Minimum wages, US-style

The NYT discusses proposals to raise the US federal minimum wage by 40% (from $5.15 per hour to $7.25 per hour by 2009). Advocate Jared Bernstein estimates that it will directly affect about 6 million workers, and indirectly affect another 7 million.

Will it lower employment? The article quotes David Neumark (recently profiled in his local newspaper), estimating that a 40% minimum wage rise will lead to a 4% drop in employment. If he’s right, it would mean that 12.5 million workers would get a wage rise, while about half a million would get a termination notice.

Note that in relative terms, the US minimum wage will still stay well below the Australian minimum wage. A minimum wage of US$7.25 would be about half of the median hourly wage in the US (currently US$14.15, but sure to be higher by 2009), while the Australian minimum wage (A$13.47) is about two-thirds of the median hourly wage here (about A$20).

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13 Responses to Minimum wages, US-style

  1. “while about half a million would get a termination notice.”

    Though it’s more likely that people simply would not be offered jobs than that they would be sacked. At least in Australia, there is high turnover in these occupations, so lots of room for not replacing people or not expanding businesses that rely on cheap labour. Perfect for people who like to pretend there are no costs to these decisions – though as you imply a case could be made on utlitarian grounds for increasing the minimum wage, even if it does cost jobs.

  2. Andrew Leigh says:

    You’re perfectly right. Rhetorical flourishes and economic accuracy don’t always go together.

    David Neumark has a pair of papers in the Journal of Human Resources, arguing that if all you care about is the total earned income of the poor (a kind of utilitarian argument, I suppose), the minimum wage turns out to be a bad policy.

  3. Perry says:

    While the minimum wage has not increased in ten years in the USA, politicians have increased their salaries by $30,000 p.a in the same period.

  4. Fred Argy says:

    Andrew, I am not an expert on the literature but common sense tells me that the employment impact of a given increase in the minimum wage will depend a great deal on its starting point e.g. it would be greater in Australia than in the US or UK. The Blair Govenment has substantially increased its minimum wage without any apparent effect on the jobless. Is my hypothesis broadly right?

  5. Fred Argy says:

    PS The Blair Government has also halved its poverty rate since 1999. I am not suggesting that it is principally because of the minimum wage (the spending on education would be more critical) but the minimum wage may have helped.

  6. derrida derider says:

    Neumark is of course at one end of the debate on the employment effects of minimum wages – most labour economists would not choose as large an elasticity in the US as his preferred one. He’s drawn that estimate from the large scale metastudy he recently did with Wascher – a study which is, IMO, seriously flawed (but that’s a long story …).

    And Fred, you are of course absolutely correct. Even if we disagree with Neumark & reckon that the employment effects in the US will be minor, this says nothing about the employment effects of rises in the high Australian minimum wage. But despite Andrew’s ingenious attempt with WA minimum wages, the national nature of our system makes it hard to get the variation needed for a good econometric handle on this.

  7. derrida derider says:

    Oh, and on poverty, the US and UK have a lot more households dependent on minimum wages – ie the ‘working poor’ in their case. So (employment effects aside) raising the min wage in the US and UK will have a lot more impact on the poverty rate than it would here.

    Note this also leaves aside the vexed question of whether income poverty rates are meaningful measures of disadvantage in most developed countries anyway.

  8. Patrick says:

    The Economist formerly called Megan McCardle points out that according to the Congressional Budget Office only 18% of American minimum-wagers are poor. In fact the whole post sounds rather like Andrew Leigh, if perhaps slightly more right-centrist – best line:

    It’s hard to argue with Greg Mankiw’s basic formulation that the minimum wage is a policy designed to help low-skilled workers—paid for by a tax on employing low-skilled workers.

    And the wisest line is from a commenter:
    Raising the minimum wage is a blunt instrument. Instead of arguing about it, why not try to find a better one?

  9. backroom girl says:

    The Washington Post had an interesting article on life on the soon to be minimum wage (http://www.washingtonpost.com/wp-dyn/content/article/2007/01/09/AR2007010901812_pf.html).

    The thing that struck me about this story was how low wage-earners in the US almost operate within their own sub-economy, where most other employees are also minimum wage. Where they really come unstuck is when they have to deal with the mainstream economy (eg having to pay $8000 for medical treatment in a country that has no subsidised medical care for low wage earners).

  10. Peter Whiteford says:

    Just to be pedantic, I think that Australia has more people around its minimum wage than the US and the UK have around theirs, but this is because their minimum wages are lower than ours (particularly the US); that is we draw the line further up the potential wage distribution and therefore cover more of the population.

    They do have more people between their minimum wage and the level corresponding to ours, i.e they have more “working poor” as DD points out.

  11. derrida derider says:

    But Patrick, Mankiw’s formula only works if you assume a strict neoclassical model. The “new labour economics” school argues, with some evidence behind it, that there are substantial rents appropriated by employers due to the effective monopsony they have over individual employee’s labour supply ( a product of costly infornation), and that we can therefore, up to a point, ‘tax’ the employer with a regulated wage without changing his or her hiring behaviour. In a fully competitive industry the cost will thus be borne by the consumer, in a fully monopolistic one by the shareholders.

    I’m a bit sceptical of some of the more extreme claims of this school but it’s clear that labour markets are far from tne nice homogenous, fully informed institutions required for the tax to fall wholly on the workers.

  12. Sinclair Davidson says:

    They do have more people between their minimum wage and the level corresponding to ours, i.e they have more “working poor” as DD points out.

    Could you expand on that please? I’m not sure what this implies. They have more “working” poor, we have poor but not working, or their economies have generated a whole heap of low pay, low skilled jobs?

    I seem to recall an argument that a higher minimum wage would transfer jobs from illegal migrants to low-skilled US workers (who also often are African-American and coincidentally, no doubt, more likely to vote Democrat – if they vote). Has that aspect of the debate reappeared? Or is my memory faulty?

  13. Andrew Leigh says:

    Peter, there are two factors affecting the share of workers earning near-minimum wages. One is that our MW is relatively higher. But the other is that in the US you see a spike the in distribution just above the minimum wage. You don’t see that in Australian data.

    FWIW, my best estimate is that 10-12% of Australian workers earn between FMW and FMW+$2.

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