Quick Thoughts On The Minimum Wage

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President Biden’s proposal to raise the minimum wage to $15 an hour by 2025 is prompting a backlash from the usual suspects. As we hear the cries about how this will be the end of the world for small businesses and lead to massive unemployment, especially for young workers, minorities, and the less-educated, there are a few points worth keeping in mind.

While $15 an hour is a large increase from the current $7.25 an hour, this is because we’ve allowed so much time to pass since the last minimum wage hike. The 12 years since the last increase in the minimum wage is the longest period without a hike since the federal minimum wage was first established in 1938. Few workers are now earning the national minimum wage, both because of market conditions and because many states and cities now have considerably higher minimum wages.

If the minimum wage had just kept pace with prices since its peak value in 1968 it would be over $12 an hour today and around $13.50 by 2025. Keeping the minimum wage rising in step with prices is actually a very modest target. It means that low-wage workers are not sharing in the benefits of economic growth.

From 1938 to 1968 the minimum wage rose in step with productivity growth. This means that as the economy grew and the country became richer, workers at the bottom of the ladder shared in this growth. If the minimum wage had continued to keep pace with productivity growth it would have been over $24 an hour last year and would be close to $30 an hour in 2025.

There has been considerable research on the extent to which the minimum wage leads to job loss. Much recent research finds that even substantial increases in the minimum, such as the $15 an hour minimum wage that is already in place in Seattle, have no effect on employment.[1]

It is worth noting that even the research that finds the minimum wage reduces employment generally finds a relatively modest effect. A recent review article by prominent opponents of the minimum wage found that the median estimate of elasticity was -0.12 for affected workers. This estimate means, for example, that a 10 percent increase in the minimum wage would lead to a reduction in employment among affected workers (e.g. workers with less education or young workers) of 1.2 percent.

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