The True Story of the Minimum-Wage Fight (Ep. 460)
Backers of a $15 federal wage say it’s a no-brainer if you want to fight poverty. Critics say it’s a blunt instrument that leads to job loss. Even the economists can’t agree! We talk to a bunch of them — and a U.S. Senator — to sort it out, and learn there’s a much bigger problem to worry about.
Listen and subscribe to our podcast at Apple Podcasts, Stitcher, or elsewhere. Below is a transcript of the episode, edited for readability. For more information on the people and ideas in the episode, see the links at the bottom of this post.
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In the U.S., the official poverty threshold is $26,500 in annual income for a family of four. For a one-person household, it’s just under $13,000. In 2019, the official poverty rate in the U.S. was 10.5 percent, down from 11.8 percent just a year earlier. In fact, this was the fifth annual drop in a row, and the 2019 figure was the lowest on record since 1959, when the poverty rate was first measured. But once the 2020 numbers come in, those gains are due to be reversed. A pandemic will do that. A series of government interventions have blunted the hit for many people. Still, it’s estimated that some 8 million Americans have slipped below the poverty line during the pandemic. As you likely know, higher-income workers were generally hit less hard by the pandemic, as a lot of their jobs could be done remotely. For lower-income workers, there was a double whammy: more lost jobs and a higher likelihood of getting COVID-19. So, with this pandemic-induced poverty spike — and with Democrats now running the federal government — there’s been a surge of interest in one of the most popular policies to fight poverty: a higher minimum wage.
Cory BOOKER: Here in Congress, there is a big movement to raise the minimum wage. And it will pass the House of Representatives because that’s a majoritarian body. The question is, can it pass in the Senate?
That’s Cory Booker.
BOOKER: I am one of the two senators from the state of New Jersey.
BOOKER: I just think that this is a basic fairness proposition in America. Do we want people who work a full-time job, and catch extra shifts where they can, to be below the poverty line?
The current federal minimum wage is $7.25 an hour, with some exceptions for seasonal workers, apprentices, and tipped employees. Someone working full-time at $7.25 an hour, 40 hours a week, would earn a bit more than $15,000 a year, which is actually a bit above the official poverty line for an individual. Still, the last time the federal minimum wage was raised was 2009. Meanwhile, as Senator Booker points out—.
BOOKER: Childcare is going up, the cost of college is going up, consumer products have gone up. And this is a defining issue in America. We have seen the dignity be stripped from work, the security be stripped from work. We see more and more Americans having this feeling on both sides of the political aisle that they’re working harder and making less.
Support for a $15 minimum wage is extremely strong among Democratic voters — 86 percent in favor — and fairly strong among Republican voters, at 43 percent. But there is much less support among Republican politicians. Their primary argument is that a higher minimum wage would punish businesses, especially small businesses, and ultimately cost jobs. This debate has been going on for a good long while. In 2013, President Obama took it on.
Betsey STEVENSON: Yeah, so there was a push to raise the federal minimum wage to $10.10.
STEVENSON: And in fact, one of the things that President Obama did was raised the minimum wage for federal contractors because he had the authority, then indexed it to inflation going forward.
Stevenson also served on the Council of Economic Advisors during Obama’s push for a broader $10.10 minimum wage. So she is familiar with the standard Washington choreography.
STEVENSON: There is a constant back and forth where Democrats point to the fact that people simply cannot live on the minimum wage and Republicans point out that all sorts of people will lose their jobs because employers won’t want to hire people at that new, higher wage.
So Obama’s bill for $10.10 failed in the Senate, with minimal Republican support. Maybe it’s useful here to have a bit of minimum-wage history. The first minimum-wage law in the U.S. was passed in 1938, under Franklin Roosevelt, during the Great Depression. There had been some earlier, local minimum-wage laws, which the Supreme Court had declared unconstitutional. But the Court reversed itself in 1937, opening the door for F.D.R.’s federal policy. The original federal wage was 25 cents an hour, and it mainly covered manufacturing jobs. Over time, it was expanded to cover retail and service jobs as well as agriculture. And it’s been raised during every presidency except four: Reagan, Ford, Obama, and Trump. But the minimum wage has never been indexed to inflation or the median wage, so its purchasing power starts to erode the moment it’s raised. Which leaves politicians to constantly fight over re-raising the wage.
STEVENSON: What else would politicians do?
