Barack Obama has long made income inequality a central theme of his second-term agenda. He has already tackled inequality from the top by preserving tax cuts for everyone but the rich. In his address to Congress on February 12th, he dealt with it from below, proposing to raise the federal minimum wage by 24%, benefiting, so the White House claimed, 15m low-wage workers.
America’s minimum wage has long been low by international standards, equaling just 38% of the median wage in 2011, close to the lowest in the OECD (see chart). Congress changes it only occasionally, and in the interim inflation eats away its value. The wage was last raised, to $7.25 per hour, in 2009. Since then its real value has slipped back to where it was in 1998. Twenty states now have minimum wages above the federal rate, compared to 15 in 2010, according to the Economic Policy Institute, a liberal research group.
Mr. Obama’s proposal would boost the nominal wage to $9 per hour by 2015, restoring it, in real terms, to its 1979 level, though relative to median wages it would still be lower than in many other rich countries. Thereafter, it would be indexed to inflation. He would also raise the minimum wage for workers who receive tips for the first time in over 20 years.
The proposal drew the predicted response: labor and liberal groups said it would reduce poverty and raise the spending power of the poorest workers, while businesses and Republicans (whose co-operation is needed if the proposal is to become law) said it would cost low-skilled workers jobs.
The economic consequences are hard to predict. Economists historically frowned on minimum wages as distortionary price fixing that reduced demand for workers affected by the wage. But that assumption has come under fire from a growing body of research. The introduction of Britain’s minimum wage in 1999 had no notable impact on jobs, for example. In America, the White House approvingly cites research by Arindrajit Dube, William Lester and Michael Reich that compared counties where the minimum wage rate rose to neighboring counties in states where it didn’t and found no negative effect on employment. The theory is that higher wages reduce costly turnover, reducing the incentive to lay workers off.
Some minimum-wage proponents go even further, arguing that a higher minimum boosts jobs by shifting income towards people who consume more of what they earn. The EPI, for example, last year claimed a minimum wage of $9.80 per hour would create 100,000 jobs.
But David Neumark and William Wascher, who have long studied, and been critical, of the minimum wage, maintain the evidence bears out basic economic intuition: a higher minimum wage costs some low-skilled workers their jobs while helping those who keep them. Mr. Neumark is particularly dismissive of the notion that a higher minimum wage can boost the economy, and indeed that is not a claim the White House makes.
For Mr. Obama, that may not matter. His speech contained many more effective means to boost growth and incomes of the poor, from increased infrastructure to early childhood education. Unlike the minimum wage, though, they cost the government money that it doesn’t have.
Source: The Economist
