Robert Samuelson January 16, 2014

This minimum wage business is tricky. On its face, raising the wage seems an easy way to fight poverty. Just pay low-wage workers more. After all,some scholarly research finds that, within reasonable limits, there’s no job penalty. A higher minimum doesn’t reduce employment much, if atall. By and large, that’s the position of the Obama administration,congressional Democrats and liberal groups. Unfortunately, it may not be that simple.

Democrats propose raising the present federal minimum of $7.25 an hour to $8.20 this year, $9.15 in 2015 and $10.10 in 2016. Assuming no job losses, almost 28 million workers would benefit by 2016,estimates the Economic Policy Institute (EPI), a liberal think tank. That’s about 17 million who now make less thanthe proposed minimums, plus 11 million slightly better-paid workers whowould get increases to keep them above the minimum.

Someone working 40 hours a week at the minimum would see annual wages go from$15,080 now to $21,008 in 2016. Today’s annual wage is about 20 percentbelow the federal poverty line for a family of three, while the 2016wage would slightly be above the line for a family of three (though notof four), says EPI. Not all workers would receive big increases, because many work part-time (46 percent), don’t stay for a full year or already are above the minimum. Still, wage gains could be sizable.

Economist John Schmitt of the Center for Economic and Policy Research, anotherleft-leaning think tank, says that recent minimum-wage studies find that “modest increases” have “little or no employment effect.” Businesses turn to other ways of absorbing the added costs rather than reducingpayrolls or workers’ hours, he says. Better-paid workers mean lessturnover. This cuts firms’ recruitment and training costs; it alsoraises workers’ productivity, because they’re more familiar with theirjobs. Finally, firms adopt “small price increases.”

All this sounds plausible; it may also be incomplete.

For starters, the minimum wage is a blunt instrument to aid the poorbecause it covers many workers from families that are well above thefederal poverty line. By the administration’s figures, 53 percent ofworkers who would benefit from a higher minimum come from families withincomes above $35,000, including 22 percent with incomes exceeding$75,000.

Next, economists still disagree on the job effect. In studies — and theirreview of other studies — economists David Neumark and J.M. Ian Salas of the University of California at Irvine and William Wascher of theFederal Reserve conclude that higher minimums do weaken low-wage employment. Under plausible assumptions, even a small effect (say, a 1 percent jobloss for each 10 percent increase in the minimum) implies nearly amillion fewer jobs over three years.

But scholarly research, regardless of conclusions, may be beside the point. Businesses don’t consult studies to decide what to do. They respondbased on their own economic outlook. They may not react to a higherminimum wage now as they did in the past. Two realities suggest this.

First, the proposed increase is huge. By 2016, it’s almost 40 percent. Similar gains usually have occurred when high inflation advanced all wagesrapidly. The minimum mainly kept pace. That’s not true today. Comparedto average wages, the proposed hike in the minimum appears to be thelargest since the 1960s.

Second, businesses have been reluctant job creators. They curb hiring at theleast pretext. They seem obsessed with cost control. The Great Recession and the 2008-09 financial crisis spawned so much fear that theychanged, at least temporarily, behavior. Firms are more cautious.

Would employers take the minimum’s steep costs in stride — or react bycutting hiring and automating more low-paid jobs (example: supermarketcheckouts)? That’s the crucial question. Which matters more forlow-income workers: added jobs or higher incomes? There’s a powerfulsymbolism to raising the minimum, but the notion that it can be boostedsharply without any job penalty may be a mirage.

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