Increasing the Minimum Wage Can Actually Create Jobs—If It’s Enforced

Until 1992, I just took this as a given. That was when the famous paper “Minimum Wages and Employment” by David Card and Alan Krueger came out. It compared the unemployment rates of fast food workers in New Jersey and Pennsylvania before and after New Jersey raised its minimum wage. Card and Krueger found nothing that worked. None. Zip. At first, I was just as shocked as the economists. The research wasn’t done well. The sample wasn’t big enough. The results were skewed by the liberal bias of the researchers. Why even bother testing something that is clear? But then more studies came out, and some of them showed that there was no effect and some showed that there was a small positive effect.

Also, the “efficiency wage hypothesis,” which was developed in part by our new Federal Reserve chair, Janet Yellen, started to make sense. There isn’t just one “market” wage for unskilled work. Instead, there is a range of “market” wages. The more money a place pays its workers compared to what other places pay, the harder they work and more loyal they are, and the less likely they are to quit. So, up to a certain point, the business saves money on costs like supervision and training, but loses money on higher wages. So, the fact that Costco is still profitable even though it pays much higher wages than low-wage superstores like Wal-Mart is not surprising. The efficiency wage hypothesis supports the idea that putting the minimum wage near the top of the wage range will help workers without hurting employers. (It goes without saying that conservatives don’t agree with this argument.)

But there’s still something missing from the story. When I first learned about supply and demand in my Econ 101 textbook, it was based on the idea that the market was perfectly competitive, which is what all first-year textbooks do. There may be a chapter on Monopoly at the end, but the teacher doesn’t usually talk about it. That’s wrong, because most businesses have some monopoly power, even your local grocery store, just because it’s closer to you than competitors. Some businesses, like Wal-Mart and Amazon, have a lot of power because they have a monopoly.

What do we learn if we get to the Monopoly chapter? We learn that monopolists, or sole sellers, cut back on production to make prices go up. Monopsonists, who are the only buyers, don’t buy enough inputs to put pressure on their suppliers. Inputs like labour. Hmm. Where has this story been told before? Ah, company towns, like the coal towns in Appalachia. [pullquote] Big low-wage employers like Wal-Mart may have a good reason to pay as little as they can and keep hiring people so that the market wage range goes down. [/pullquote]

So, it makes sense that big low-wage employers like Wal-Mart might try to pay as little as possible, keeping jobs open so they can push down the market wage range. By paying low wages, they also get another benefit: the high turnover of employees makes it harder for workers to join a union. Do big companies work together on this plan? The CEOs of Apple, Intel, Google, Adobe, Intuit, and Pixar have been caught by the U.S. Justice Department plotting to keep programmers’ wages low. Wal-Mart and other big low-wage employers don’t need a secret plan; they just need to know what each other is doing. [pullquote] Big low-wage employers put pressure on their workers by staying short-staffed on purpose and relying on mandatory overtime when it’s needed. [/pullquote]

But if the big low-wage employers drive down the whole wage range, then surely the answer is to set the minimum wage even higher than the top of that range, higher than what the efficiency wage hypothesis suggests. Maybe even a lot higher. Also, a wage increase like this should help create jobs by going against the low-wage strategy. What would happen? Big low-wage employers put pressure on their workers by staying short-staffed on purpose and relying on mandatory overtime when it’s needed. A forced wage increase creates jobs because it takes away the benefit of having too few workers. What the…? Econ 101 has been turned on its head!

So what’s the bug in the works? Enforcement. Employers often don’t pay the federal and state minimum wages. They pay people for fewer hours than they work, or they take money from their tips. My son works in a restaurant. When I think about how his bosses have taken advantage of him, like sending him to make deliveries and pick up supplies in his own car without paying for it, I clench my teeth. [pullquote] Without enforcement, a big raise in the minimum wage isn’t much of a win. [/pullquote]

Enforcement. Without enforcement, a big raise in the minimum wage isn’t much of a win. When there are unions, grievance procedures are how they get things done. We won’t have effective unions unless we also work to enforce anti-trust laws and change tax and regulatory policies that favour the big companies. But at least we can get rid of the old schoolbook argument that raising the minimum wage makes people lose their jobs.

Polly Cleveland is a part-time professor of environmental economics at the Columbia University School of International and Public Affairs.

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