But again, we’re talking about the federal minimum-wage. We happen to live in a funny country, where for certain issues, individual states are free to charge forward with their own laws. We heard about this last week on the show with marijuana legalization. Since 2014, 29 states have passed a minimum wage that’s anywhere from a little bit higher than the federal wage to more than double, with several cities, like New York and San Francisco and Seattle, passing their own higher wage. So with all that variation, all those natural experiments, you’d think that economists could easily answer the key question we all care about: is a higher minimum wage, on balance, a winning policy?
Jacob VIGDOR: The estimates in the literature are all over the map.
Today on Freakonomics Radio, we’ll try to decipher that map.
David NEUMARK: Well, I think we know a lot, actually. We don’t all agree.
And we’ll tell you exactly why a $15 minimum wage is a brilliant idea. Or a terrible idea. A brilliant idea? Or maybe a terrible idea?
Also: the trickiest thing about making economic policy:
Betsey STEVENSON: People are not cogs in machines. They are people.
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David Neumark is a labor economist at the University of California, Irvine.
NEUMARK: I’d say my mission as an economic researcher is to really try to provide the most solid and most objective evidence I can on policy questions, and the ones I’m most interested in are policy questions relating to inequality. Really, two dimensions I focus on. One is anti-poverty policy: How do we raise earnings of people at the bottom? And the other dimension I focus on is discrimination.
DUBNER: So if you’re concerned with anti-poverty, I would assume that you are a big supporter of minimum-wage laws, including the new proposed $15 federal minimum-wage law, yes?
NEUMARK: Not exactly, no.
Again, a little history here is useful — this time about the economic research on the minimum wage. In 1976, a survey by the American Economic Association found that 90 percent of its members agreed that if you raise minimum wages, you decrease employment for younger and less-skilled workers. The idea was that employers don’t want to overpay workers who they think aren’t worth the wage. Another survey in 1990 found this was still the consensus view, with 80 percent of economists saying that higher minimum wages are bad for what they call total employment.
NEUMARK: When I was starting out in graduate school, the professor, Jim Medoff, came in, and he plopped down these five volumes, like the old New York phone book for those who remember what those are. And this was the report of the Minimum Wage Study Commission, and it was, I don’t know, 100 papers. And he said, “One thing you shouldn’t work on is minimum wages because we know everything.”
This may shock you, but it turns out that economists didn’t know everything. But also: things were changing. In the late 1980s, with rising inflation and a stagnant minimum wage, some states started raising their wages.
NEUMARK: Suddenly you had this multitude of different strategies for estimating minimum-wage effects.
Meaning: there were new data — and new research methods — to address the old minimum-wage question. In 1994, the economic consensus was abruptly overturned in a paper by the economists Alan Krueger and David Card. They took advantage of the fact that New Jersey had raised its wage while neighboring Pennsylvania didn’t. Analyzing employment data from fast-food chains on either side of the border, Krueger and Card found that the new law did boost the earnings of low-income workers without reducing employment. So: did the economics profession begin to converge around a new consensus, a pro-minimum-wage consensus? They did not. At this moment the field is, essentially, split. In a recent survey of academic economists, 45 percent agree that a federal minimum wage of $15 would lower employment; but 33 percent said they were uncertain, with the remainder mostly disagreeing. Even when asked if it would be good to peg the federal minimum wage to some kind of cost-of-living index, an astonishing 42 percent of economists were uncertain. And let me say this: economists almost never profess uncertainty around anything — even non-economic issues — so a 42-percent uncertain vote on this question is bizarre. Why is this such a hard issue to figure out? Let’s try to understand. As we heard, David Neumark is not a big fan of a $15 federal wage. Why?
NEUMARK: So my research on the minimum wage, one of the things it tends to say is there definitely is some job loss. And I’m quite convinced of that. So on net, there are winners and there are losers. I think then the question is, how do you add those up? So one reasonable metric is to say, “Well, okay, do we reduce poverty?” If we do, then maybe the costs are acceptable relative to the benefits. My reading of the evidence is that it’s pretty hard to find convincing evidence that poverty will fall.
But how can that be? How can an anti-poverty policy not reduce poverty?
NEUMARK: So the minimum wage is a blunt instrument to target the poor. What we would like to do to eliminate or reduce poverty is pass a law that says, “Thou shalt not be poor” or “We shall not have poor families.” But the law we actually pass when we raise the minimum wage is, “Thou shalt not pay low wages.”
And this law, Neumark says, fails for two reasons.
