Why Not A Higher Minimum Wage?

For several decades, the traditional literature on effects of minimum wages has perpetuated the notion that, while higher minimum wages raise the wages of those at the very bottom of the income scale, they also lead to a decline in employment. This is intuitive. Of course, when companies need to pay workers more, they have fewer resources to hire more workers. But this Economist article shows that the logic above might oversimplify the effects of minimum wage legislation.

In the article, the Free Exchange correspondent for the Economist traces the history of the minimum wage and of theory surrounding the provision. New Zealand created the first minimum wage in 1894, and the United States instituted a federal minimum wage in 1938. The US minimum wage is currently less than 40% of median earnings. France’s minimum wage, on the other hand, creates a floor set at 60% of median earnings.

Since the early 1990s, some economists have attempted to challenge the traditional interpretation of minimum wage effects. They argue that the minimum wage can boost earnings and employment simultaneously. While many conservative economists continue to disagree with this notion, even some in this camp now accept that alternative methods of providing a minimum wage (such as the Earned Income Tax Credit in the United States) help achieve these effects.

Certainly, not everyone now contends that the minimum wage benefits outweigh its costs. This article characterizes the current thinking as follows: “Bastions of orthodoxy, such as the OECD, a rich-country think-tank, and the International Monetary Fund, now assert that a moderate minimum wage probably does not do much harm and may do some good.” In other words, the verdict is still out. But there is stronger evidence that minimum wages help reduce wage inequality than there is that they reduce employment, at least to an equal degree.

While the article does not claim that economists have arrived at a new consensus on minimum wage effects, it does reveal that interpretations of the costs and benefits of the provisions have changed in the more than one hundred years since the minimum wage has come about. The ability of a minimum wage to raise earnings not just for those earning the minimum wage, but also those fairly high up the income ladder, is promising. It reveals that the tool could be applied more directly in the future as a means to mitigate income inequality in the marketplace.