William N. Evans
Keough-Hesburgh Professor of Economics, University of Notre Dame
As a Catholic economist, the minimum wage has always presented a conundrum for me. The argument that the minimum wage does not deliver the poverty relief it promises, and that programs such as the Earned Income Tax Credit (EITC) are more efficient, is rather persuasive. However, I worry that the current system does too little to preserve the dignity of work for low-skilled workers. The dignity of the person must be upheld in all aspects of life, including work. As stated in the Catechism of the Catholic Church (CCC),“In work, the person exercises and fulfills in part the potential inscribed in his nature” (CCC, 2428). Worker dignity is preserved in part when one’s efforts are “able to draw from work the means of providing for his life and that of his family, and of serving the human community” (CCC, 2428). In an increasingly global economy, the ability for low-skilled workers in the U.S. to provide for themselves and their families has diminished. The Congressional Budget Office reports that the median real hourly wages of workers (in 2009 dollars) without a high school degree fell from $13.30 in 1979 to $9.00 in 2009. The corresponding numbers for a high school graduate were $16.80 in 1979 and $12.10 in 2009. A worker working 40 hours/week for 50 weeks a year at a wage of $8/hour will generate gross income of $16,000, which is only 68% of the 2009 federal poverty level for family of 4.
For many, a solution to the plight of the low skilled worker is a higher minimum wage, which is often presented as an anti-poverty program. When President Obama announced the executive order that raised the minimum wage on federal contracts to $10.10/hour, he noted the popular sentiment that “nobody who works full-time should have to live in poverty.” From a legislative standpoint, it is easy to support a higher minimum wage. Compliance is high and the outcome is very visible; the legislation provides exactly what it promises – higher wages for workers. In contrast, the key negative effects of the minimum wage, higher prices and the potential of reduced employment, are more difficult to appreciate. While all voters know someone who would benefit from a higher minimum wage, ex ante nobody knows who would lose their job. Given the salience of the benefits and the diffuse nature of the costs, it is no surprise that the minimum wage is very popular with the electorate. A November 2013 Gallup Poll found that 76% of respondents said they would support a hike in the Federal minimum wage to $9/hour.
Contrasting the wide support of the minimum wage among the electorate is its disfavor among economists. Whaples’s 2006 survey of 210 members of the American Economic Association found that while 37.7% supported a raise in the minimum wage of anywhere from $0.5 to more than $1/hour, 46.8% favored elimination of the minimum wage entirely. A recent Wall Street Journal survey of professional economists found that 54% were opposed to a proposed hike in the minimum wage to $10/hour.
My reading of the academic literature is that the employment lost due to a minimum wage is modest – but more importantly, hard to detect. These difficulties are exemplified by a recent paper by Dube, Lester and Reich that has received a reasonable degree of attention in academic and popular circles. The authors consider adjacent counties in different states, one impacted by a minimum wage hike and the other experiencing no minimum wage increase, their treatment and control groups in a reasonable difference-in-difference model. The authors conclude that there is “no detectable employment losses from the kind of minimum wage increases we have seen in the United States.” In their preferred specification, the authors estimate an elasticity of labor demand of 0.079 with a standard error of 0.289, which means we are 95 percent sure the elasticity of demand for labor is somewhere between -0.48 and 0.64, which also means that I am 100 percent sure we have not learned much from the exercise. Most of the economic literature has focused almost exclusively on estimating short-run employment displacement caused by higher minimum wages. A more important exercise may be examining the long run substitution of capital for labor and economists need to spend more energy estimating this value. I do not know whether this is a large number, but I do grow concerned about this problem every time I fill up my own iced tea at McDonalds or Panera, or check myself out at Home Depot.
Regardless of what the elasticity of labor demand is, support for the minimum wage among economists does not appear to be moved by this number. A survey by Fuch, Krueger and Poterba in 1998 of 65 labor economists found that the support for the minimum wage was not correlated with the respondent’s perception of how much teen employment would fall as a result of a minimum wage hike.
Instead, my suspicion is that economists primarily object to the minimum wage on ideological grounds or because they believe it poorly addresses poverty. The beneficiaries of a higher minimum wage are many; the CBO estimates that increasing the minimum wage to $10.10 would, in 2016, raise the wages of 16.5 million people. But if the primary purpose of the minimum wage is to reduce poverty, it is a rather blunt instrument that impacts a large number of non-poor as well. To gain some notion of who might benefit from a hike in the minimum wage, I took data from the March 2013 Current Population Survey, deleted the self-employed, eliminated occupations where a high fraction of income is based on tips, and identified people whose hourly pay would increase as a result of a sudden increase in the minimum wage to $10.10/hour. Of the group that would benefit from a higher minimum wage, one fifth are aged 22 or under, one quarter are working less than 25 hours a week, 31 percent are in families at three times the poverty rate and 37 percent are in families with family income in excess of $50,000. Only 40 percent of those impacted by a minimum wage hike of this magnitude are full time workers (30 or more hours a week) living in a family (married or with children), and less than 10 percent are full time workers from impoverished families.
Economists tend to argue that there are better tools available to fight poverty, such as the EITC. In a 2007 mail survey of 280 labor economists, 70 percent cited the EITC as the policy that best meets the income needs of poor families, while only 9 percent cited the minimum wage. For economists, the EITC is an appealing option to the minimum wage. It rewards work and provides the proper incentives – particularly for single poor people ineligible for the maximum benefit outlaid by most welfare programs. The program is also structured such that low income workers are the primary beneficiaries, so the benefits are targeted to those most in need.
However, evaluating the minimum wage solely as an anti-poverty mechanism casts this mechanism in a rather narrow role. Our concern for families does not end once they cross the poverty threshold. Although the numbers above suggest that many beneficiaries of the minimum wage are in higher income families, it is still the case that 50 percent of beneficiaries of a $10.10 minimum wage hike would live in households earning less than two times the poverty level — $46,100 in 2012, and an amount 26 percent below the median family income for that year. Given the long-term stagnation of wages and earnings in the low end of these distributions, that fact that the minimum wage helps some families above the poverty line is a benefit, not a shortcoming. Meanwhile, the key program economists support as a minimum wage alternative, the aforementioned EITC, provides more limited support for families of more modest means, as the EITC phase-out range for families with children begins at $22,900 adjusted gross income for married couples and $17,550 for single heads of households. Thus, there are work-disincentives built into the EITC that appear quite early in the income distribution.
As the wages and earnings of low skill workers continue to decline in real terms, the country will struggle how best to assist them in their quest for dignity. The minimum wage is far from perfect, but looking at it from a strictly economic standpoint, the perfect may be the enemy of the good.
William N. Evans is a member of the CREDO board and Advisory Panel, and the Keough-Hesburgh Professor of Economics at the University of Notre Dame. His research is applied economics, with interests in labor economic, the economics of education, public finance, industrial organization and health economics. A lifelong Catholic, he is co-founder of the Lab for Economic Opportunities (LEO), a unique partnership between the University of Notre Dame and Catholic Charities USA that attempts to provide evidence-based poverty solutions. He holds a Ph.D. in economics from Duke University. He is a parishioner at the Basilica of the Immaculate Conception at Notre Dame.
