For many conservatives, President Obama’s proposal to raise the minimum wage may be good politics, but it’s bad economics. It’s become a part of the free market bBible (Friedman 1:13-15, one might say) that raising the minimum wage increases unemployment. It’s common sense, right?
It turns out that economists are far more uncertain about the effects of a minimum wage increase than it may appear. The Initiative on Global Markets at the University of Chicago’s Booth School of Business recently surveyed 38 experts (including Nobel Prize winners, past presidents of both the American Economic Association, and past Democratic and Republican members of the President’s Council of Economic Advisers) about their views on the minimum wage, with interesting results.
When asked whether increasing the minimum wage to $9 per hour would make it “noticeably harder” for low-skilled workers to find employment, a 34% plurality answered yes. But close on their heels, 32% answered thought there would be no effect. And perhaps most interestingly, 24% said they were uncertain. Of this latter group, some were wary of the word “noticeably,” some said they would normally disagree but the current high levels of unemployment may antagonize the effects, and some said there would be mixed results. But the point still stands: a fourth of economists surveyed said they didn’t really know what would happen.
While economists were split as to the effects of increasing the minimum wage, they were less divided when asked if the benefits to low-skilled workers were worth the costs. More were uncertain, 32% this time, but 47% said they either agreed or strongly agreed while only 11% disagreed or strongly disagreed. Their individual comments are interesting, several mention out that other options (like the Earned Income Tax Credit) should be considered, but nearly a majority of these very distinguished economists believe that the benefits of raising the minimum wage outweigh the costs.
For those suspicious of surveys, turning to the literature offers an equally complex picture. A number of empirical studies have mixed conclusions, some concluding a negative effect on employment, some concluding no effect whatsoever. In 1995, David Card and Alan Krueger found evidence of publication bias and methodological errors in 14 different studies that stated a negative impact on unemployment, confirmed by T.D. Stanley in 2005. Another meta-analysis examined 64 previous studies on the topic, concluding that, “Once this publication selection is corrected, little or no evidence of a negative association between minimum wages and employment remains.” Card and Krueger published their own empirical study in 1992, concluding that employment in New Jersey actually increased following a hike in the minimum wage, which has been both contradicted and supported by subsequent reviewers.
The bottom line is that the relationship between the minimum wage and unemployment is nowhere near as clear cut as asserted. If anything, the literature seems to lean in the direction of no effect. But the most likely answer is that economic theories are vastly simplified snapshots of an immensely complex, interconnected system. There are thousands, if not millions of factors that influence the relationship between wages and employment; economic theory simply cannot take all of them into account. Which means that no matter what common sense or economic theory may dictate, reality seems to take a certain perverse pleasure in defying expectations.