The Minimum Wage: Facts vs. Fiction

by James Sherk

On Tuesday night, President Obama repeated his call for raising the minimum wage. Conservatives (including myself) respond that this would hurt the very workers he wants to help. But one of the most frustrating parts of this debate is the disagreement over basic facts, because the evidence does not support many of the president’s contentions.

For example, the president claimed the “federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here.” However, he uses a less accurate measure of inflation to come to this conclusion.

A more accurate measure of inflation — the PCE deflator, which the CBO and the Federal Reserve prefer — shows the 1981 minimum wage would be worth $7.47 an hour in today’s dollars. In other words, the purchasing power of the federal minimum wage has changed little over the past generation. And the president’s proposed hike would raise the minimum wage to a historically unprecedented level. Liberals and conservatives can debate the wisdom of doing this in a weak economy, but both sides should understand that that’s what’s being proposed.

Similarly, President Obama argued, “No one who works full time should ever have to raise a family in poverty.” Who could argue with that goal? But that does not mean raising the minimum wage will accomplish it.

Yes, one study by an academic sympathetic to higher minimum wages finds they reduce poverty. Another study by skeptical academics finds minimum-wage increases raise poverty. But the overwhelming majority of studies find minimum wage increases have little statistically significant effect on poverty rates. Some workers get raises, others do not get hired; overall poverty rates do not improve. Both conservatives and liberals should understand this fact.

Or consider the president’s contention we should raise the minimum wage because many businesses “see higher wages as the smart way to boost productivity and reduce turnover.” Not even Paul Krugman finds that argument persuasive:

The obvious economist’s reply is, if paying higher wages is such a good idea, why aren’t companies doing it voluntarily? But in any case there is a fundamental flaw in the argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage “compared with other companies” — and that is precisely what mandating an increase in the minimum wage for all companies cannot accomplish.