THE BLOG
12/02/2013 07:08 pm ET Updated Feb 01, 2014

Minimum Wages, Bargaining Power, Poverty, and Work

Arin Dube has a great piece in the New York TImes on the minimum wage, covering all the bases in that aged debate.

Key points:

-- As the total workforce has become older and better educated, so has the low-wage workforce; the idea that the minimum wage provides a bit of extra spending money for middle-class teenagers is wrong. This insight helps explain the grownups you see featured in recent retail and fast-food strikes calling for a higher minimum.

...if most minimum wage workers were middle-class teenagers, many of us might shrug off concerns about their wages, since they are taken care of in other ways. But in reality, the low-wage work force has become older and more educated over time. In 1979, among low-wage workers earning no more than $10 an hour (adjusted for inflation), 26 percent were teenagers between 16 and 19, and 25 percent had at least some college experience. By 2011, the teenage composition had fallen to 12 percent, while over 43 percent of low-wage workers had spent at least some time in college. Even among those earning no more than the federal minimum wage of $7.25 in 2011, less than a quarter were teenagers.

-- The main argument against moderate increases in the minimum wage is one of unintended consequences: workers who get the raise will be priced out of the labor market. Dube reports careful, innovative research that shows that claim to range from false to way overblown. Summarizing his own recent work with various colleagues, Dube reports findings that use:

...nearly two decades' worth of data and compare all bordering areas in the United States to show that while higher minimum wages raise earnings of low-wage workers, they do not have a detectable impact on employment. Our estimates -- published in 2010 in the Review of Economics and Statistics -- suggest that a hypothetical 10 percent increase in the minimum wage affects employment in the restaurant or retail industries, by much less than 1 percent; the change is in fact statistically indistinguishable from zero.

There are careful studies that find larger negative impacts, but they are small in that a) they're close to zero, and b) as such, they confirm that even if there is some job loss or reduced hours as a result of the increase, the benefits to affected workers far outweigh the costs.

Look, at the end of the day, what policy makers really need to be looking for are ideas that most efficiently reduce wage and income inequality. That's a main reason why I've been so stuck on full employment, as it perfectly meets that criterion. It's highly inefficient to stay stuck in this mode of underutilized labor resources (i.e., high unemployment) and as we show in Figure 2.7 in our new book on full employment, tight labor markets are highly equalizing. They provide low-wage workers with some of the bargaining power they severely and increasingly lack.

Same with the minimum wage. In fact, its introduction in the Fair Labor Standards Act of 1938 -- 75 years old this year -- was predicated on this premise. Left unattended, the vast imbalance in bargaining power between wage setters and the lowest-wage workers would drive their wages down to privation levels, and thus Congress sets a wage floor. It complements that wage floor with other policies, like the Earned Income Credit, to help raise the paychecks of low-income workers to level wherein they can get closer to meeting their families basic needs.

Of course, many policy makers do not in good faith on the issue, today's crop especially (during the Reagan years, the real value of the minimum fell by 30 percent). That's one reason why, as Dube documents, there's so much action on minimum wages at the sub-national level.

In my view, there's nothing wrong, and a lot right, with the idea that work for able-bodied adults is an important pathway out of poverty. But the only, and I mean ONLY, way that works is if ample living wage jobs are available to all comers. If labor demand in the low-wage sector outpaces, or at least tightly matches, labor supply. If the minimum wage is set at a supportive level and other work supports, like the EITC and affordable health care, are solidly in place.

Otherwise, "work as a pathway out of poverty" is nothing more than a cruel construct, mindlessly repeated by ideologues with little connection to the real world.

This post originally appeared at Jared Bernstein's On The Economy blog.