Analysis: Economists Split on Obama's Call to Raise Minimum Wage

Reuters, February 13, 2013

by Jason Lange

(Reuters) - President Barack Obama argues an increase in the federal minimum wage will fight poverty without causing companies to lay off workers. Top economists, however, are sharply divided on that question.

For at least a century, academics have debated whether setting a floor for salaries would do more harm than good.

The view held by many prominent labor economists and business executives is that making companies boost pay will lead them to hire less. The point was supported by numerous studies and was a widely held view among economists in the 1980s.

In the 1990s, some economists focused more on employment trends in parts of the United States where the minimum wage rose and compared them with trends in areas where they did not. Eventually, those researchers argued that higher wages made employees less likely to quit their jobs. That reduced the expense of recruiting and training new workers, a big deal for industries like fast food restaurants where employees typically make minimum wage and turnover is high.

"We found that raising the minimum wage doesn't kill jobs. It kills job vacancies," said Michael Reich, an economist at the University of California at Berkeley.

Some of the early research in this vein was conducted by the economist who chairs Obama's Council of Economic Advisers, Alan Krueger.

In Obama's State of the Union address on Tuesday, he recommended raising the minimum wage from $7.25 to $9 an hour by 2015. The minimum wage was last raised in 2009.

The proposal was embraced by Democrats who lament that the buying power of the federal minimum wage peaked in 1968, when adjusted for inflation, and has trended lower ever since.

But the idea raised the hackles of business leaders and may have spooked some investors. Shares in fast food giant McDonald's Corp (MCD.N) fell on Wednesday.

Many economists still think the minimum wage is bad policy.

David Neumark, an economist at the University of California at Irvine, has surveyed more than 100 academic papers on the matter and said the consensus remains that raising the minimum wage hurts employment, particularly among teenagers and restaurant workers.

"The evidence is overwhelming that the minimum wage has reduced jobs among the people they are trying to help," he said.

The prevailing sentiment among many economists is that a 10 percent increase in the minimum wage reduces employment among low-skilled workers by 1 percent or 2 percent, Neumark said.

But research by Reich and others has found no such relationship, and suggests hiking the wage can make the economy more productive.

In a 2010 paper cited by the White House on Tuesday, Reich and two other Berkeley researchers studied more than a decade of data from pairs of counties that bordered one another but were in different states. The counties in one state raised the minimum wage but the other did not.

They found the increase in the minimum wage led to no detectable employment losses. They also found that in counties where the minimum wage rose, the rate at which workers quit fell.

"People who stay longer in their jobs are going to be more productive and more experienced," Reich said.

 

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