Other Views: Economics support raising minimum wage

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William L. Holahan & Charles O. Kroncke
Monday, September 1, 2014

The expanding inequality of incomes in the U.S. has prompted the push to increase the federal minimum wage rate from its current level of $7.25 per hour, set in July 2009. This fall, voters in Wisconsin’s First Congressional District will have a choice between two candidates who differ sharply on this issue. Incumbent Congressman Paul Ryan opposes any increase, while his opponent, Rob Zerban, favors an inflation adjuster to $10.10 per hour. 

In his new book, “The Way Forward,” Ryan warns of “the politics of emotion.” The issue of the minimum wage certainly is an emotional one for many, such as for those who assert that “fairness and decency” demand that people who work 2,000 hours annually should earn above the federal poverty level. Ryan observes that basing public policy on sentiment such as this may backfire because some employers may respond to the higher minimum wage by replacing workers with robots or foreign labor.

 Economists offer measurement rather than emotion. Past increases in the minimum wage have produced plenty of data to measure the responses of employers: “How many workers kept their jobs at the new higher wage for each job that was lost at this new rate of pay?” The results of such measurement may help voters evaluate the stark policy difference between the candidates.

The Congressional Budget Office recently reported that the consensus of a large number of these studies found that for every job lost by the past increases in the federal minimum wage, more than 30 people earned the higher minimum wage. The ratio of 30 to 1 means that raising the minimum wage produced 30 winners (those with jobs at the higher wage) for each of the job losers (those without a job who would have had one without the increase in the minimum wage).

Why? Workers produce a net gain for their employer—a positive difference between the value of their productivity and the wages they earn. Since 1980, labor productivity has risen faster than inflation, while the minimum wage has risen by somewhat less than the rate of inflation. A large gap has grown between the value of worker productivity and minimum wages.

If employers calculate that an increase in the minimum wage narrows this gap, but does not eliminate it, there is a remaining net gain that can only be captured by retaining their workers. Conversely, if the employer calculates that the value of worker productivity is less than this new wage, the result will be job loss. 

William L. Holahan is emeritus professor of economics at the UW-Milwaukee. Charles O. Kroncke is retired dean of the College of Business at UWM. They are co-authors of “Economics for Voters.”

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