NEUMARK: One is: there’s a lot of minimum-wage workers who — they’re not in poor families. They’re not even in low-income families. Who are they? Well, like my daughter when she was in high school and had a job. I’m upper-middle income or upper income, depending on your definition. We lived in San Francisco, which was one of the first cities to pass a high minimum wage. And she came home one day in high school, all excited about her raise from the city minimum wage. And I said, “I will bet you I make three times more than the guy you work for.” The point being, some of this benefit from the higher wage bill we’re going to make employers pay was going to actually flow up the income distribution, not down.
About one in five people who currently work at the federal minimum wage are teenagers; about two in five are under 25 years old. What are the biggest sectors for minimum-wage jobs? As of 2019, nearly 40 percent of the people earning the federal minimum wage work in restaurants, hotels, or other hospitality jobs. More than 20 percent work in retail, with another 14 percent in education and healthcare.
NEUMARK: The second reason it’s a blunt instrument is because the single biggest reason people are poor is that nobody in the family works. More than half of poor families have zero workers. So raising the minimum wage, unless it somehow brings some of them into the labor market, it’s not doing anything for them at all.
There is evidence that higher minimum wages do pull some people into the workforce, but the vast majority of people who don’t work aren’t holding out for a higher wage. So if Neumark thinks a $15 federal minimum wage is a bad policy to reduce poverty, what does he suggest?
NEUMARK: We could write checks to the poor. Or we could expand the earned-income tax credit, which basically writes checks to the working poor — which is something conservatives can get behind too, because at least they have to work, and it encourages work. Why are small business owners the ones who have to pay to fix this problem? The owner of the laundromat down the street from me has to pay more because we have a high minimum wage in San Francisco and in California and would everywhere if this bill passes. But the guy who works at Goldman Sachs who makes way more than the person who owns my laundromat isn’t going to pay anything for it.
Because so many states have raised their minimum wage, the federal wage of $7.25 an hour is only applicable in 21 states, including Mississippi, Texas, Louisiana, and Indiana. What would happen in those states with a federal raise to $15 an hour?
NEUMARK: What would happen with $15 is that the share of workers affected would be tremendous.
Indeed: a $15-an-hour minimum wage in those states would be roughly the same as the median wage. Which means something like 50 percent of all workers in those states would be affected.
NEUMARK: And when we study past minimum-wage increases, a small percentage of workers are affected. There may be a lot of ways for companies to adjust around that aside from reducing employment. If you’re a restaurant, the portions get a little smaller, the bathrooms get a little dirtier, whatever it is. But if it’s 50 percent of your workforce or more, suddenly your hands are tied. You’re talking about businesses, the small ones, operating on small margins. And how are they going to adjust? They can raise prices a lot, but then it’s not clear we’ve made low-income people better off at all. My well-reasoned fear is that the losses here may be quite large. And I’m worried that these extrapolations from past estimates are way too optimistic.
David Neumark is not the only economist who worries about this. And among the political class, it’s not just the Republicans who worry about it either. When Senate Democrats tried to put a $15 minimum-wage proposal in the latest Covid relief package, eight Democratic Senators joined the Republicans in opposition. One of the lead Democratic voices was Joe Manchin of West Virginia.
BOOKER: He’s a dear friend.
That, again, is New Jersey Senator Cory Booker.
BOOKER: He often makes the argument that a $15 minimum wage would be great in areas like where I live in New Jersey, which is the New York metropolitan area, the Philly metropolitan area, but is a lot different in his area now. My counter to him is that if you just look at the cost of living in West Virginia — take, for example the least populous, most rural county in West Virginia. An average family with two adult earners and two children would need nearly $75,000 to afford an adequate standard of living without significant government assistance. And unfortunately, today’s median household income there is just over $46,000. So, even in your most rural areas, out away from big metropolitan areas like L.A. or New York or Chicago, the cost of living in America has become so staggeringly high that $15 an hour is arguably what families would need to make it.
Democrats like Booker have vowed to keep pushing for a $15 federal minimum wage; just this week, President Biden announced that he’s raising the minimum wage for federal contractors to $15. What would be the effects of a $15 wage for everyone? The Congressional Budget Office, a non-partisan agency that analyzes legislative proposals, took a hard look at a $15 federal minimum wage. Their conclusion? Over 10 years, they said, it would “cost 1.4 million jobs and increase the deficit by $54 billion” — that’s the bad news — but also, they said, it would raise income for 17 million people and “lift 900,000 people out of poverty.” In other words: big benefits and big costs. Which is exactly why some economists, like David Neumark, are against the policy — and why other economists are in favor:
Arin DUBE: I think the minimum wage so far has been a successful policy.
