In Praise of a Higher Minimum Wage

By Richard Florida

Raising the minimum wage helps low-paid workers without damaging the broader economy, the authors of two new research papers find.

The United States now has its highest minimum wage ever (even when adjusting for inflation), but only if you take into account the new minimum-wage laws that states and cities have recently adopted. As The New York Times reported earlier this week, the effective national minimum wage has risen to $11.80 an hour.

That’s substantially higher than the federally mandated minimum of $7.25 per hour, which has remained unchanged for a decade.

Conservative economists and pundits have long argued that higher minimum wages cause firms to reduce employment, especially of low-wage workers, and thus they inflict damage on the U.S. economy. But two new papers provide powerful evidence that higher minimum wages in fact boost the conditions of workers—especially the least skilled and lowest paid among them—without doing broad economic harm.

The first paper is forthcoming in the prestigious Quarterly Journal of Economics and is currently available as a NBER working paper. (There is also a shorter, more reader-friendly research brief available.) It tracks the economic effects of more than 100 minimum-wage hikes across the country between 1979 and 2016.

Economist Arindrajit Dube of the University of Massachusetts at Amherst, who is perhaps the leading expert on the economic impact of the minimum wage, and his co-authors Doruk Cengiz (also at UMass), Attila Lindner of University College London, and Ben Zipperer of the Economic Policy Institute conducted the study.

They used detailed data and advanced statistical methods to parse the effects of minimum-wage increases on low-skilled workers—including those making at or around the minimum wage—as well as on high-skilled workers and the economy as a whole.

The study finds that minimum-wage increases occurring over more than three-and-a-half decades resulted in higher wages for low-skilled workers, with no reduction in low-wage employment five years out. This was true overall, and separately for younger workers, less educated workers, and minorities. Low-wage workers saw a wage gain of 7 percent after an increase in the minimum wage.

Furthermore, the authors find that higher minimum wages have positive effects (what economists call “spillovers”) for a wide range of lower-skilled workers, including those who make up to $5 an hour more than the new minimum. A higher minimum wage boosts these workers’ wages as well, and without causing any additional unemployment or damage to the economy.

However, the spillover benefits mainly accrue to incumbent workers (those who had their jobs before the minimum-wage increases were put in place) and not to new workers.

Dube and his co-authors caution that these findings hold for minimum-wage increases up to about 60 percent of the prevailing local median wage. After that point, increases may be economically counterproductive, although this remains an open research question.

Richard L. Florida is an American urban studies theorist focusing on social and economic theory. He is a professor and head of the Martin Prosperity Institute at the Rotman School of Management at the University of Toronto.