Pushing on the minimum
16 May 2017
Although the United States has a reputation for having loosely regulated labour markets compared to most other advanced economies, workplaces are still governed by a complex patchwork of federal, state and local laws. These span everything from minimum wages, which at the federal level are around the OECD average in PPP-adjusted terms (see Charts 2 and 3) and higher in some states, to unions’ ability to compel employees to join and pay dues, to occupational health and safety.
Of these, minimum wages are especially totemic. In recent years, Democrats in federal and state legislatures have started pushing for large increases to boost the incomes of low wage workers, with varying success. In late April for example, congressional Democrats introduced legislation to progressively raise the federal minimum wage from its current rate of $7.25 per hour to $15 per hour by 2024. This was of course rejected by a Republican majority that is more aligned with the interests of employers and tends to view the labour market through a neoclassical theory that predicts severe negative employment impacts from artificial wage floors. Democrats have had much more success in passing minimum wage increases at the state and local level. In April last year a bill was signed into law in California that will lift the state minimum from $10 per hour to $15 per hour by 2022. New York State has also passed legislation that will significantly raise minimum wages over the next few years, though by an amount that varies by region and type of worker. For example, in New York City the minimum will increase from $11 per hour to $15 per hour by December 31 2018 for anyone working in businesses with more than 10 employees, while those working in businesses with fewer employees will reach the $15 threshold at the end of 2019. Meanwhile, other, mostly ‘blue’ states like Oregon, Washington, Colorado and Maine have also joined the party.
Setting aside politics, minimum wages are also controversial among economists, in part because different theories of how labour markets function imply different employment impacts, but also because the empirical evidence has often been conflicting. A recent survey by economist David Neumark in a 2015 San Francisco Fed letter showed that while the average elasticity (the percentage change in employment from a 1% increase in the minimum wage) across studies is small at -0.2, estimates vary significantly, with studies relying on close geographic proximity for identification often finding no negative effects, but studies using other ways of comparing regions tending to find statistically significant negative impacts. Even if the average impact is small, there is stronger evidence that minimum wage increases harm the employment of teens and low-skill workers. Moreover, because most minimum wage workers do not live in low-income households, minimum wages are not the most efficient way of reducing inequality and poverty; earned income-tax credits are more effective in this regard and it would be good to see more of a focus on this among policymakers. Although it is far too early to assess the impact of the most recent round of state and local minimum wage increases, we expect the economy to absorb the scheduled wage hikes without too much disruption in the nearterm; it will be the next downturn where the potentially negative consequences are more fully felt.
Jeremy Lawson, Chief Economist