Why market forces will overwhelm a higher minimum wage

Minimum wage: Requiring employers to pay $15 won't provide much ballast against market forces

The slogans are everywhere: Fight for 15; People Not Profits; One Job Should Be Enough. Worsening income inequality and the persistence of poverty have spurred a movement to raise the minimum wage, at both the national and state levels. Some West Coast cities have already voted to boost their minimum wage to $15, or more than double the federal standard. And Los Angeles is now considering a similarly aggressive move.

The labor market problems that these higher minimum wages are intended to fix are very real. But would a higher wage floor address the underlying problems? A large body of research shows that the answer is almost certainly no, and that there are better solutions, although they are harder for policymakers to embrace.

There are several reasons why workers' wages are currently too low to provide what many view as an acceptable standard of living. One big factor is that technological changes have increased the value of higher-skilled work and reduced the value of lower-skilled work. Globalization, meanwhile, has brought many lower-skilled American workers into greater competition with their counterparts in other countries.

Simply requiring employers to pay $15 won't provide much ballast against these market forces. In fact, data indicate that minimum wages are ineffective at delivering benefits to poor or low-income families, and that many of the benefits flow to higher-income families. That's because minimum wages target low wages rather than low family incomes. And many minimum-wage workers are not poor or even in low-income families; nearly a quarter are teenagers who will eventually find better-paid jobs. Moreover, most poor families have no workers at all.

As a result, for every $5 in higher wages that a higher minimum imposes on employers, only about $1 goes to poor families, whereas roughly twice as much goes to families with incomes above the median.

Higher minimum wages also reduce employment for the least-skilled workers. Certainly not every one of the hundreds of studies on the topic confirms this conclusion. But there are also studies claiming that humans have not contributed to climate change, and that supply-side economics did not contribute to massive budget deficits. The most comprehensive survey of minimum wage studies, which I conducted with William Wascher of the Federal Reserve System, found that two-thirds of studies point to negative employment effects, as do over 80% of the more credible studies.

Yet another reason to be wary of raising the minimum wage is that modest job loss overall may mask much steeper job loss among the least skilled. Economists use the phrase “labor-labor substitution” to describe employers responding to a higher minimum wage by replacing their lowest-skilled workers with higher-skilled workers, whom they are more willing to hire at the higher minimum.

Based on my research, I think it is likely that a $15 minimum wage in Los Angeles will lead some teenagers currently focused on their education to take part-time jobs at the new, higher minimum, and displace low-skilled workers from the jobs they now hold. That seems like a bad outcome.

If we really want to help low-skilled workers, we need to recognize that the solutions that actually work are expensive, difficult to achieve or both.

Guaranteeing a minimally acceptable standard of living for those who work entails redistribution of some kind. Minimum wage is one form of redistribution — although we don't always think of it as such — but it's a blunt instrument. Using the tax system is clearly better.

The Earned Income Tax Credit, for instance, targets low-income families very well. Research establishes that it provides generous government subsidies to these families' labor market earnings and that it leads more people to work, which probably explains its bipartisan support.

Some decry the EITC as “corporate welfare,” because the labor market entry it encourages pushes down market wages. But that is precisely why it increases employment. If it did not lower wages, employers would not hire additional workers, and those not hired would be more dependent on public programs.

Of course we could still do more. We could make the EITC more generous, including increasing it for those without children who are eligible only for minuscule payments. More radically, we might consider whether all low-income families, irrespective of employment, should receive more general income support in the form of direct cash payments. One might think of these payments as a “public dividend” from the extraordinary productivity of the U.S. economy, which has permitted those at the top to earn dramatically increasing salaries while incomes at the bottom have stagnated.

These alternative policies would have to be financed by higher taxes, but that's a good thing. Redistribution through taxes is paid for by those with the highest incomes. In contrast, higher minimum wages are paid for by those who happen to own businesses in low-wage industries, and the consumers of the products of those industries, who are more likely to be poor.

Progressives who want to help low-income families by pushing for higher minimum wages would do better to channel their energy toward methods of redistribution that do less to harm the least-skilled, and more to help them.

And assuming that something is going to change in response to stagnating incomes, conservatives may be happier with the consequences of well-designed redistribution policies than the kind of high minimum wage floor Los Angeles is contemplating. For now, redistribution is a dead letter that provokes anguished cries of “socialism.” But it doesn't have to be.

David Neumark is Chancellor's Professor of Economics and director, Center for Economics & Public Policy at UC Irvine.

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