About That “Lame” Minimum Wage Idea

Paul Krugman has a good primer today that doesn’t mention Scott Walker’s claim that the minimum wage is a “lame” idea, but does rebut it.

[O]ur understanding of wage determination has been transformed by an intellectual revolution — that’s not too strong a word — brought on by a series of remarkable studies of what happens when governments change the minimum wage.

More than two decades ago the economists David Card and Alan Krueger realized that when an individual state raises its minimum wage rate, it in effect performs an experiment on the labor market. Better still, it’s an experiment that offers a natural control group: neighboring states that don’t raise their minimum wages. Mr. Card and Mr. Krueger applied their insight by looking at what happened to the fast-food sector — which is where the effects of the minimum wage should be most pronounced — after New Jersey hiked its minimum wage but Pennsylvania did not.

Until the Card-Krueger study, most economists, myself included, assumed that raising the minimum wage would have a clear negative effect on employment. But they found, if anything, a positive effect. Their result has since been confirmed using data from many episodes. There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.

How can this be? There are several answers, but the most important is probably that the market for labor isn’t like the market for, say, wheat, because workers are people. And because they’re people, there are important benefits, even to the employer, from paying them more: better morale, lower turnover, increased productivity. These benefits largely offset the direct effect of higher labor costs, so that raising the minimum wage needn’t cost jobs after all.

People at the minimum wage level tend to spend virtually all their earnings, too, which has a stimulative effect on the economy. But let’s get back to Krugman:

[E]mployers always face a trade-off between low-wage and higher-wage strategies — between, say, the traditional Walmart model of paying as little as possible and accepting high turnover and low morale, and the Costco model of higher pay and benefits leading to a more stable work force. And there’s every reason to believe that public policy can, in a variety of ways — including making it easier for workers to organize — encourage more firms to choose the good-wage strategy.

There you have it: there are low and high roads to economic growth (and as Bernie Sanders says, things that are more important than growth, too), and one road leads to a growing middle class while the other road leads to Mississippi. Which makes for a better society? Scott Walker really does not seem to have no clue.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.