Raise the minimum wage. By Matthew Yglesias

Raise the minimum wage. By Matthew Yglesias

January 21, 2021. 

(Scott Olsen / Getty Images)

Raising the minimum wage to $15/hour is broadly popular with the mass public, enjoys healthy political support among Democratic Party elected officials, and would on the whole raise incomes and living standards for disadvantaged people while coming primarily at the expense of relatively affluent people.

In other words, it’s a good idea. Joe Biden should do it. Congress should do it.

And most of all, centrist wonk types who feel, correctly, that minimum wage hikes are not optimal policy should do what they often tell left-wing people to do and be practical about it. Some day, perhaps, the wonks themselves will work out a consensus around a more optimal system of explicit wage subsidies and start doing the spadework to build political support for it. It’s a perfectly reasonable idea in theory, and I tend to think that — just like a single-payer health care system — it’s probably a better idea than the current trajectory of wage regulation.

But one can’t let the perfect be the enemy of the good here.

Delivering assistance to families in need is urgently important, and a reasonably phased-in minimum wage increase will help. More broadly, skeptical wonk types should consider that the realistic alternative here is not the status quo (which would be bad enough), but the endless escalation of Trump-style “populist” efforts to bolster working class pay with trade and immigration restrictions. In the universe of mechanisms that raise wages and that normal people understand and support, a minimum wage increase is easily the best of the lot. And just as single-payer supporters should accept more practical keyhole ideas, so too should wonky optimizers accept that a minimum wage increase is a good idea for the real world.

Steelmanning the case against

Lately Twitter has been full of progressives retweeting or dunking on really bad arguments against minimum wage increases, generally being made by right-wing people who are not especially prominent or influential. This is something that happens all the time on social media, and it’s a real illness. It infects not just partisan politics but factional battles, too, so that on any topic people are maximally exposed to the worst arguments of the people on the other side.

So you’ve got:

Allegations that a minimum wage increase will cause eye-poppingly large increases in the price of food.

Allegations that a minimum wage increase will spark a massive wave of automation that eliminates human labor.

The sentiment that fast food workers are basically bad people who don’t deserve higher living standards.

This is all really dumb. Everyone deserves high living standards. Within reason, if a minimum wage promotes capital deepening and higher productivity, that’s an argument in favor of doing it, not an argument against. And while it is probably true that a big minimum wage hike would lead to some kind of upward price pressure on low-end fast food, that’s hardly a reason not to do it.

It’s healthier for your brain to engage with serious arguments.

For example, the composition of the workforce might change. Jennifer Doleac, a very good empirical economist who doesn’t particularly specialize in labor market issues, noted that she personally would hire fewer RAs if she had to pay higher wages.

I don’t know exactly what her research situation is like, but if you think about the non-profit sector in general you’ll see that she obviously can’t respond to an increase in her cost basis by raising prices. Of course if she’s lucky, someone in charge of financial matters would show up with a bag full of money and say, “we know labor costs have gone up but we want everyone to keep their RA headcount steady.” But she’s saying she doesn’t think that will happen. Instead, since she’s dealing with a basically fixed budget, she will try to hire a smaller number of more experienced researchers.

Note that this will very plausibly happen even if there isn’t any impact on employment aggregates. Say most employers do adapt to the higher wage structure without reducing employment. That puts more money into the pockets of low wage workers, and thus creates more job opportunities producing the things that low wage workers consume. That creates new job opportunities for the people disemployed by economics professors hiring fewer RAs, so you end up with fewer undergrads working as research assistants and more working retail jobs. But unlike productivity increases driven by investments in better technology, I do think that driving people out of jobs that have non-pecuniary benefits could be a real problem.

And that’s over and above the fact that empirical studies of minimum wage increases are very slightly more likely to show job losses than job gains.

If you’re a casual consumer of the news, you may be under the impression that there is a heated research battle over the employment impact of the minimum wage. But I think it’s important to see that this isn’t really true. Instead there’s a heated battle between people who on the one hand say, “there’s no reason to believe a minimum wage hike will substantially reduce employment” and people who on the other hand say, “the bulk of the literature says a minimum wage hike will reduce employment.”

Those are very different ways to characterize that chart, but they are completely compatible statements. My view is that the right way to look at this chart is that we should raise the minimum wage.

People want a higher minimum wage

Minimum wage increases are really popular.

They’ve passed in ballot initiatives in Florida and Missouri. The $15/hour idea polls in the high 60s in most results I’ve seen. You can push those numbers down a little bit by providing negative messaging, but it doesn’t budge that much since this is a widely debated idea that people are generally familiar with. Elected officials have good reason to want to try to identify popular ways of helping people. Under the circumstances, the right question to ask about a minimum wage increase is not “is it optimal?” or “does it have some downsides?” but “is it actually bad?”

And while I know some people of good will who insist that it is actually bad, I don’t see that as credible.

Michael Strain, for example, is a labor market guy who I respect a lot, and he recommended to me this CBO report, which he said reflects the consensus in the literature that a big minimum wage increase will reduce employment. Well, the report does say that. It also says that earnings will rise for poor and near-poor families, offset by a big drop in income for relatively affluent people.

To me that clears the bar for “this is a good idea.” You’re talking, in the main, about a large transfer of income from relatively affluent families to relatively needy ones. It is absolutely true that doing this with an explicit tax and transfer program would allow for better targeting than doing it with a minimum wage hike. But a practical politician has very good reason to prefer the minimum wage hike, and this CBO report makes a minimum wage hike seem good to me.

