I want to wish all listeners a much better year in 2024 than in the previous year. As the year ends with carnage in Ukraine and Gaza and the very REAL danger that the Hamas-Israel war will expand to a full-scale Israel and US war against Iran (Part of me thinks that’s what Netanyahu wants!) we can indeed hope that the killing subsides and ultimately stops early in 2024.
But I want to focus on the fact that the New Year came in with good news for low wage workers. On January 1, 22 states and 38 cities and counties raised their minimum wage. The increases at the state level ranged from as low as $.20 an hour to as much as $2.00 an hour. The increases at the local level ranged from $.35 to $2.04 an hour.
The result is that at the state level, minimum wages range from over $10.00 an hour to over $16.00 an hour --- and among the localities that have raised their minimum wage to higher levels than in their states is one of over $20.00 an hour.
[For many details state by state and locality by locality see Sebastian M. Hickey, “Twenty-two states will increase their minimum wages on January 1, raising pay for nearly 10 million workers,” Economic Policy Institute, Working Economics Blog, December 21, 2023, available here.]
Meanwhile, the federal minimum wage was last raised in January 2009 to its current value of $7.25. According to the nifty inflation calculator available on line, by the end of 2023, the minimum wage would have had to be over $10 to purchase what the $7.25 minimum could buy in 2009. (In other words the real value of the minimum wage has been eroded close to 30% since it was last raised.)
Thus, it is clearly a wonderful thing that many states and localities have taken it upon themselves to raise their minimum wages well above the pitiful federal one. It is unfortunate the too many members of Congress still cling to the long-discredited economics argument that a rise in the minimum wage actually causes an increase in unemployment for low-skilled workers (especially teen-agers and other workers at places like fast-food restaurants)
I’d like to take this opportunity to once again drive home to listeners that that argument against the minimum wage is totally flawed. Beginning back in 1994, when David Card and Alan Krueger published the first of many studies, the old analysis was defeated by actual factual research.
[The original Card-Krueger paper was published in the American Economic Review “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” available here.]
In 1992, when New Jersey raised its minimum wage and Pennsylvania did not, Card and Krueger realized that right on their doorstep (they worked at Princeton, close to the NJ – Pennsylvania border) was a “natural experiment.” What they did is they surveyed fast food restaurants on the New Jersey side of the border and compared the employment changes there with activity on the Pennsylvania side of the border. The traditional economics prediction would have been that employment in fast food restaurants on the New Jersey side (where the minimum wage had gone up) would fall relative to employment in similar enterprises on the Pennsylvania side. In fact, they found NO difference --- to quote their article, they found:
“…no evidence that the rise in New Jersey's minimum wage reduced employment at fast-food restaurants in the state.”
[Their paper sparked a furious effort to refute their findings --- some of it financed by the restaurant industry. Over the long run, their methodology and conclusions stood the test of time and David Card won the Nobel Prize in Economics in 2021.]
The main reason that New Jersey establishments did not feel the need to reduce employment to compensate for having to pay many of their workers more is that the public was more than willing to pay the (slightly) higher prices that the New Jersey restaurants charged as result of having to give some (in some cases most) of their workers raises.
But why didn’t customers reduce their purchases? Let us remember that the rise in wages means a rise in incomes for low wage workers. Given that these are workers with relatively low incomes, one would expect that virtually 100% of the increase in wages will go towards increased consumption (or paying down debt). Some of that increased consumption by people affected by the minimum wage will certainly find its way into increased spending at fast food restaurants. This impact of rising wages is often ignored by simple economic models.
Too often, economists think of a rise in wages only in terms of its increased cost to businesses. By the way, this applies to all wage increases, not just the increase in the minimum wage. For decades before the advent of Keynesian economics in the 1930s and 40s, the traditional economic view was that if labor unions forced wages up, the result would be increased unemployment and that whenever unemployed did go up, the correct solution would be to cut wages.
This “traditional” point of view was thoroughly destroyed by the Keynesian revolution in economics.
[Anyone who wants to follow it can check out Howard Sherman’s, Paul Sherman’s and my text book Principles of Macroeconomics, Activist vs. Austerity Policies, Chapters 3 and 4.].
The argument against raising wages in general and against raising the minimum wage in specific, ignores the fact that a rise in wages means a rise in incomes and a rise in incomes translates into increased REVENUE for businesses. I have always believed that the spending impact of an increased minimum wage (and therefore increases in wages in general) is quite significant.
Returning to the increases in minimum wages beginning January 1, I would expect that the result of the state and localities’ increases in the minimum wage this year will have no negative impact on employment in the states and localities where these increases occur.
I also think that these increases in the minimum wage will have a positive impact on consumption spending in these areas which will continue to push the economy forward, making the long-predicted recession even more unlikely than has been shown by last year’s economic experiences.
[There is an old joke that the stock market is a great predictor of economic activity, it has predicted FIVE OF THE LAST THREE recessions! In 2023, the market and lots of economists predicted a recession yet the economy chugged along setting records for low unemployment even as the rate of inflation fell. And the employment information released on Jan 4 shows that the economy continues to generate jobs at higher than predicted rates and that unemployment remains at historically low levels.]
So, the good news for low wage workers with which I began this commentary, is also good news for the rest of us. I wish Congress would see fit the raise the federal minimum wage --- the goal should be $15 an hour which isn’t quite a living wage but would go a LONG WAY towards improving the lives of low-income workers. But even a rise to $11 an hour would just make up for the erosion in the purchasing power of the federal minimum wage since 2009.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies.
The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.