Through an Executive Order, President Biden said four kinds of federal contractors had to observe an hourly $15 minimum wage. Up from $10.95, the minimum applied to new contracts after January 2022.
As for a national minimum wage, while $7.25 remains, the mandated minimum depends on where you live. It also could depend on which study you look at.
The Minimum Wage Impact
For more than 110 years, economists have fought the minimum wage battle. Perhaps they would only agree that the war is worth winning.
Shown by the left y-axis, the federal minimum wage has been $7.25 since 2009. However, as a real wage, after a 1968 high, its spending power has plunged:
Our story starts during the 1910s when state legislators were most concerned with women and children. But by the 1930s, the Congress recopgnized it too should be fighting poverty and passed the Fair Labor Standards Act of 1938. Applying to just half of the work force, it declared industry specific minimums that would gradually rise, Then, between 1961 and 1977, an ascending minimum spread to most of the work force. Meanwhile, on the state level, Massachsetts had the first minimum wage in 1912 and Oregon, the second one, in 1913.
The one constant was the debate. One group believed the minimum wage boosted spending and productivity. Others fought it saying jobs would be lost, there were other ways to help the poor, and no one could identify an optimal minimum wage. Then, adding to the opposition, Ronald Reagan was the first president to oppose minimum wages hikes. Even the NY Times said in January 1987 that “The Right Minimum Wage was $0.00.” Instead, they supported alternatives like the Earned Income Tax Credit. At the time, economic research increasingly displayed that the minimum wage created job losses.
But no one is sure if it does.
Now, we’ve returned to substantial differences among state and local municipalities. I’ve labeled some state minimum wages on the following Department Of Labor map:
In one 2022 paper, economists disagreed with past studies that concluded there was little impact on employment from a minimum wage rise when comparing neighboring comununities. Instead they said you have to look at multi-state commuting zones. Then they found the the restaurant industry’s “robust negative relationship between minimum wage and employment.”
Next, in a second recent paper, an NBER researcher stepped away from the wage/employment connection. Including changes in the skill mix of employees, health benefits, and safety, he looked at an array of alternative responses to minimum wage hikes. Somewhat similarly, in a past econlife post, we saw McDonald’s charge more for a Big Mac after a wage increase.
Our Bottom Line: Traditional Price Floors
Our baseline, though, is always the traditional price floor graph. It, most fundamentally, is what the whole debate is about:
Focusing on whether there really are the jobs shortages displayed by the floor, we can choose our side in the minimum wage battle.
My sources and more: Among the countless articles on the minimum wage impact, I suggest several. First though, some history came in handy. Next, this paper was the most recent challenge to the “no impact” group. Then, completing the picture, the Winter 2021 issue of The Journal of Economic Perspectives focused on the minimum wage debate. And finally, this law firm detailed how to observe President Biden’s minimum wage Executive Order.
Before rushing to assert that minimum wage laws must reduce employment, it should be noted that labor market frictions (such as desperation and difficulty of commuting) weigh more heavily on workers than on employers. The resulting partial oligopsomy in the labor market, in many places, violates the conditions of the arrow debreu general equilibrium proof, so that minimum wage laws can not only not cause dead-weight losses, but also can actually increase product.
Even where minimum wage laws do depress employment, uniform national laws will minimize internal capital migration; and international differences will result (via currency depreciation) in full employment via comparitive advantage.
Whilst increased cost of intermediate goods for exports will unfortunately be a positive feedback, the net effect will be higher prices primarily for consumers of imports. Do we want to be a place where the iron law of wages drives vulnerable workers to poverty, in order to have cheaper TVs?