Then, of course, there is also the minority of more optimistic studies, where a minimum wage hike produces much larger economic gains by modestly increasing employment rather than modestly reducing it.

Is there a better way?

Economists often vaguely gesture at the Earned Income Tax Credit as a superior alternative to the minimum wage.

The EITC, unfortunately, has a lot of administrative problems that lead to a lot of people who should be eligible not getting it. There’s also a ton of auditing of EITC claimants. And the EITC is linked to family size, so there’s a view that by subsidizing low-wage work from parents, it lowers market wages and reduces the incomes of non-parents. There’s also a view that because the EITC is non-transparent, it doesn’t actually encourage work because people don’t know it’s there.

Rather than sort through all that, let’s just say there is probably an Idealized Wage Subsidy Program (IWSP) that abstracts away from these ideas. The IWSP would be an explicit tax-and-transfer program that would have several benefits relative to the minimum wage:

A minimum wage increase makes most (but not all) low-wage families better off, whereas an IWSP could get all of them.

A minimum wage increase probably reduces non-pecuniary job quality, whereas an IWSP would, if anything, raise it.

The costs of a minimum wage increase are borne in an opaque way by a fairly broad swathe of affluent people, whereas an IWSP could more narrowly target the top one percent.

There’s also a school of thought on the right, exemplified by Charles Murray, that you should give everyone a Universal Basic Income and have that replace the whole welfare state and all labor market regulation.

Coming from a whole other direction, Sweden and the other Nordic countries don’t have minimum wages because they have strong unions and sectoral bargaining (they also have very low levels of in-work poverty). Personally, I find this model to be very attractive. The Center for American Progress came out with a proposal in 2018 for states to use wage boards to create a sectoral bargaining system. If the federal minimum wage rises, I assume pressure will resume on rich blue states to go even higher than $15/hour. And I think it’d be great if states like California and New York took the wage board approach to higher pay instead.

That being said, CAP sensibly puts forward the wage boards thing as their blue sky idea and also supports a minimum wage increase in the real world.

And that’s what I ask of the wage subsidy crowd, too. I agree that an explicit subsidy would be better, just as I agree with leftists that a single-payer health care system with explicit taxes would be better than our current crazy-quilt of cross subsidies. The reality, though, is that voters get tax sticker shock and prefer opaque solutions. So on health care we need to look to stuff like incremental Medicaid and Medicare expansions, plus clever public option designs that avoid huge overt tax increases. And by the exact same token, in the real world, the minimum wage is a great politically tractable way to raise pay. Political pragmatism is a virtue for centrist wonks just as much as it is for progressive activists.

The regional difference

The minimum wage quibble that makes the most sense is concern about regional differences in the United States. In a place where average wages are higher, it probably makes sense for the wage floor to be higher.

That’s especially true because these are places where the cost of the other factors of production is higher.

If a higher minimum wage causes lower retail profits in Boston, that probably ultimately feeds its way through the system in the form of cheaper rents. In Bangor, ME, that exact same effect might manifest in the form of less construction.

The Bureau of Economic Analysis publishes these regional price parities that helps you get a sense of the relevant scale.

What this says is that $15/hour nationally has about the same purchasing power as $17.90 in Hawaii or $12.66 in Mississippi. Or alternatively, if $15/hour is the right wage for Mississippi, then that implies it should be $17.77 nationally and $21.20 in Hawaii.

Now, if it were the case that partisan control of state governments was distributed randomly across the price spectrum, that might lead to some interesting questions. But given that the lowest price parity states are also very right-wing, in effect what we’re talking about is a scenario in which the minimum wage goes up to $15/hour in the cheap states and then the activists who used to “fight for $15!” in the expensive ones decide to “turn out for $20!”

That again strikes me as basically fine. The first “Fight for $15” rallies happened in 2012, and adjusted for inflation that should be $17.24 by now. If the “Raise The Wage Act” passed as written, the federal minimum wage would hit $15 by 2026. If moderates want to stretch that timeline out by a year or two that’s fine. If they want to hedge against possible problems by reminding the Fed that we need robust full employment monetary policy to make this work — that’s better than fine. That’s exactly what we should do.

And if you’re not willing to get on board with raising pay with wage regulations, then you should ask yourself what’s the real-world political alternative? Is it wage subsidies? I’d love to see a movement for wage subsidies. But what I see movements for on the right are blocking immigrants from coming to America and saving low-productivity small business from competing with chain stores, perhaps with a side of imposing tariffs on foreign-made products. Those are all ideas that definitely have the kind of negative impact on economic efficiency that minimum wage skeptics worry about, but they also deliver direct hits to the economy’s productivity and capacity to innovate. I’d urge people with right-of-center views on economics to remember the wisdom of Ed Prescott and Stephen Parente — the kind of bad regulations that hold societies back are the ones that prevent the use of the best available technologies.

Zoning rules that stop us from using apartment buildings to address land scarcity are a really big deal. Even a “too high” minimum wage would not be a big deal in this sense, and it’s at least possible that a move to $15/hour would encourage productivity-enhancing investments and organizational improvements.

Progressives looking to win tough races should embrace a higher minimum wage enthusiastically. Republicans looking to co-opt populist energy without hopping on the anti-trade bandwagon should consider this a far superior alternative. Free marketers who strongly favor deregulation should find something more important to focus on. And people who think the real answer is a wage subsidy scheme (does the restaurant-backed Employment Policies Institute ever actually advocate for a more generous EITC or just bring it up as a talking point?) should do the legwork of building the coalition for that rather than just standing in the way.