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BOHANON & CUROTT: Raising the minimum wage is not black-and-white issue

July 27, 2018

Economic Analysis by Cecil Bohanon & Nick CurottOne thing we have learned as economists is that few policy issues are simple “morality plays” where the forces of good are pitted against the forces of evil. Yet many inevitably cast economic issues in such black-and-white terms. The good guys on one side and the bad guys on the other side.

Consider raising the minimum wage. Many call for a $15-an-hour rate, an amount necessary, in their estimation, for a full-time worker to have a “living wage.” Who can quarrel with such a goal?

But this ignores what economists have known for generations. Raising the minimum wage increases the cost of low-skilled labor. Inevitably, this reduces the amount of low-skilled labor employed. There have been scores of studies over the last few decades that corroborate this result. So does an increase in the minimum wage help or hurt the poor? On this the theory and the research are less clear.

If the minimum wage is increased and a worker’s hours remain constant, her income clearly rises. If her hours are reduced to zero, her income clearly declines. What happens to most workers, however, probably falls in the middle. The hours they work are reduced but the wage they receive per hour rises. What occurs to their total income is unclear.

The recent increase in the minimum wage in Seattle has been subject to a great deal of scrutiny by economists. One blue-ribbon team affiliated with the National Bureau of Economic Research found the minimum-wage hike “lowered the amount paid to workers in low-wage jobs by an average of $74 per month per job in 2016.” We would note that this is just an average; some workers fared better and some worse.

However, the full social implications of an increase in the minimum wage are probably not captured in the simple metric of income earned. Suppose a higher minimum wage increases the income of adult workers but reduces work opportunities for teens? Adult households might be lifted from poverty today, but teens lose valuable work experience, which hinders their ability to earn income in the long run, implying more poor households in the future.

We are skeptical that there is a definitive metric that properly weighs the benefits of lifting some from poverty while driving others deeper into poverty. More to our point: Couching the issue as good versus evil does not advance the discussion.•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

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