That’s Arin Dube, an economist at the University of Massachusetts, Amherst.
DUBE: It tends to raise wages at the bottom, lower poverty. And honestly, I think the highest quality research suggests job loss has been pretty small. As a result, I think we can explore a higher minimum wage going up to say, $15 by 2025.
Among economists who support a $15 target, Dube is one of the most prominent voices. And some of the high-quality research he mentioned is his own. One study looked at wages over 18 years in counties that border each other.
DUBE: Imagine a control group and imagine a treatment group. One side of the border raises the minimum wage, the other side does not. The bet here is that the side not raising the minimum wage is a good proxy to what would have happened had the treatment side not raised their minimum wage.
In this 2010 study, Dube and his coauthors looked at restaurants across 316 county borders — and found no negative employment effects after the introduction of a higher minimum wage. In more recent research, he’s come up with new analytic methods.
DUBE: Until very recently, most studies focused on particular subgroups.
Teenagers, for instance. Remember: around one in five minimum-wage workers are in their teens.
DUBE: So you’re leaving out four-fifths of low-wage workers when you study teens.
Dube developed a way to assess the overall impact of a wage increase.
DUBE: It is basically pretty simple. How many jobs are paid below the new minimum wage? Let’s say the minimum rises to $10. How many fewer jobs in Massachusetts for raising the minimum wage to $10? And then compare that to how many more jobs being exactly 10 or maybe 11 or 12. And doing that actually allowed us to jointly estimate what the impacts are on wages, on wage spillovers, on employment.
The British government, wanting guidance on whether a minimum-wage hike would lead to job loss, recently asked Dube to apply his methodology to various economies around the world. Britain has had a minimum wage since 1997, and it’s been raised nearly every year. It now stands at around $12 U.S.D. an hour, with carve-outs for younger workers. So what did Dube find when he analyzed minimum-wage laws in multiple countries?
DUBE: I didn’t see very much convincing evidence that job losses had occurred. And following that, the U.K. chancellor decided to pursue the minimum wage all the way to two-thirds, 66 percent, of their median wage.
In the U.S., the median wage is just under $20 an hour. And so, if you fit this global analysis onto the U.S. economy—.
DUBE: I think that $15 in 2025, which would be something like $13.50 in today’s dollars, is a reasonable target.
This brings us back to a fundamental, and contentious question: who pays for these higher wages?
DUBE: Middle- and higher-income consumers end up subsidizing wages at the bottom. And if you ask those individuals, most people in this country are very happy to do that.
But think back to David Neumark’s concern:
NEUMARK: Why are small business owners the ones who have to pay to fix this problem? The owner of the laundromat down the street has to pay more but the guy who works at Goldman Sachs isn’t going to pay anything for it.
How does Arin Dube respond to that?
DUBE: It is the case that some employers may see reduction in profit, but if you look at the price pass-through, it’s actually quite substantial and in some cases, may cover almost 100 percent of the wage increase.
“Price pass-through” meaning: businesses pass the higher costs on to customers. Evidence from Hungary, for instance, estimates that 75 percent of a wage increase gets passed on as higher prices. Consider what might happen at a McDonald’s.
DUBE: The price of a burger may rise like 50 cents. That’s a substantial increase in the price of a burger. However, most goods and services are not minimum-wage intensive. And as a result, if you look at the overall C.P.I., the inflation rate, it’s going to be affected in a very small manner, even though particular services and products — especially, for example, fast food — those are going to see some larger increases.
DUBNER: But if low-price items are more typically consumed by low- income people, doesn’t that affect the very people that the raise of the minimum wage is meant to improve?
DUBE: Sure, but the wage gains are 10 times larger.
That said, organizations like the National Restaurant Association have come out strongly against a minimum wage hike. After surveying 2,000 of its members, the association said: “Nearly all restaurant operators say they will increase menu prices. But what is clear is that raising prices for consumers will not be enough for restaurants to absorb higher labor costs.” Amazon.com, meanwhile, which is the second-largest private employer in the U.S. has already raised its own minimum wage to $15 an hour, and it strongly supports a federal raise to $15. You might think that Amazon is simply championing a policy it believes in. Or, if you’re a bit cynical — maybe “realistic” is the better word — you might think that Amazon stands to benefit if all firms have to pay more, since most of them don’t have the resources and scale that Amazon has to absorb the cost. If you own one restaurant, meanwhile, that’s an entirely different proposition — especially as the Raise the Wage Act of 2021 would eliminate the so-called tip credit that lets restaurants pay some of their workers less than the minimum wage. Arin Dube again:
DUBE: Especially right now, given the difficulties faced by small restaurants and the hospitality sector, I can see a very reasonable argument for providing some tax credits, some assistance. And also, I think there’s a reasonable argument to stretch out the phase-in period to make sure that there’s not very large increases while the economy is recovering from the pandemic.
