Why Biden and Krugman Are Wrong about the $15 Minimum Wage
President Biden claimed during his Super Bowl interview that “all the economics show” that if the government imposes a $15 minimum wage then “the whole economy rises.” For his part, Nobel laureate Paul Krugman has claimed for years that “[t]here’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.” Is this really possible? Are all of the free market fans on the internet just spouting unscientific nonsense when they argue that a minimum wage hike will hurt unskilled workers?
The quick answer is no; Biden and Krugman are wrong. Although the empirical evidence regarding the minimum wage is not the slam dunk it once was, the studies that find a modest impact on employment couch their results in terms of a modest hike in the minimum wage. But the proposal to raise it from $7.25/hour to $15/hour involves a more than doubling. To my knowledge, not a single peer-reviewed econometric study has looked at the historical evidence and concluded that such a massive increase would have a negligible impact on employment.
In this article, I’ll review the scholarly research on the minimum wage to understand how Krugman can make such a slippery claim. I’ll then demonstrate that the proposed $15 minimum wage hike would be extremely aggressive and make it difficult for millions of young, unskilled workers to get a job in the first place.
The Textbook Treatment of Minimum Wage
In an introductory economics class, they can use supply and demand curves to illustrate a major problem with the minimum wage: By insisting that employers pay a higher wage than the market-clearing level, the government will cause a surplus or “glut” of workers on the market. For example, here’s the diagram from my introductory economics text (published by the Mises Institute and available as a free PDF):
In the diagram above (which comes from lesson 17 in my book), the original market-clearing wage rate for low-skill labor is $5 per hour. At this wage, there are 100,000 low-skill workers who want a job, and employers want to hire 100,000 low-skill workers.
Then the government comes along and sets a minimum wage of $8 per hour. At this higher wage rate, the quantity supplied of labor goes up—more people want to work at $8 an hour than $5 an hour. On the other hand, the quantity of labor demanded drops: when inputs become more expensive, businesses tend to buy fewer units of them.
In the diagram, I supposed that at $8 per hour 120,000 workers wanted a job, but businesses only wanted to hire 80,000. So there is unemployment to the tune of 40,000 workers. Even though they have the same (low) skills as the people with jobs, and even though these 40,000 potential workers would be happy to take a job at the prevailing wage, they just can’t find a match with a willing employer.
Such is the conventional textbook treatment of the economics of a minimum wage. Although it raises hourly earnings for workers who keep their jobs, it makes it harder for low-skill workers to get hired in the first place. If we wonder why the teen unemployment rate is so high—especially for certain historically disadvantaged communities—the minimum wage is one obvious culprit.
Article from Mises Wire