The History of Economic Thought on the Minimum Wage

• Published date: 01 October 2015
• Date: 01 October 2015
• DOI: http://doi.org/10.1111/irel.12104

The History of Economic Thought on the

Minimum Wage

*

ALAN B. KRUEGER

I was in the audience at the State of the Union address in February

2013 when President Obama announced, “Tonight, let’s declare that in the

wealthiest nation on Earth, no one who works full time should have to live in

poverty, and raise the federal minimum wage to $9.00 an hour.”

The thought that ran through my head at that time was, “Wow, it’s remark-

able that economic thinking has come full circle on the minimum wage.”Let

me take you on a quick tour of 75 years of the history of economic thought

on the minimum wage. This history demonstrates that periodically raising the

minimum wage to help low-wage workers is not only the right thing to do, it

is also the smart thing to do.

Economists were largely supportive of the minimum wage when it was

enacted as part of the Fair Labor Standards Act (FLSA) in 1938.

Economists in the 1930s and 1940s understood the logic that said demand

curves sloped downward, but they also were aware that labor markets were

imperfect, and that workers lacked bargaining power. The fact that wages and

working conditions varied for workers of equal skill and training in a locality

suggested that employers had some discretion to set pay. Companies were

more than passive wage takers, as the simple theory of labor demand requires.

Economists from Princeton’s Richard Lester to the University of Chicago’s

Paul Douglas—who became a distinguished Senator from Illinois—supported

minimum-wage hikes.

They recognized that there was nothing optimal in the way that employers

set wages, and that the economy would function better if the minimum wage

set a floor below which wages could not fall. An adequate wage floor would

also improve employee morale and bring more workers into the job market.

When employers have monopsony power over workers because of frictions in

the job market, a skillfully set minimum wage could provide a standard that

clears the market, and raises the purchasing power of households to buy, as

*The author’saffiliation is Princeton University, Princeton, New Jersey; Email: akrueger@princeton.edu.

The author was the Chairman of the President’s Council of Economic Advisers when this speech was deliv-

ered.

INDUSTRIAL RELATIONS, Vol. 54, No. 4 (October 2015). ©2015 Regents of the University of California

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