Minimum wages are going up. Jobs may disappear

The minimum wage is roaring back.

President Joe Biden may have failed to drive through Congress an increase in the federal wage floor, which remains stuck at $7.25. But last month, Connecticut, Nevada and Oregon raised their minimums alongside Washington D.C. and a handful of other cities. Twenty-one states raised their minimum wages at the turn of the year. In San Francisco, it is $16.99 an hour. In Emeryville, California, it hit $17.68.

These increases may be warranted in a moment when high inflation is eroding the paycheck of American workers. Still, the newfound enthusiasm for the minimum wage risks doing a lot of harm to many of the workers it is intended to help. 

Proponents "haven't measured the long term," Erik Hurst of the University of Chicago told me. "So they think they have a costless solution."

Recent research by Hurst and three colleagues concludes that President Biden's proposal to raise the federal minimum to $15 would end up damaging the livelihood of about 15% of the workers earning less than that — mainly those at the very bottom of the pay scale. Even if they benefited from the pay boost in the short term, many would lose their jobs in the end. 

This is bad news for advocates of higher minimum wages, who have come to believe that the argument over the pros and cons of the policy — whether it destroys jobs or not — has been decisively settled in their favor. 

Three decades ago, economists David Card from the University of California, Berkeley, and Alan Krueger from Princeton University surveyed fast-food restaurants on both sides of the border between New Jersey, which raised its minimum wage, and Pennsylvania, which didn't. To the surprise of many, they found no evidence that raising the wage floor cost jobs.

The confounding finding seemed in conflict with a basic tenet of economics — that in a competitive market, raising the price of a good, a service or an input in the production process will reduce demand for the thing. But economists noted that it makes a lot of sense if the labor market is not competitive. 

Like a monopolist who has the power to raise prices without losing market share to cheaper rivals, employers facing little competition for workers can pay them less than their contribution to the bottom line without fear that a rival will swoop in to hire them away. 

Economists have found evidence of so-called monopsonistic behavior among employers in some industries and markets. This has bolstered the proposition that forcing employers to raise wages will not automatically lead them to drop workers altogether, because they are paying them less than what they are worth to the firm. They can pay them more and still make a profit.

Lifting the minimum wage in this kind of market might even create new jobs. More people would be drawn to work by the higher pay. As long as the new wage didn't rise above the value of their contribution to the firm, the employer would still turn a profit on each additional worker.

There has been sniping around the limits of the proposition that the minimum wage can do no harm. Subsequent research in the style of Card and Krueger has sometimes found increases in the minimum wage reducing employment. Others have found no effect. The magnitude of the impact has usually been small.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.