What’s So Scary About Raising Minimum Wage?

Why $9/hour won't stifle job growth.

A week ago, in his State of the Union address, President Obama proposed raising minimum wage from $7.25 an hour to $9 an hour. If Congress passed such legislation, the average worker would net an extra $280 a month in their paycheck.

The President’s minimum wage proposal set the Twitterverse humming—outranking both gun control and early childhood education in total tweets per minute during the SOTU address; and it has since become one of the most talked about points of the President’s second-term agenda.

The response from Republican leaders was predictable. The day after delivering his reply to the State of the Union speech, Florida Senator Marco Rubio pushed the boundaries of established GOP policy, all but calling for the elimination of minimum wage laws. House Speaker John Boehner stuck closer to the script, lamenting the potential impact on jobs growth.

“When you raise the price of employment, guess what happens? You get less of it,” he said.

There’s just one little problem with that take: Facts don’t exactly back it up (not that facts have been much of a concern for the GOP over the past decade). While research on the subject is hardly unanimous, most studies indicate that the negative effect of modest increases in the minimum wage on employment levels is negligible to non-existent. Some studies—like this oft-cited 1992 assessment of New Jersey’s minimum wage increase—have found rising base pay can even lead to increased employment in some cases.

Last week, the Center for Economic and Policy Research (CEPR) released a sweeping assessment of this research, while noting that the current minimum wage of $7.25 per hour has failed to keep pace with worker productivity and purchasing power. (The President’s proposal also mandates automatically pegging the minimum wage to inflation, an idea that even Mitt Romney has supported.)

But opponents of President Obama’s minimum wage proposal insist that even if a boost in base pay is warranted, given the current state of the economy, now isn’t the time to do it. This too becomes a flimsy argument once facts enter the mix. In 2006, more than 600 economists including five Nobel Prize winners, signed a statement endorsing the Fair Minimum Wage Act of 2007, which raised base pay to its current level over the course of two years. The final jump — from $6.55 to the current $7.25—took effect on July 24, 2009, while the U.S. was in the throes of the worst economic recession in more than half a century, and following a year of record job losses. But a growing body of academic research confirms that the change had little to do with the mounting job losses during the economic crisis.

Critics of the President’s plan worry that teens, who typically rely on low-paying work, would be hardest hit by a wage increase, since employers will be forced to trim staff to compensate for higher pay. But a 2009 report by Hoffman and Ke at the University of Delaware that compares states that were affected by the 2007 increase to those that already had a minimum wage of $7.25 or higher found the negative impact on teen unemployment was statistically insignificant. According to one of the studies cited in the new CEPR report, that’s because employers—many of whom have already eliminated unnecessary positions in response to the recession—have lots of other ways to make up the difference.

For instance, employers can, and do, respond to an increased minimum wage by trimming non-wage benefits, lowering training costs, or delaying raises or bonuses for higher paid workers—a process known as “wage compression.” Economists have suggested that offsetting this capital to low-wage workers—who tend to save less in comparison to their employers and higher-income earners—actually stimulates economic activity and raises overall GDP. According to the research, this phenomenon is especially pronounced during periods of economic stagnation.

Yet the very fact that pundits like myself put so much stock in data like that which I have presented above confirms that the current debate over the proposal to raise the minimum wage accepts, as a gauge of the plan’s sensibility, the net effect of jobs created or lost. Would evidence that increasing base pay has a slightly negative effect on job growth be enough to prove such a plan unworthy? I don’t necessarily think so. I have yet to find a model that shows the economy is better off having more people making less, than fewer people making more (particularly when those making less are barely scraping by).

Still, a better question might be not whether a higher minimum wage increases or stifles job growth, but whether, as social policy, having a mandated base pay violates an employee’s right to work for less if he or she should wish to. Indeed, some libertarians have argued that a minimum wage creates a “buyers’ market for unskilled labor” and diminishes worker bargaining power.  These are discussions that are better suited for another time; my point is simply that when considering where you stand on an increased minimum wage, there are other things to consider than how many jobs it could kill.