Supersize My Wage
New York Times, December 22, 2013
By Annie Lowrey
About 20 years ago, in the midst of a recession, New Jersey decided to boost its minimum wage to $5.05 an hour from $4.25. Its neighbor to the west, Pennsylvania, chose not to tinker with its wage floor. Two bright young economists at Princeton, David Card and Alan B. Krueger, recognized in that dull occurrence a promising natural experiment.
The two found fast-food joints along the New Jersey-Pennsylvania border, and surveyed them twice over the course of 11 months about how many people they employed. They figured that when New Jersey's minimum wage went up, Garden State burger joints would hire fewer workers. The ones on the Pennsylvania side, acting as a kind of control, would see no change.
They were wrong. To everyone's surprise, there was actually no change in employment in the New Jersey restaurants, relative to the Pennsylvania ones. The price of low-wage work had gone up, and somehow, demand had remained the same.
That paper completely upended prevailing economic thought on the issue of minimum wages, leading to a flurry of studies and counterstudies, editorials and countereditorials. (It even got personal, Card said, describing the debate among economists as a "very, very nasty spat.") Since those days, the economy has grown about 63 percent in real terms, not that anyone working at a McDonald's in Trenton would have noticed. Their 1992 raise brought their wage to about $8.40 an hour, adjusted for inflation. Today, they earn $7.25 an hour, the federal minimum.
Recently, New Jersey voted by public referendum to raise its baseline wage by a dollar and peg it to inflation. On a national level, stagnant wages and a generally crummy economy for millions of workers have spurred politicians to push for a $10 federal minimum wage. Fast-food workers are organizing and lobbying for $15. But even given Krueger and Card's work, economists wonder how much an increase can really help the economy, considering how many Americans are out of work right now.
What Krueger and Card did was undermine the once-dominant rationale against raising the minimum wage: that it might lead to fewer workers being employed. The IGM forum at the University of Chicago acts as a barometer of opinion within the field. It recently asked its panel of experts — all top economists, from various backgrounds, disciplines and political tendencies – — whether raising the federal minimum wage to $9 an hour would make it noticeably harder for low-skilled workers to find employment. About a third said yes, a third said no and a quarter said they were not sure. As always in economics, nobody seems to agree on anything.
Some academics argue that Card and Krueger's conclusion is wrong, and that one relatively small-scale study does not prove anything. Among them is David Neumark of the University of California, Irvine, who described the study as "flawed," questioning how the data was collected and whether it made sense to extrapolate lessons about the whole economy from a relatively small number of KFCs, Burger Kings and the like. Other studies he has conducted have shown the expected, conventional-wisdom result: Wage increases mean less employment.
But other, larger studies have since confirmed Krueger and Card's results, and there are signs that the prevailing wisdom in labor economics has shifted over time, too — away from treating labor as a commodity like any other.
"If you go to the supermarket and the price of beef goes up, people buy less beef and more fish," said Michael Reich, a professor of economics at the University of California, Berkeley, who contributed to one such study. But labor markets are much more complicated than that, he said. The types of jobs available to workers at the minimum wage — meatpacking, box-stuffing, burger-flipping — tend to be hard, unpleasant, dull work. Employees rarely stick around for long, and their productivity is typically low. "Companies like Walmart can have turnover rates of 100 percent a year," Reich said. According to Reich's reasoning, when New Jersey raised its minimum wage, businesses ended up having less trouble filling vacancies and workers stuck around for longer.
Craig Jelinek, the C.E.O. of Costco, agrees. "Paying employees good wages makes good sense for business," he said earlier this year, calling for a federal minimum-wage increase. (Costco pays a starting wage of $11.50 an hour in all states where it does business.) "We know it's a lot more profitable in the long term," Jelinek said, "to minimize employee turnover and maximize employee productivity, commitment and loyalty." He should know; he started his career as a checkout boy.
There are more pressing reasons for a higher minimum wage, Krueger argues. "It increases the reward for work for people who have struggled in the economy over the past few decades," he said, ticking off a long list of positive effects it might have: "It helps low-wage workers to raise their family above the poverty line. It has a small ripple effect for people making more than the minimum wage. It particularly helps women." Ultimately, raising the minimum to, say, $9 an hour might lift hundreds of thousands of families above the poverty line and erase as much as 20 percent of the increase in income inequality that has emerged since the 1980s, according to the Obama administration, which supports legislation that would raise the federal minimum to that very level. (Krueger spent two years as Obama's chairman of the Council of Economic Advisers.)
Of course, conservatives in Washington, like Speaker John A. Boehner, tend to disagree. "I've got 11 brothers and sisters on every rung of the economic ladder," he told reporters before House Republicans unanimously voted down a proposal to gradually raise the minimum wage to $10 earlier this year. "I know about this issue as much as anybody in this town. What happens when you take away the first couple of rungs on the economic ladder, you make it harder for people to get on the ladder. Our goal is to get people on the ladder."
But Boehner has a point, at least in theory: If White Castle raises its starting pay to $15 an hour, it purchases access to a better pool of employees, made considerably larger by a high jobless rate. Labor retention has its benefits, but the downside might be less hiring of those whose only option had been the worst jobs. There will still be millions of teenage or otherwise unskilled employees left out of the labor force.
Raising the minimum wage is hardly a panacea. For one, it does little for the millions of struggling families who have higher hourly wages or a salary. Second, the strongest division between those below the poverty line and those just above it is work itself. Raising the minimum wage does little to help the millions of Americans looking for a job.
Messy economics aside, the cynicism of Washington's political class might ultimately lead to the increase. The minimum wage's value has eroded over time, and raising it is hugely popular among voters. Corporate profits are well north of a trillion dollars a year. The federal government, meanwhile, continues to run in the red. Unlike any other form of wealth redistribution, raising the minimum wage is basically cost-free to Washington. If it won't hurt the unemployment rate — as some research suggests — Washington figures, why not slip those fast-food joints the bill?