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Wednesday, June 21, 2006

The Endless Debate over the Minimum Wage

I say the debate is "endless" for two reasons.  First, every five or ten years, members of Congress are "shocked, shocked" (apologies to Captain Renault) to discover that the minimum wage they raised years ago has declined in real terms.  Of course, in an economy with steady, low-level inflation (e.g., the U.S. economy for the past almost quarter-century), it's obvious that a fixed minimum wage will lose real value over time.  The last minimum wage increase (to $5.15/hr) was in 1997, so the wage set in 1997 has declined by 20-30% in real terms since then.  Why can't the feds index the minimum wage, just as they index social security?  Sure, conservatives wouldn't like it, but isn't there obvious room for a compromise -- e.g., the next time an increase of $1+ is about to pass, raise it by less but also index it.  To decrease the complications for employers, maybe have the increases take effect only in even-numbered years (e.g., rather than a roughly 3% increase annually, a 6% increase every two years), and round it to the nearest nickel.

The second reason I say the debate is endless is that I can't think of anything new to say about it, and I don't think anyone else can, either.  The last new thing I heard about the minimum wage was in the mid-90s, when an empirical study by Card & Krueger showed that a local increase in the minimum wage (in an interesting border area in which one state raised the min but the other didn't) had no effect on unemployment levels.  This was counter-intuitive to their fellow economists, whose basic supply-and-demand model always showed that price floors (like the min wage, a price floor for labor) decrease quantity (i.e., the number of jobs).  Possible explanations include limited short-term labor elasticity (i.e., employers don't adjust their labor needs very quickly when labor costs change) or monopsony effects (i.e., if  a company is the only employer available for a population of workers, then raising the minimum wage may induce them to hire more workers, because one effect of a price floor is that hiring additional workers no longer raises everyone's wages).

But that's it.  I can't think of anything new in the past decade or so about the minimum wage.  So we have to reiterate this political debate about the decline in the real minimum wage that everyone say coming, and there's almost nothing new to say in that debate.  Anyone else have something new to add to the same old, same old?  Anyone?  Please???

Update:  My apologies for negecting to mention that the impetus for my post was Wedneday's failure of a minimum wage hike in the Senate.  Actually, it "passed," 52-46, but that was short of the 60 votes needed for the bill to advance under Senate rules.  (So much for Majority Leader Frist's odes to the simple majority up-or-down vote during the controversy over Bush's appellate court nominees....)

Posted by Scott on June 21, 2006 at 05:33 PM | Permalink

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» Waging war from Why We Worry
On Wednesday, the Senate shot down a proposal to raise the current minimum wage ($5.15 per hour) to $7.25 within two years. A worker earning $5.15 an hour full-time would end up about $6,000 below the poverty line, noted Senator Edward Kennedy. The vot... [Read More]

Tracked on Jun 21, 2006 9:33:36 PM

Comments

An expansion of the Earned Income Tax Credit would be a much more efficient and equitable way of helping the working poor than raising the minimum wage.

Posted by: David F. Prenatt, Jr. | Jul 8, 2006 11:44:04 PM

There has been back and forth about this for a long time among economists. And there's also the recurring "does it help actual poor people or just give extra money to teenagers living with their parents working at McDonalds over the summer" debate, although that seems to have settled into a "both" answer.

But since it's pretty clear that the U.S. is going to keep some minimum wage, the most interesting question, I think, is what you raise in your first paragraph: why isn't it indexed, or at least pegged to *something*? Most western European countries, as I understand it, peg it to inflation, or to a percentage of rates of pay overall or in particular industries, etc.

One of the enduring mysteries to me about employment law in the U.S. is that the miminum wage seems mostly calculated on the "when Repubs. are in power, it doesn't go up, and then when Dems. get into power, it finally gets raised a bit."

Posted by: Joseph Slater | Jun 22, 2006 2:04:26 PM

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