DUBNER: In New York City, which has raised the minimum wage, and it’s affected restaurants, you hear this very complicated complaining game, where people complain that restaurant workers are underpaid, so they want the wage to rise. So there’s popular support for that. But then the restaurant owners say, “Well, if I raise wages, then we’re going to have to raise prices significantly.” And then the consumers say, “Well, that’s okay that’s the way the economy works.” And then they raise the prices, and then the customers stop going there, and the restaurant goes out of business, and everybody’s left to blame everybody else. So this is not your problem to solve, Arin, I realize. But when that argument gets played out over and over and over again, not just in restaurants, but all kinds of small businesses, how would you suggest that people learn to balance these benefits and costs in a way that does what most voters want — which is pay people more — but that doesn’t punish the employers so much that they suffer?
DUBE: It may not be surprising to hear that I actually don’t think that the price increases have had very strong overall business closures. I do think there is some that happened, some especially lower-productivity firms are more likely to go out of business. We are seeing some evidence of that, reallocating work to more higher-productivity firms. You could think that’s a good thing.
DUBNER: I just want to make sure I’m understanding you when you talk about the productivity of the firms that may go out of business. Basically, if a firm is not running itself well enough to withstand slightly higher wages, then they deserve to go out of business, right? I mean, I don’t mean to be brutal about it, but that’s essentially the argument.
DUBE: That’s essentially the argument.
STEVENSON: If there’s a business that’s right on the margin, and the only way they is by paying people no more than $7.25 an hour, then they’re just not adding that much to society.
The former Obama labor economist Betsey Stevenson again.
STEVENSON: And if they see themselves only as generating value when they’re doing it off the backs of people who are being underpaid, I don’t want that business to keep existing. And I don’t think that’s harsh because there’s some other business that will come into its place.
Okay, we’ve heard some minimum-wage history. We’ve heard some minimum-wage economic analysis, which fails to produce a clear way forward. So how about a case study?
VIGDOR: There’s no place like Seattle.
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Roughly three-quarters of the published economic research argues that raising the minimum wage leads to job loss. But a lot of newer research essentially argues the opposite. Which means you’re left with a lot of economists arguing with one another.
VIGDOR: Just these really bare-knuckled arguments. Starting to study the minimum wages is like walking into a bar where there’s a fight going on. And I’ve worked on plenty of controversial stuff in the past, but nothing like this.
Jacob Vigdor is an economist at the University of Washington in Seattle. In the other areas he’s done research — like housing policy, education policy, even immigration policy — things are different.
VIGDOR: If one study says the number is big and the other study says the number is small, then everybody sort of agrees that, well, the truth probably lies somewhere in between. But that’s just not the way that the scholars in the minimum-wage literature go about this debate. It’s more on the order of, “My number’s right and your number’s wrong.”
Here’s how the economist Jennifer Doleac recently put it in a tweet about minimum-wage research: “I study lots of controversial topics but would never go near that one, thanks. So political. A nightmare.” So perhaps it was understandable that Jacob Vigdor wasn’t all that keen on studying the minimum wage. But in 2014, the city of Seattle passed a minimum-wage law.
VIGDOR: The city decided to raise the minimum wage to $15. And the same day they passed that ordinance, they passed a resolution that said there should be an academic study of this minimum wage.
And guess who was invited to be director of the Seattle Minimum Wage Study? I’ll give you a hint. It rhymes with Shmacob Shmigdor.
VIGDOR: I remember sitting in a meeting, back in 2014, deciding whether I wanted to devote five years of my life to this study and thinking to myself, this is a pretty crowded literature. I don’t know that you could write something about Seattle and really have it move the needle on our understanding of the minimum wage.
But he began to reconsider when he heard about the data he and his team would have access to.
VIGDOR: When it was revealed that there actually was hours data in the Washington state data, that was the game changer for me.
“Hours data” meaning — well, just what it sounds like: how many hours each employee works at their hourly wage.
