Minimum Wage Effect At The National Level

The possibility of an increase in the minimum wage at the Federal level of the United States is an extremely interesting reform. By itself, I am unconvinced about its macro significance (for reasons to be discussed herein). However, if part of a slate of policies aimed to run the economy hotter, it could be one potential component of a hypothetical structural shift.

Sub-National Experience Different

There is a long ongoing debate about minimum wage policies within the economics literature. When I looked at the discussion (years ago), the literature was focused on trying to estimate effects at the sub-national level. (Given that the U.S. Federal minimum wage has not been raised in decades, national data are scarce.)

At the sub-national level, keeping the minimum wage below the national average is a form of "smokestack chasing": trying to develop by drawing investment from other sub-national regions. As such, I can accept that there might be effects worth taking into account when discussing sub-national (state, provincial) minimum wage changes.

At the National Level, Macro Policy Exists

When we jump to the national level, we have to accept that any effects of the minimum wage hike would show up in the national aggregates -- and can be dealt with via macro policy.

Although academics might try to do some "all else equal" analysis (estimating the marginal effect of changing the national minimum wage), this is ignoring macroeconomics. Why did neoclassical economists insist that fiscal policy was ineffective before 2008? Because monetary policy would cancel out the effect of fiscal policy.

There is absolutely no reason to believe that fiscal and monetary policy are inadequate to compensate for any side effects of a hike in the minimum wage. The only interesting question is if there are a large number of policy changes that are all pointing in the same direction. It is easy to imagine that critics of the Biden administration making that claim.

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