President Obama made his proposal to hike the minimum wage a key theme of his State of the Union address, casting the idea as a sign of his commitment to helping the middle class. He argued that it's wrong for wage earners with two kids to be stuck below the poverty line. In addition to making the moral argument, though, Obama also pressed an economic case for lifting the minimum wage to $9 by 2015 from its current level of $7.25.
“This single step ... could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets. And a whole lot of folks out there would probably need less help from government,” Obama said.
House Speaker John Boehner, an Ohio Republican, was quick to criticize the president's proposal. “When you raise the price of employment, guess what happens? You get less of it,” he said.
Wade into the economic literature, and you're likely to find a less dramatic picture. Despite what politicians say, raising the minimum wage is neither a panacea for the ailing economy nor a big obstacle to a healthy labor market.
In the economic community, a debate has raged for decades over the minimum wage. Some experts contend that higher minimum wages actually hurt poor workers because they lead companies to hire fewer people. Others tout the economic benefits of bigger paychecks for workers.
Congress has approved increases to the federal minimum wage many times since the passage of the 1938 Fair Labor Standards Act, which established the minimum wage. But in "real" terms--how much your salary will buy you--the minimum wage is not at its peak.
(Changes in the federally mandated minimum wage over the last three decades. Source: Labor Department data)
Here's why the economic picture is so muddled. Consider two recent “studies of studies” on the effects of the minimum wage hike. The first, conducted by economists David Neumark and William Wascher in 2007, has already been cited by critics of the president’s proposal to increase the federal minimum wage.
Neumark and Wascher reviewed previous research on the minimum wage and concluded that most studies since the early 1990s had shown that raising the minimum wage meant fewer jobs for low-skilled workers.
But in 2013, John Schmitt, a senior economist at the Center for Economic and Policy Research, reviewed literature—including Neumark and Wascher’s research, making his a study of studies of studies—since 2000 and came to the opposite conclusion. “The weight of that evidence points to little or no employment response to modest increases in the minimum wage,” he wrote. In other words, raising the minimum wage doesn't cost jobs. Nor does it spur job creation.
In fact, a key presidential adviser has examined the issue and argued that very point in a research paper written before he joined the administration. Alan Krueger, head of Obama's Council of Economic Advisers, and his then-Princeton colleague David Card surveyed hundreds of fast-food restaurants in New Jersey and Pennsylvania to see whether a recent increase in New Jersey's minimum wage led to fewer jobs for workers in that state compared with their counterparts in neighboring Pennsylvania. Krueger and Card concluded there was no evidence that higher minimum wages reduced employment in a study that is still cited today.
There's no damning evidence on the other side. The general consensus among economists is that most increases in the minimum wage have very small, if any, effects on employment, explained Brad Hershbein, an economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.
In the absence of a definitive economic answer to the question of raising the minimum wage, some argue it should be done simply because it's the morally right thing to do.
“It’s good to do for fairness. I don’t expect think anyone should expect … any effect one way or another on the rate of growth of the economy,” said Gary Burtless, an economist at the Brookings Institution.