VIGDOR: The limitation of studies that can’t use hours data — which is the vast majority of them — we think that when you raise the minimum wage, employers will make adjustments. Most of the work that’s been done on the minimum wage so far has looked for one particular type of adjustment, which is: the employer lays people off, the employer decides to go with a smaller workforce. That’s not the only potential way that an employer could adjust. They could decide to keep their workforce the same size and just have everybody work fewer hours. That is a reaction that is invisible in most data sets, because most data sets used to study the minimum wage, you get information on the total number of employees, but you don’t get the information on how many hours they work.
If that’s surprising to you — that economists and other researchers try to do robust research with such imperfect data — well, it’s a reminder how hard it can be to get the right data to do robust research. This means you have to do a lot of intellectual jujitsu: coming up with proxies, with estimates, with workarounds. But not this time: Vigdor was given access to all the hours worked at all the jobs in the state of Washington, along with earnings data. And because it was only the city of Seattle raising the minimum wage, he could use the rest of the state as control conditions.
VIGDOR: Most of our analysis is using a technique called synthetic control, which basically says, let the data show us where the right control regions are. A lot of them were in the suburban fringe of the Seattle-Tacoma metropolitan region.
In 2014, Seattle’s minimum wage was $9.47 an hour. The new law gradually increased it to $15 by 2021.
VIGDOR: We first got our hands on the Washington State data for purposes of analysis in early 2016.
So what’d they find?
VIGDOR: From the first runs of the data to today, the story has remained remarkably consistent: We see evidence that when the minimum wage goes up, hours decline.
These declines in hours worked were primarily driven by whether a business was busy or not.
VIGDOR: It’s periods of time where there’s not as much work, where it might make more sense to send people home, to not have as many people working.
So what’s the net effect for workers? Is the higher wage enough to offset the reduction in hours?
VIGDOR: If you’re an experienced worker, this looks like it’s not such a bad deal.
Which implies experienced workers are less likely to get sent home when business is slow. So, for those workers—.
VIGDOR: Their income at the end of the day is higher.
How much higher?
VIGDOR: The estimates from our data suggest that when you raise the minimum wage by what Seattle did in the period we studied, which is about 34 percent, that the more experienced workers were seeing their total incomes go up on the order of 9 percent at most. So as a tool for delivering more money to these families, it does deliver some. But it’s a real leaky bucket. And the leaks come from the forms of cutbacks in hours.
So some workers benefit under the higher wage, though not by too much. Other workers may lose enough hours that they earn less money, even at a higher wage. And yet other workers may be crowded out entirely.
VIGDOR: If you are looking for your first job, never been employed before, and therefore you’ve never been in our data, it looks like it’s become harder to find your way into our data.
In other words, you’re not in the data because you’re not in the workforce. Why’s that? Maybe an employer doesn’t want to pay a relatively high wage to a young or inexperienced worker.
VIGDOR: A teenage worker comes up to you on Thursday and says, “Can I have Saturday night off? You know, I want to hang out with my friends.” The manager says back, “No, I need you to work Saturday night.” And the teenager says back, “Well, I quit.” And what we heard over and over again from the business owners and managers is that with a higher minimum wage, I want someone experienced. I need someone who I can rely on, who I don’t have to train on the job, who I can expect to be reliable day in and day out. And the older workers who have the track record, they have the references that you can check, and when you get right down to it, they need the job. They have to have the job. And that’s going to lead them to be a more reliable worker than the kid who is sort of indifferent between showing up for work and playing Fortnight.
Not all teenagers, of course, would treat a job so cavalierly. But Vigdor’s research suggests that a higher minimum wage may lead employers to treat all teenagers as a risk. And what happens when a young person who wants to work can’t get in the workforce? Walter Williams, the prominent Black economist who died last year, argued that minimum-wage laws contributed to the high rate of unemployment among Black men, since kids who used to get their first job at 13 or 15, like he did, were now getting priced out of the market by employers. And then many of them, especially those with low education, would never enter the labor force. I asked the economist David Neumark about this theory.
NEUMARK: I think it’s a very interesting hypothesis. It’s plausible on the surface. There is disappointingly little evidence either way on that question. If it forecloses a young person getting a job, that has longer-run adverse implications for what we call their human capital accumulation. I mean, two huge contributors to wage growth, why people earn more, are schooling and job experience. And there’s actually some evidence on that. I have a paper that looks at if you’re a teenager where minimum wages are high, how are you doing later, like 30 or so? And the answer is a little bit worse.
BOOKER: Well, that’s sort of saying, “Let’s not raise the minimum wage because we have an inferior education system.”
