07/04/2021 Getting the Minimum Wage Right by Anne O.

Krueger - Project Syndicate

Getting the Minimum Wage Right

Mar 24, 2021 | ANNE O. KRUEGER

WASHINGTON, DC – Proponents of a higher minimum wage are well-intentioned

in their effort to help low-wage workers. But whether a higher minimum wage
would help most workers is debatable. Though it would raise wages for some, it
would leave total compensation for others the same and reduce to zero the wages
of those who lose their jobs as a result. 
US President Joe Biden has proposed phasing in a federal minimum wage of $15
per hour, up from the current $7.25 per hour, and Republicans have objected. The
president’s proposal would more than double the minimum wage over four years,
whereupon it would then be indexed to increases in the cost of living (COL).

But there are foreseeable costs to such interventions. A higher minimum wage
could finish off many small businesses that are already on shaky ground. It could
prompt businesses to cut fringe benefits to offset some of the increase, thus
reducing the purported gains to total worker compensation. And it could undercut
the competitiveness of US industries in world markets.

Those who oppose a minimum-wage increase worry especially about its likely
effects on industries that are already struggling to survive. The hospitality
industry, childcare, and other services that have been hit hard by the pandemic
would struggle to absorb the additional wage costs. Employers in these industries
could respond by passing those costs to consumers by raising prices, but this
might reduce demand for their services. Moreover, when the minimum wage for
unskilled labor increases, the skill premium declines, creating a temptation for
employers to substitute skilled workers for unskilled, or for automation
technologies.

Obviously, the level of the wage floor matters. A minimum wage could be set so
high that it reduces employment substantially, or so low that it has no effect at all.
The higher it is, the greater the risk that more workers who are unable to find jobs
in the formal economy will turn to extralegal activities.

That is what has happened in Puerto Rico, which is subject to the US mainland
minimum wage, and where a large share of the workforce is unskilled. Puerto
Rico’s official labor-force participation rate is 40% – compared to a rate
consistently above 60% on the mainland – reflecting the fact that many of its
residents work informally without paying taxes or receiving legally mandated
employer benefits. Many developing countries have experienced the same

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07/04/2021 Getting the Minimum Wage Right by Anne O. Krueger - Project Syndicate

problem. In India, for example, the labor laws protecting workers are so strict that
only around 15% of workers are employed in the formal economy.
In the United States, the Congressional Budget Office estimates that an increase to
a $15 hourly minimum wage over four years would raise the wages of 27 million
workers but lead to a loss of 1.4 million jobs. One question, then, is whether the
wage gains for the 27 million would more than offset the losses for the 1.4 million
who lose their jobs.

But it is also unclear whether the minimum-wage increase would actually raise
the total compensation of workers receiving higher wages. Following a rise in the
minimum wage, employers could become less generous with health-care benefits,
sick leave allowances, training programs, on-site amenities, and other non-wage
benefits. Indeed, there is some evidence to suggest that companies will offset at
least part of the impact of a wage increase by scaling back such expenditures.

If there is to be a sizeable increase in the minimum wage, the policy could be less
costly if it included some other provisions, such as adjustments for COL
differentials in different parts of the country and measures for young workers
and apprenticeships.

On the COL index, Hawaii leads US states with a score of 192.9, followed by
California at 151.7 and New York at 139.1 . At the other end of the spectrum,
Mississippi scores 86.1, and nine other states are below 90. Given these disparities,
it makes no sense to have the same minimum wage in Hawaii as in Mississippi.
Not only would a single rate fail to provide the same “living wage” across every
state; it would most likely reduce employment in low-COL states.
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There is no reason to insist on a blanket policy. COL data from the Department of
Labor could readily be used to reflect differences in living costs in the minimum
wage. After all, state-level minimum wage laws already differ widely. Whereas
Georgia’s hourly minimum wage is $5.15, New York’s is $12.50. And several states,
such as Minnesota, have a higher minimum wage for large employers than for
small employers.

An analogous distinction should be considered for teenage and apprenticeship

employment. Employers may be discouraged from providing training if they must
pay the minimum wage to teenage summer workers, young people who are in
school or working part time, and apprentices.

A compromised minimum-wage rate well above $7.25, but well below $15,
combined with these exemptions and adjustments for COL differences among
states could reduce the potential negative effects of a minimum-wage increase. It
might even induce employers to provide more training for the unskilled, thus
improving the functioning of the labor market overall.

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07/04/2021 Getting the Minimum Wage Right by Anne O. Krueger - Project Syndicate

ANNE O. KRUEGER
Anne O. Krueger, a former World Bank chief economist and former first deputy
managing director of the International Monetary Fund, is Senior Research
Professor of International Economics at the Johns Hopkins University School of
Advanced International Studies and Senior Fellow at the Center for International
Development at Stanford University.

https://prosyn.org/8CT8cxC

© Project Syndicate - 2021

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