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Major Reversal: Economists Agree Minimum Wage Works!

Model T Ford

For many decades, economists have sounded nearly unanimous in their condemnation of the minimum wage. The consensus view among economists was that minimum-wage rules resulted in lower employment, and that the most uneducated and unskilled workers were those most likely to lose their jobs due to a mandatory minimum wage.

Well, the research is in, and the majority of economists were wrong! Surprise! Minimum-wage laws actually don’t reduce employment. In fact, they increase the welfare of minimum-wage workers and their employers.

Who says so? None other than The Economist, the house organ of the economics profession, the gold standard of consensus among economists. In a recent “Free Exchange” column, The Economist dishes the numbers on minimum-wage laws and begrudgingly concludes, “Whatever their flaws, minimum wage laws are here to stay.”

Why? Because “whatever their flaws,” they work. The Economist cites a slew of data about the effectiveness of minimum-wage laws that has become available recently — data which refutes the long-held belief that minimum-wage laws increase unemployment.

Much of this data comes from Great Britain, which introduced a national minimum-wage law in 1999. The British government requires a minimum wage equal to about 46% of median earnings — compared with a less generous 40% in the United States. When Great Britain instituted the national minimum wage “worries about potential damage to employment were widespread,” says The Economist, itself a major worrier. “Yet today the consensus is that Britain’s minimum wage has done little or no harm.”

In case you’re having trouble with the British accent, “little or no harm” means the law did quite a bit of good — by every measurable standard:

Not only has it pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale — and thus reduced wage inequality. Wage gaps in the bottom half of Britain’s pay scale have shrunk sharply since the late 1990s. A new study by a trio of British labour-market economists (including one at the Low Pay Commission) attributes much of that contraction to the minimum wage. Wage inequality fell more for women (a higher proportion of whom are on the minimum wage) than for men and the effect was most pronounced in low-wage parts of Britain.

Again, let me translate from the British: The minimum-wage law boosted wages at the very bottom of the earnings scale — and all the way up the scale! As Richard R. Troxell, head of the campaign for a Universal Living Wage has eloquently argued, greater income at the bottom leads to greater spending at the bottom, boosting the entire economy. It also leads to lower government spending, lower taxes, and lower budget deficits, as those at the bottom rely less on government subsidies.

How is that possible — for increasing wages to increase profits? The Economist thinks much more work needs to be done to understand the relationship between employment and the minimum wage. The magazine goes part way by explaining that increased wages at the bottom lead to less turnover which saves more money for businesses than the wage increase costs them.

This lesson was not lost on Henry Ford. He paid workers more and thereby reduced the costs of building a car while increasing his profits. All of this is laid out in Richard R. Troxell’s book, Looking Up at the Bottom Line: The Struggle for the Living Wage. While it’s gratifying to see The Economist finally reverse its kneejerk objections to a guaranteed living wage, they have a long way to go to make up for the delays caused by their previous incorrect statements about the mythical damage caused by a minimum wage.

Source: “The Argument in the Floor,” The Economist, 11/24/12
Image by bsabarnowl (Bill McChesney).

  1. […] Additionally, study after study has shown that 98% or more of all minimum wage  increases have been directly spent back into the local economy, thus acting as a local economic stimulant. […]