On the Minimum Wage, Both Sides Have Their Economics Wrong.

• Author: McKenzie, Richard B.
• Position: BRIEFLY NOTED

The Biden administration has proposed raising the federal hourly minimum wage in annual steps from $7.25 to $15 by 2025. Supporters and critics of this idea have staked out their usual policy positions on the labor-market effects of raising the wage. Yet both sides are misguided in their assessments because they misunderstand the economics of labor markets for menial/low-wage workers. Their big mistake is their conclusion that the proposed increase will make a substantial majority of covered workers better off The opposite is more likely, mainly because covered workers will lose employer-based and government-based benefits that can be expected to largely offset their money-wage gains.

Standard positions / Critics of minimum wage hikes have pointed to the mountain of econometric studies undertaken over the last half-century that show tens if not hundreds of thousands of job losses among covered low-wage workers from even a modest--say, 10%--minimum wage increase.

In making their statistical arguments, critics have inadvertently fortified proponents' case. Proponents have realized that the critics' estimated job losses across scores of studies are only a small percentage of the covered jobs--no more than 3%--with many studies reporting losses of under 1%. This has enabled minimum wage proponents to stress that for a 10% wage hike, more than 97% of the covered workers (which can easily be in the millions) will not only keep their jobs but get a raise.

Accordingly, the Congressional Budget Office (CBO) reported in early 2021 that the Biden proposal will give a pay raise to 27 million covered workers while killing off 1.4 million low-wage jobs, which represents only 5% of the total covered jobs. Given the proposed 107% minimum wage increase, this is in line with the findings of past studies.

The proponents can then ask the obvious policy question: How else can the federal government give so many low-wage workers an income boost and raise so many out of poverty (nearly a million Americans, according to the CBO) with so little economic damage? Good point--but only if the proponents have their labor-market economics right.

Increased work demands, cut benefits / Unfortunately, many minimum wage proponents and critics alike have long misconstrued how competitive low-wage labor markets work under wage mandates. Both sides seem to understand that those workers receive low wages because of competitive labor-market pressures they face. But both sides also seem to overlook the fact that those competitive pressures on both workers and employers don't evaporate with mandated wage hikes. The pressures are simply redirected toward nonmoney forms of worker compensation.

As economists have conventionally argued, a minimum wage hike will price some low-wage...