Recently, two University of Michigan Economists, Jeffrey Smith and Chris House, have voiced their opposition to a petition to raise the minimum wage. This petition was released on January 14, 2014, and was signed by over 600 economists, including six University of Michigan professors. The petition called for a hike in the minimum wage from $7.25 an hour to $10.10 an hour by 2016. Since then, several Michigan politicians met with Ann Arbor business owners at Zingerman’s on Thursday in support of a higher minimum wage. So what gives? Is a higher minimum wage actually a good thing?
In the petition, there are two main arguments for a higher minimum wage: higher wages and therefore higher incomes for low wage workers, and a small stimulative effect to the economy due to more disposable income from low income workers without much effect on employment. A higher minimum wage would lead to higher incomes for workers currently below the proposed minimum wage, $10.10, since employers would be obligated to pay higher wages and for workers just above the minimum wage as employers would have to compete to keep higher skilled workers. This would then lead to more money in the pockets of workers that they would then spend, helping to improve the economy.
However, anyone who has taken an introductory economics course will realize that this violates the law of supply and demand. As the price of a good or service goes up, demand for the good tends to fall. Thus, a higher minimum wage would lead to lower employment or fewer hours worked by these low wages workers. Given this, why do so many economists support this petition?
The petition cites “important developments in the academic literature on the effect of increases in the minimum wage on employment,” and they claim that “the weight of evidence now [shows] that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers.”
However, Professor Smith argues that these results, while interesting, focus too much on the short-run effects or lack thereof of a higher minimum wage. Thus, while the short-run effects, namely lower employment or fewer hours, may be small, the long-run impact of a higher minimum wage on employment are quite large as employers invest more in labor saving technology to reduce labor costs.
In addition, both Professor Smith and Professor House argue that a minimum wage hike is poorly targeted. Some programs, such as the Earned Income Tax Credit, provide a tax credit to lower income households. However, a higher minimum wage raises the wages of not just low-income households, but also other workers, such as college students or second earners who may not come from low-income households. Finally, as Professor House points out, if businesses raise prices in response to a higher minimum wage, it may actually hurt low-income households who are required to pay more, as a result.
Thus, even if a higher minimum wage might lead to higher incomes for low-wage workers in the short run with minimal costs in the long run, it is likely to reduce the employment of low-wage workers. There is “no free lunch,” which implies that higher wages for workers have to come from somewhere, either profits of the business or higher costs for households (who may be low-income). If the minimum wage is going to be a program to help lower income households, why not target them directly?