What should the federal minimum wage be? [View all]

[BlueCheese]

Last edited Sat Jan 2, 2016, 07:52 PM - Edit history (1)

TL; DR: A $12 per hour minimum wage would already be the highest in U.S. history, even accounting for inflation. It would also be the second highest in the world, behind only the tiny enclave of San Marino, in terms of purchasing power. On the other hand, $15 would be so far beyond what's been tried internationally or at home that it risks significant unwanted consequences.

One issue of debate in the Democratic primary is raising the minimum wage. The current federal minimum wage is $7.25 an hour. All three of our candidates propose raising this significantly-- Clinton wants to raise it to $12 an hour, while Sanders and O'Malley propose raising it to $15 an hour.

Now, this sounds like an easy one-- isn't $15 more than $12? So Sanders and O'Malley are better, right? Well, not necessarily.

If it were that simple, people should be arguing for $20, or $50, or $100. But nobody is seriously proposing that. What would go wrong if we made it $100? Most directly, the cost of labor would increase so high that businesses would have to lay off all their employees or greatly raise prices. You wouldn't pay your babysitter $100 an hour-- you'd simply stop going out. Restaurants couldn't pay their staff that much-- either they'd be forced to close, or raise their prices hugely to compensate. Same for virtually everyone else. In the end, all the inflation would undo the effect of the new minimum wage, after a fair amount of upheaval.

So we can't simply raise the minimum wage to $100. But how high can we make it?

First, it's comforting to know that there likely is room to raise the minimum wage without economic disruption, despite what conservatives will tell you. In one very influential paper, economists David Card and Alan Krueger found that when New Jersey raised its minimum wage, job growth at fast food restaurants near the border with Pennsylvania was not at all negatively affected, nor was job growth at low-wage restaurants worse than at higher-wage restaurants within New Jersey.

This same Alan Krueger, by the way, was chair of Obama's Council of Economic Advisers, and is considered one of the nation's foremost experts on labor economics and the minimum wage. What does he think? In a New York Times column, he argues that $12 would be a responsible level than will do more good than harm, but that $15 would venture too far be too risky, as it is "beyond international experience".

Probably due to space limitations, Krueger doesn't elaborate on what that means, but I tried to figure a little bit out on my own. The first question is, what do other countries have as their minimum wages? According to Wikipedia, by purchasing power, the world's highest minimum wage is in San Marino, at a equivalent of $12.55. Second is Luxembourg at $11.43, followed by Australia ($11.14), France ($11.01) , and Germany ($10.43). So $12, far from being miserly, would actually be nearly the highest in the world. And $15 would be so high than we're in the realm of potential serious unexpected consequences, in terms of unemployment or inflation.

Another way we might look at things is to see what the hourly wages are right now across the United States. After all, the cost of living varies widely from state to state, and often within the same state. San Francisco, with its high incomes and high real estate prices, could likely easily increase its minimum wage to $15 (in fact, it will do so by July 2018), but the nearby Central Valley might not. Now, here, I couldn't find a source that listed everything in a nice table, but the Bureau of Labor Statistics has a page where you can look up each state one-by-one.

Here are some states which I thought might have high median hourly wages, and some which I guessed would have lower ones.

New York: $19.65
Maryland: $19.63
California: $18.84
Rhode Island: $18.43
New Mexico: $15.29
Alabama: $14.83
West Virginia: $14.14
Mississippi: $13.76

What we see here is that there are entire states whose median hourly wage is less than $15. So far from being something that helps those at the lower end, a $15 minimum wage would affect more than half the workers in those states. With that kind of impact, and so few relevant real-world examples to study, it's really hard to know what effects unemployment or inflation would have there.

Editorializing for a moment:

Edit: Removed this section. I decided it wasn't helpful.