December 24, 2015 | By

How High a Minimum Wage?

REUTERS/Patrick T. Fallon

One of the easier forecasts one could make for the coming year is that there will be an election ruckus about the minimum wage. The Democratic candidates already started. While Sen. Bernie Sanders and former Gov. Martin O’Malley both backed a $15/hour minimum wage, former Secretary of State Hillary Clinton would only bid $12/hour. They will all be more enthused than any likely Republican candidate.

On this issue, the public seems to be with the Democrats. A recent Pew survey just found that 73 percent of respondents supported a higher federal minimum wage, while only 24 percent opposed. The most interesting part of the survey, though, was that they asked respondents an open-ended question about how high the minimum wage should be. Here, Secretary Clinton found herself closer to the mainstream. Of the total, 46 percent favored an increase to $10.99/hour or less, 14 percent  to somewhere in the $11 to $14.99 range, and only 11 percent to $15 or more.

The numbers are interesting because they get at some of the core beliefs about how a minimum wage works. Proponents tend to think that it offers higher rewards to the lowest-paid members of society. To the extent they think there are costs to the program, they presumably find them minimal. After all, unlike a wage subsidy program, with a minimum wage hike, someone else pays. Those who downplay costs tend to cite a 1994 study by David Card and Alan Krueger that found minimal job destruction when New Jersey raised its minimum wage in 1992.

Opponents of minimum wage hikes tend to work off a more basic economic model of labor supply and demand. If you raise the wage above its market level, you’ll have more people who want to work and fewer employers who will want to hire. Particularly for some of the low-skilled jobs where the minimum wage is most relevant – think restaurants – one can see how employers can substitute away from costlier labor. Notice those tablets or ordering terminals at your local family restaurant? Those are taking the place of a server or two. Even if restaurants can’t substitute away from expensive labor and have to raise prices, customers can substitute away and cook at home.

Sure enough, when the Congressional Budget Office recently estimated the effects of increasing the federal minimum to $9/hour, it estimated a loss of 100,000 jobs. They thought an increase to $10.10/hour would cost 500,000 jobs. To be fair, they found these losses would be paired with an earnings increase for about 16.5 million workers. This gets into some very challenging tradeoffs. Who’s getting laid off and who’s getting the raise? Is it the young single mother or the college student trying to earn some money on the side?

It’s pretty unlikely that most of the Pew respondents had a clear economic model in the back of their mind. Alan Krueger, who certainly does, recently wrote that “a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences.” It was interesting to see how the Pew respondents balanced a real enthusiasm for the policy with a vague sense that at some level it could go awry. It would have been fun to ask them more about how they calculated that balance.

About

Phil Levy is senior fellow on the global economy at The Chicago Council on Global Affairs. Previously he was associate professor of business administration at the University of Virginia’s Darden School of Business. He was formerly a resident scholar at the American Enterprise Institute and taught at Columbia University’s School of International and Public Affairs. From 2003 to 2006, he served first as senior economist for trade for President Bush’s Council of Economic Advisers and then as a member of Secretary of State Rice’s Policy Planning Staff, covering international economic matters. Before working in government, he was a faculty member of Yale University’s Department of Economics for nine years and spent one of those as academic director of Yale’s Center for the Study of Globalization.

His academic writings have appeared in such outlets as The American Economic ReviewEconomic Journal, and theJournal of International Economics. He is a regular contributor to Foreign Policy magazine’s online Shadow Government section and writes on topics including trade policy, economic relations with China, and the European economic crisis. Dr. Levy has testified before the House Committee on Foreign Affairs, the Joint Economic Committee, the House Committee on Ways and Mean, and the US-China Economic and Security Review Commission. He received his PhD in Economics from Stanford University in 1994 and his AB in Economics from the University of Michigan in Ann Arbor in 1988.

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