In his State of the Union address Tuesday night, President Barack Obama called on Congress to pass legislation changing the minimum wage to $9.00 per hour, up from its current value of $7.25 per hour. Not surprisingly, this proposal has garnered plenty of opposition from congressional Republicans.
House Majority Whip Kevin McCarthy, R-Calif., told Fox News he opposes the minimum wage hike, saying, “It’ll take away from the economy.”
However, that claim is far from substantiated. While economics is an imprecise science, an increasing body of research is suggesting that increasing the minimum wage, as Obama has suggested, would do more good than harm.
One argument for this increase is simple: labor productivity has increased at a much faster rate than wages. Simply put, this means workers have increased their output without receiving a corresponding increase in their compensation. That’s exactly what the graph below shows — productivity shooting up with wages lagging behind.
According to classical supply-demand analysis, the effect of increasing the minimum wage is very straightforward: instituting an effective price floor (i.e., a minimum wage) on a good decreases quantity demanded of that good — in this case, demand for labor, which in turn leads to increased unemployment.
However, reality suggests the case is not so simple. A seminal study by David Card and Alan Krueger looked at fast-food employment before and after New Jersey increased their minimum wage by nearly 20 percent.
Their conclusion? “Contrary to the central prediction of the textbook model of the minimum wage, but consistent with a number of recent studies based on cross-sectional time-series comparisons of affected and unaffected markets or employers, we find no evidence that the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state.”
Why might this be? Some economists suggest wages may be determined more by history and tradition rather than underlying economic factors. For example, a restaurant owner might keep paying the same wage just because that’s what he or she has always done.
This, of course, is not conclusive — one study does not a fact make. However, it’s certainly food for thought. Hopefully, the President’s proposal will lead to much reasonable debate and eventually some policy change. Only time will tell.
Joe Timmerman ([email protected]) is a sophomore majoring in economics and math.