Senator Cory Booker again.
BOOKER: You know, why don’t we fix those problems, as opposed to saying we’re going to pay workers substandard wages, lock millions into poverty or near- poverty, to make up for structural racism that exists?
Booker’s point is that poverty exists on many dimensions, and even a $15 minimum wage won’t fix everything. To that end, both the Trump and Biden Covid relief packages have sent money directly to families in need, and Biden has proposed several other anti-poverty measures, including money for childcare, paid leave, and free community college. Meanwhile, back to the minimum-wage debate: Jacob Vigdor’s analysis of Seattle’s minimum wage didn’t quite turn into the bar fight he feared, but it was met with some intensity. Here’s a Washington Post headline: “A ‘Very Credible’ New Study on Seattle’s $15 Minimum Wage Has Bad News for Liberals.” Some critics argued the study wasn’t representative enough.
VIGDOR: So, a critique that a lot of people will say about our work, and it’s a completely valid critique, is there’s no place like Seattle. I mean, the big challenge is coming up with your estimate of what would have happened in Seattle in the absence of the minimum-wage increase. You need to compare Seattle to someplace else. And the basic message is, there’s no place like Seattle. You just can’t do this.
Seattle, after all, has a red-hot, high-wage economy with firms like Microsoft and Amazon, with strong trickle-down demand for restaurants and other services. Also: Seattle has a relatively low population of teenagers — and many of them come from higher-income families. But Vigdor thinks his findings are useful.
VIGDOR: I think that what our study illuminates that could be more generalizable is more information about the adaptation, and what are the sorts of things that you can expect businesses to do when they face higher labor costs, whether we’re talking about Seattle or Mississippi.
So where does Vigdor land on the minimum-wage argument overall?
VIGDOR: What I take away from actually doing the analysis is that the actual impacts of the minimum wage are not necessarily worth all the sound and fury. I mean, we didn’t find any evidence that it destroys businesses because the businesses adapt. It does not necessarily transform workers’ lives because of the hours question, really. So it’s a big fight over what is really not that transformative of a policy.
Betsey Stevenson, the Obama veteran, is a bit more enthusiastic about the transformative power of a higher minimum wage.
STEVENSON: You can go to any C.B.O. report and they’ll tell you how many people are lifted out of poverty.
C.B.O. is the Congressional Budget Office.
STEVENSON: It’ll tell you how many children are lifted out of poverty. And if I gave you a policy proposal that had the benefits that C.B.O. cites and the costs that C.B.O. cites and didn’t tell you what it was and said, “Is this something that you think will be good for society?” I think most people would say, “Yeah, I‘d take those tradeoffs.” But the problem is that somehow the idea of a minimum wage has been very hard for the United States to wrestle with.
In other words: the minimum-wage argument has become, like many economic arguments, a political argument. But there’s another angle to entertain — probably a much more important angle in the long run. David Neumark again:
NEUMARK: So there’s certainly a popular perception and anecdotal evidence that a higher minimum wage spurs automation.
That makes sense, doesn’t it? That as human labor gets more expensive, it becomes more attractive to automate labor.
NEUMARK: There is some evidence that this happens. The data are consistent with the anecdotes. Now, I think you’ve got to be really careful about this, because automation is going to happen anyways, right? I mean, if we compare the economy to where we were before 1938, when the minimum-wage law passed, we have a lot more technology and a lot more automation doing things workers used to do. Is that all because the minimum wage? No, of course not.
And Arin Dube again:
DUBE: Automation doesn’t just reduce employment. It can sometimes change what kind of employment happens. As you increase automation, you change tasks. So workers don’t do certain tasks anymore, but then they do other tasks. And as a result, I actually don’t believe in the very pessimistic version of automation.
Is this true? Do automation and robotics and other work-changing technologies really create more, even better opportunities for human workers? That’s the question we’ll ask next week.
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Freakonomics Radio is produced by Stitcher and Renbud Radio. This episode was produced by Zack Lapinski. Our staff also includes Alison Craiglow, Greg Rippin, Mark McClusky, Matt Hickey, Mary Diduch, Emma Tyrrell, Lyric Bowditch, and Jacob Clemente. We had help this week from Jasmin Klinger. Our theme song is “Mr. Fortune,” by the Hitchhikers; the rest of the music was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts.
Here’s where you can learn more about the people and ideas in this episode:
- Cory Booker, United States Senator for New Jersey.
- Betsey Stevenson, professor of public policy and economics at the University of Michigan.
