In Minimum Wage Debate, A Battle Over Inequality and Job Loss

By an IPS Correspondent Reprint | | Print |

A strike by fast-food workers for higher wages in New York City's Union Square in August 2013. Credit: The All-Nite Images/ CC by 2.0

WASHINGTON, Dec 11 2013 (IPS) - In the midst of a nationwide movement for policymakers to raise minimum wages for millions of workers in the United States, experts here continue to debate the advantages and drawbacks of raising the federal rate.

The push for higher minimum wages has gained momentum in recent weeks, particularly with strikes by low-wage restaurant workers last Thursday in more than 100 cities. President Barack Obama also joined the debate, delivering a landmark speech condemning income inequality and the “race to the bottom” where businesses try to “pay the lowest wages” possible.

Obama’s renewed call coincided with a letter by 53 members of Congress calling on McDonald’s and other employers in the fast-food sector to raise pay for their employees. “Put[ting] more money in the hands of consumers…can help strengthen our economy,” the lawmakers noted.

But while higher minimum wages are widely believed to have a positive effect on social conditions, particularly by easing poverty among the most vulnerable sectors of society, economists maintain varying views on the issue.

“We’re all looking for ways to help low-income people get ahead, and that’s a very important goal,” Jonathan Meer, an assistant professor at Texas A&M University and an expert on economic public policy, told IPS. “But the real question is, what’s the right way to do it?”

So far, he said, most people have proposed minimum wage increases because “it’s the easy fall-back to say, ‘Let’s just pay people more.’ But research shows that increasing minimum wages actually reduces job growth. Simply put: people never get hired.”

This is a phenomenon economists call “disemployment” or “job loss” – that is, when employers don’t lay off workers but simply stop hiring new ones while decreasing the hours of those who are already employed. Opponents of raising the minimum wage say doing so leads to an overall lower level of employed individuals and slower job growth.

In his speech, Obama stressed that “inequality…hurts us all,” especially when “middle-class families can no longer afford to buy the goods and services that businesses are selling.” In the United States, he continued, “success has never been about survival of the fittest [but one] where we’re all better off.”

Despite strong opposition from many sectors of American society, including businesses and policymakers, some states have already started moving toward the president’s vision. According to the most recent statistics from the U.S. Department of Labour, 19 states plus the District of Columbia have a minimum wage that is higher than the federally mandated threshold of 7.25 dollars per hour. Washington state leads the country at 9.19 dollars per hour, while several others have proposals to raise some of these rates even higher.

Others have recently raised their minimum wage, including California, Connecticut, New Jersey and New York. But experts say it is too early to establish whether these moves have had a sizable positive impact on low-income workers, and those who subscribe to the view that higher minimum wages could increase unemployment have used statistical evidence to prove their point.

But Meer said this view may be too simplistic and that it ignores the larger trends that often hide behind the numbers. When trying to understand the relationship between minimum wage and employment, he said policymakers need to look at “the rate of job creation and job disruption.” When employers stop expanding their workforce, you get to job disruption, which is when employers stop hiring new workers because of the higher costs associated with their wages.

It is a larger trend that “goes beyond simple numbers, with more and more people living on government subsidies,” Meer said. And it is usually very “difficult to see in the conventional data.”