue anymore that minimum wage legislation is always counterproductive. Today’s research suggests wage gains most often outweigh the costs — and there are costs. Most surveyed do expect a $15 federal minimum wage to have more negative outcomes than positive, especially for younger workers. The prevailing wisdom among experts, then, is that there is a theoretical bound at which wages are too low and one at which a minimum wage is too high. We just don’t know yet what they are, how dynamically they might change and how specific they are to geography and trade. Then again, the experts have been wrong before.
Below is a helpful video recap of the debate from The Economist:
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