Economists once considered the minimum wage a simple and classic case of bad economic policy.
The minimum wage is a price floor, and price floors lead to surpluses and waste without fail. A surplus in the market for low-skilled labor is an especially serious problem. It means reduced hours or unemployment for workers who can least afford it.
But careful observation over the past generation has made clear that the economics of the minimum wage is not so simple.
The new economics of the minimum wage shows that businesses don’t always adjust to the minimum wage by cutting the hours or employment of low-skilled workers. Reducing other forms of compensation to low-skilled workers, upgrading jobs and demanding greater productivity, raising prices, or simply accepting lower profits are other ways businesses adjust.
The minimum wage might even provide the wage increase that low-skilled workers with few options and weak bargaining power are unable to negotiate on their own.
The new economics of the minimum wage also shows that the effects of the minimum wage are likely to vary considerably across businesses, industries, towns, cities, states and low-skilled workers.
Consequently, economists are now more divided on the minimum wage. A majority still opposes the law, but it’s a much smaller majority. Some, once opposed to the law, are now unsure. Plenty have changed their minds and now support raising the minimum wage to $15 per hour.
To my mind, rather than muddying the waters, the new economics of the minimum wage has made the case against the minimum wage even stronger.
The new economics of the minimum wage makes it clear that a federal minimum wage is a one-size-fits-all policy for an anything but one-size-fits-all economy.
A $15 minimum wage would certainly benefit some low-skilled workers. Low-skilled workers employed by large corporations or other firms for which low-skilled labor is a small fraction of costs would probably see at most minor decreases in hours or other forms of compensation, leaving them better off on net. The same would be true for many low-skilled workers in cities, where workers have more options and wages are higher already.
But a $15 minimum wage would just as certainly harm some low-skilled workers. Low-skilled workers employed by low-skilled labor-intensive businesses, especially those located in towns or rural areas where wages and small business profits tend to be lower would be particularly vulnerable to cuts in work hours, cuts in other forms of compensation or job loss.
Evidence suggests that, in aggregate, a $15 minimum wage would benefit low-skilled workers more than it costs them. And the low-skilled worked workers made better off by a $15 minimum wage would probably outnumber those made worse off.
But does that justify the policy?
Good economic policy requires more than good economics. It requires ethical judgment. Economists are keen on identifying flaws in markets. We ought to be no less keen on identifying flaws in ourselves. A flaw to be especially vigilant for is hubris.
I would gently suggest that on matters of public policy, we economists ought to be extremely careful.
To advocate a $15 minimum wage is to advocate a policy that restricts freedom, reduces opportunities and is certain to harm some highly vulnerable workers and small business owners in highly vulnerable communities.
Those who would benefit from a $15 minimum wage might well outnumber those harmed, but the harm would be concentrated and very real, and none of it would be borne by the economists advocating the law.
The minimum wage is still bad economic policy.
Reg Murphy Center