Where Does the Minimum Wage Max Out?

Alan Krueger says we should set a nationwide wage floor no higher than $12/hr, since that’s as far as our research knowledge extends.  We know that a statutory minimum at that level will have little or no employment impact, but anything above that is beyond empirical familiarity—we just don’t know.  He is open to cities, where wages and living costs are higher, to experiment with higher wage floors, but not the Feds.

Far be it from me to dispute Krueger, who, with David Card, launched the revolution in empirical minimum wage studies a generation ago, finding in the process that he has become a poster boy for quasi-experimental methods.  Good for him!  But I don’t think his inference from the existing research is warranted, for three reasons.

1. From a policy perspective, the minimum wage could be set either too low or too high.  It would be too low if large gains in equity, poverty reduction and economic dynamism could be achieved at little cost in employment.  (Dynamism could take the form of innovation to offset higher labor costs.)  It would be too high if employment at the low end of the labor market were crippled.  What Krueger seems to be aiming at is a zero risk of overshooting the ideal minimum, as if there were no cost to undershooting it.  But surely, if we know that $12 is unlikely to bite back, then a proper balancing of risks should take us somewhere above $12.

2. A high percentage of low-wage jobs are intermittent.  People work for a while, get laid off or quit, then go back to another crapola job, and so on.  This means that a lot of the employment loss of a “too high” minimum wage simply means that workers will earn more money per hour but work fewer hours per year.  What that means for their bottom line depends on the elasticity of labor demand with respect to the wage mandate.  Even the economists on the payroll of the restaurant industry who have done battle with Card & Krueger find low elasticities, meaning that most intermittent workers would come out ahead despite longer spells of unemployment.  This doesn’t mean that we shouldn’t worry about unemployment at all, but that it isn’t quite the problem it’s made out to be.

3. Even if the minimum wage is set at a level that eats into employment, this can be offset by other policies.  Macropolicy, especially on the fiscal side, should push for lower overall unemployment rates.  We should finally begin to treat all young people, especially from low income backgrounds, as the repositories of incredible potential they are, by investing in their education, skill and practical experience—there are lots of models for this.  A ramping up of skill would, over time, lead to productivity gains that would support a higher wage structure.  The point is that the minimum wage is one piece of a much larger mosaic of economic policy, and its effects differ depending on what else is being done.

So is $15 the magic number?  I don’t know.  Like Krueger would probably say, we need more research.  But what I do know is that, if $12 is very safe, the right number is higher than that.