Updating our minimum wage is a smart policy for Minnesota’s economy. The state’s minimum wage is $7.25 per hour, or $14,500 for a year of full-time work. A minimum-wage increase would help thousands of our state’s lowest-paid workers afford basic expenses like food, gasoline and utilities. Nineteen states across the country have already raised their minimum wage above $7.25 per hour, including states with much lower costs of living, such as Arizona, Missouri, Montana and Nevada.
If we update our minimum wage to $9.80 per hour, roughly 464,000 Minnesotans would see their pay rise, according to a study by the nonpartisan Economic Policy Institute. This would deliver much-needed assistance to families relying on low-wage jobs to make ends meet. The families that would benefit include more than one in five Minnesota kids.
Some object to any increase in the minimum wage, arguing that it will destroy jobs for people who most need them. Most of these arguments are based on classical models of the labor market that ignore recent decades’ advances in labor economics. Though classical models clearly predict that a minimum-wage hike will destroy low-wage jobs, modern models show why it isn’t necessarily so. Three economists who developed these modern models won the Nobel Prize in 2010.
What do real-world data say? In 1992, New Jersey raised its state minimum wage. Neighboring Pennsylvania did not. Two leading economists measured wages and employment at fast-food restaurants along the states’ border before and after New Jersey’s minimum-wage hike. Wages rose faster in New Jersey than in Pennsylvania, but employment did not fall. Classical theory got it wrong.
This was no fluke. A recent study generalized this approach, comparing employment levels in all pairs of cross-state border counties that had differing minimum-wage rates at any point over the last 20 years — more than 250 pairs — including counties in Minnesota and all our neighboring states. Again, higher minimum wages did not reduce employment or encourage business to relocate to areas with lower minimum wages.
According to classical theory, anyone who wants a job can immediately find a job and the job will pay an amount equal to the worker’s contribution to the firm’s bottom line. Modern theories recognize that labor markets don’t really work this way.
Workers cannot immediately and costlessly find a new job. This job-search problem can create a gap between what each worker contributes to the firm’s bottom line and the worker’s pay. When unemployment is high, the issue becomes more severe and employers can take advantage of labor-market inefficiencies to pay workers less than they add to the bottom line. Raising the minimum wage can protect the paychecks of vulnerable workers.
Fully two-thirds of all low-wage workers are employed by large companies with more than 100 employees, not by small mom-and-pop shops. The largest employers of low-wage workers — the national retail and fast-food chains like Wal-Mart and McDonald’s — are earning strong profits today. There are often-overlooked savings that result from paying higher wages. When workers earn higher pay, they are spared from having to balance multiple jobs in order to make ends meet, and employers that pay higher wages can benefit from reduced employee turnover and higher worker productivity. Major companies such as Costco are able to offer low-price products while paying their workers higher wages precisely because of these kinds of savings.
Lobbyists may oppose any effort to raise the minimum wage because their clients prefer to boost profits by paying very low wages and pushing their workers onto public assistance to pay their bills. However, the best economic research shows that businesses can afford to pay a higher minimum wage that would help low-paid workers afford basic expenses. A moderate phased-in increase to $9.80 would be in line with policies in other states, which did not experience any detectable contraction of jobs.
Minnesota’s minimum wage has lagged behind the cost of living for the past several decades. If it had kept pace with inflation since the late 1960s, it would be more than $10.55 today. Ten states already tie their minimum wages to changes in the state’s cost of living. Indexing the minimum wage in this way ensures that its purchasing power will not gradually erode as basic expenses rise and ensures that it will stay in line if prices fall. States that index do not experience job losses compared with states that do not index.
Don’t take it from us. The majority of Americans searching for work support a policy of minimum-wage indexing, and they’re the people minimum-wage opponents claim to be looking out for.
An updated minimum wage will offer some relief to the state’s lowest-paid workers and help protect the promise of upward economic mobility for hardworking Minnesotans.
Aaron Sojourner is an economist at the University of Minnesota’s Carlson School of Management. Michael Reich is an economics professor at the University of California, Berkeley, where he also directs the Institute for Research on Labor and Employment.