Wage-Old Truth: Increasing Pay Doesn’t Decrease Job Growth


Across the country, state legislatures are debating the minimum wage. This week Washington, D.C. became the latest major city to better conditions for low-wage workers. Still, the ideological divide that halts wage progress in other cities and states often falls along party lines, with the alleged effect higher wages have on the job market as a central sticking point.  The argument of those who oppose raising the minimum wage typically states that doing so would stunt job growth.  

But a decades-long study by two young economists, highlighted this week in The New York Times by Annie Lowrey, challenges this assertion.

Twenty years ago, American workers were hurting from a recession. David Card and Alan B. Krueger, Princeton economists, used a policy change in New Jersey to study the effects of wage gains on employment.  When the garden state raised its minimum wage from $4.25 to $5.05, the pair compared employment in towns on the New Jersey-Pennsylvania border.  Their study found that employment did not change in either state, according to Lowrey:

That paper completely upended prevailing economic thought on the issue of minimum wages, leading to a flurry of studies and counterstudies, editorials and countereditorials. (It even got personal, Card said, describing the debate among economists as a “very, very nasty spat.”) Since those days, the economy has grown about 63 percent in real terms, not that anyone working at a McDonald’s in Trenton would have noticed. Their 1992 raise brought their wage to about $8.40 an hour, adjusted for inflation. Today, they earn $7.25 an hour, the federal minimum.

As with most politically-related issues, the economic community is divided in its opinion of Krueger and Card’s findings. But a large contingent of this community believes that their argument is correct when applied to labor markets. Lowery quotes Berkely professor Michael Reich:  

If you go to the supermarket and the price of beef goes up, people buy less beef and more fish,” said Michael Reich, a professor of economics at the University of California, Berkeley, who contributed to one such study. But labor markets are much more complicated than that, he said. The types of jobs available to workers at the minimum wage — meatpacking, box-stuffing, burger-flipping — tend to be hard, unpleasant, dull work. Employees rarely stick around for long, and their productivity is typically low. “Companies like Walmart can have turnover rates of 100 percent a year,” Reich said. According to Reich’s reasoning, when New Jersey raised its minimum wage, businesses ended up having less trouble filling vacancies and workers stuck around for longer.

Lowery points to a present-day example of a big business supporting wage gains: Costco. The company features living wages as a staple of its business model, according to Craig Jelinek, the C.E.O. of Costco:

“Paying employees good wages makes good sense for business,” he said earlier this year, calling for a federal minimum-wage increase. (Costco pays a starting wage of $11.50 an hour in all states where it does business.) “We know it’s a lot more profitable in the long term,” Jelinek said, “to minimize employee turnover and maximize employee productivity, commitment and loyalty.”

When adjusted for inflation, the current minimum wage is tremendously low. Congress has raised the minimum wage 11 times since 1978 but it has failed to keep pace with inflation. Therefore, workers earning the minimum wage now have less purchasing power than workers earning the minimum wage in decades past.  Many calculations (see graph above), suggest the wage is currently more than two dollars below what it should be.

Congress has been unwilling to act and President Obama has not made clear his intentions for a national minimum wage increase. Luckily, state legislatures are awakening to the United States’ crisis of wage discrepancy. A couple more D.C.’s and SeaTac’s and New Jersey’s and the precedent will be well set. It will no longer be considered a looney, lefty idea to provide decent pay. It will be understood as the only option.

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