Why higher American wages would be a blessing

For years, MB has campaigned for higher wages on the basis that it is what capitalism needs to survive. This position is based on sound economics, that is higher wages drive productivity gains, the longer-term input of rising living standards. And the understanding that unfettered capital chasing ever lower-wage jurisdictions is a race to the inequality bottom culminating in rising western populism.

One of the most refreshing features of the swing to the American left embodied in the Biden administration is its plan to lift chronically low wages that haven’t grown at all in thirty years. This is given even greater urgency by the fallout from COVID-19, via BofA:

The pace of job creation in January was subdued: 49k jobs added with net negative revisions of 159k. But, in better news, the U-rate fell to 6.3%.

  • The labor market recovery has been highly uneven when measured by income, gender and region.
  • This inequity is a critical driver for the dovish Fed and a force behind the Biden Administration’s call for stimulus.

Today Goldman looks at the economic implications of the drive to lift American wages:

The Benefits of a Higher Minimum Wage for Low-Income Workers

The main benefit of an increase in the minimum wage is that it would raise income for low-wage workers. We estimate that about 30% of workers would benefit from the direct or spillover effects of a $15 minimum, more than half of them adults with family incomes below $50,000…

Researchers have found that previous state-level minimum wage hikes substantially reduced poverty and raised the incomes of low-wage workers. In a review of the literature, economist Arindrajit Dube finds that 72 of 78 key estimates from previous studies found that higher minimum wages decrease poverty. For example, using administrative data from the Social Security administration, Census researchers have found that minimum wage hikes increased earnings for low-wage workers, raised family incomes, and reduced poverty. Intriguingly, they also found that the wage gains for affected workers tended to grow over time in the years following minimum wage hikes.

Other policy tools can also raise the earnings of low-wage workers, in particular the Earned Income Tax Credit (EITC), a refundable tax credit offered to workers with verylow wages. As several economists have noted, the EITC and minimum wage can complement each other. The EITC in isolation should raise workers’ willingness to work at low wages because their pay is supplemented by the tax credit, allowing employers to capture some of the benefit of the policy. Combining the EITC with a higher minimum wage shifts more of the benefit to workers, as intended.

The Employment Costs of a Higher Minimum Wage

The main potential risk of a minimum wage hike is reduced employment of low-wage workers.

Many academic studies have examined the employment effects of minimum wage increases. Most U.S. studies compare the employment of low-wage workers in states that raised the minimum wage to employment in bordering counties or similar states that did not raise the minimum wage, averaging the impact across many individual state minimum wage increases. Other studies focus on a single minimum wage hike and compare employment at firms with higher wages to employment at firms that paid lower wages before the increase. Studies usually focus on specific groups of workers who are most likely to be affected by minimum wage hikes, such as low-wage workers demographic groups such as restaurant workers or teenagers. One new study uses machine learning techniques to identify workers who likely earn the minimum wage based on their demographic characteristics.

In a recent analysis, Dube reviewed the results of 36 studies using US data and found that on average they find only modestly negative effects of minimum wage hikes on the employment of low-wage workers. His summary is shown in Exhibit 4, which categorizes studies into those that analyze particular demographic groups (left) and those that analyze all low-wage workers (right). Dube finds that the median estimated elasticity of employment to a worker’s own wage was -0.17 in the studies of demographic groups. This means that for every 1% increase in a group’s average wage caused by a minimum wage hike, employment of the group studied fell by 0.17%. He finds an even smaller estimated elasticity of -0.04 on average in studies that focus on all low-wage workers. Applying this elasticity to a $15 federal minimum wage, we estimate that in 2026 employment would be 0.05% lower than in a scenario in which the federal minimum remains unchanged but already-planned state minimum wage increases take place.

However, few studies examine the employment effects of minimum wage hikes as substantial as a $15 federal minimum would be for the majority of U.S. states, simply because few hikes of this size have occurred in the U.S. or elsewhere. While most existing research has examined minimum wage policies that resulted in minimum-to-median wage ratios of less than 0.5910, the proposed $15 federal minimum wage would produce a minimum-to-median wage ratio in 2026 that is above 0.59 in 38 states and above 0.65 in 28 states…

That accords with my view. The Biden Administration should waste no time in getting this policy underway. Along with creating cheaper new paths to higher education and access to healthcare, it is the best long-term antidote to Trumpism.

David Llewellyn-Smith
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  1. Yet the Harris-Biden administration also plans to enact a raft of measures that will flood the United States labour market with large numbers of additional ‘undocumented’ workers and visa-holders. What does mass immigration do to wage growth again?