- David Neumark, professor of economics at the University of California, Irvine.
- Arin Dube, professor of economics at the University of Massachusetts, Amherst.
- Jacob Vigdor, professor of public policy and governance at the University of Washington.
- “Biden Raising Minimum Wage for Federal Contractors to $15/hr,” by Nandita Bose and Jarrett Renshaw (Reuters, 2021).
- “Group of Senate Democrats and Republicans Vote to Keep $15 Minimum Wage Out of Biden’s COVID Stimulus Bill,” by Nicholas Wu (USA Today, 2021).
- “When Amazon Raises Its Minimum Wage, Local Companies Follow Suit,” by Ben Casselman and Jim Tankersley (The New York Times, 2021).
- “Senate Says No To $15 Minimum Wage For Now, But Democrats Vow To Push On,” by Andrea Hsu, Sam Gringlas, and Audie Cornish (NPR, 2021).
- “One Thing America Might Buy With All the Spending? Less Inequality.” by Jeanna Smialek and Jim Tankersley (The New York Times, 2021).
- “Biden Wants a $15 Minimum Wage. Here’s What People Say It Would Do to the Economy.” by Eric Morath (The Wall Street Journal, 2021).
- “Biden’s Minimum-Wage Proposal: When Would It Reach $15 an Hour?” by Eric Morath (The Wall Street Journal, 2021).
- “Amazon Exec Jay Carney Pens Letter in Support of $15 Minimum Wage Increase,” by Allana Akhtar (Insider, 2021).
- “CBO Report Finds $15 Minimum Wage Would Cost Jobs but Lower Poverty Levels,” by Eli Rosenberg (The Washington Post, 2021).
- “Myth or Measurement: What Does the New Minimum Wage Research Say about Minimum Wages and Job Loss in the United States?” by David Neumark and Peter Shirley (NBER Working Papers, 2021).
- “Tackling the Inequality Pandemic: Is There a Cure?” by Zia Qureshi (Brookings, 2020).
- “8 Million Americans Slipped into Poverty Amid Coronavirus Pandemic, New Study Says,” by Stefan Sykes (NBC News, 2020).
- “Income and Poverty in the United States: 2019,” by Jessica Semega, Melissa Kollar, Emily A. Shrider, and John Creamer (The United States Census Bureau, 2020).
- “State of Working America Wages 2019,” by Elise Gould (Economic Policy Institute, 2020).
- “Two-Thirds of Americans Favor Raising Federal Minimum Wage to $15 an Hour,” by Leslie Davis and Hannah Hartig (FactTank, 2019).
- “Who Pays for the Minimum Wage?” by Peter Harasztosi and Attila Lindner (The American Economic Review, 2019).
- “Minimum Wage Increases and Individual Employment Trajectories,” by Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor, and Hilary Wething (NBER Working Papers, 2018).
- “After Nine Years of No Change, is the Federal Minimum Wage Irrelevant?” by Jana Kasperkevic (Marketplace, 2018).
- “People Versus Machines: The Impact of Minimum Wages on Automatable Jobs,” by Grace Lordan and David Neumark (NBER Working Papers, 2017).
- “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle,” by Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor, and Hilary Wething (NBER Working Papers, 2017).
- “A ‘Very Credible’ New Study on Seattle’s $15 Minimum Wage Has Bad News for Liberals,” by Max Ehrenfreund (The Washington Post, 2017).
- “Walter Williams: Elitist Arrogance On Minimum Wage Hurts Minorities,” by Walter Williams (Investor’s Business Daily, 2016).
- “Reducing Poverty via Minimum Wages, Alternatives,” by David Neumark (FRBSF Economic Letter, 2015).
- “Obama Signs Order to Raise Minimum Wage for Federal Contractors,” by Reuters staff (Reuters, 2014).
- “Centrist Republicans Cool to Minimum Wage Hike Compromise,” by Alexander Bolton (The Hill, 2014).
- “Raising Minimum Wage Would Ease Income Gap but Carries Political Risks,” by Annie Lowrey (The New York Times, 2013).
- “Minimum Wage, Maximum Folly,” by Walter Williams (The Freeman, 2007).
- “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties,” by Andrajit Dube, T. William Lester, and Michael Reich (UC Berkeley Institute for Research on Labor and Employment Working Paper Series, 2010).
- “Impacts of minimum wages: review of the international evidence,” by Andrajit Dube (HM Treasury, 2019).
- “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” by David Card and Alan Krueger (The American Economic Review, 1994).