The Minimum Wage and the Laws of Economics

By JARED BERNSTEIN

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.
Todays Economist

Perspectives from expert contributors. I cant open the paper these days without stumbling onto something about the minimum wage, which I take to be a good thing as its a simple, popular way to help address the problem of very low-wage work in America. Its not a complete solution; its not the only solution it is, in fact, a relatively small-bore policy that sets an important labor standard: the government will compensate for the severe lack of bargaining clout among our lowest-wage workers by setting a floor below which we wont allow their wages to fall. Its also that case that we need to look carefully these days at any policies that will help offset income inequality and wage stagnation, especially ones with low budgetary costs, or in this case, virtually none. Thats one reason that I expect President Obama to amplify these points in an economics speech on Wednesday in Washington. I will not rehearse the age-old arguments about unintended consequences, primarily job loss among affected workers. The economist Arindrajit Dube, who himself has made important contributions to our understanding of this issue, does so admirably in a recent comprehensive review. The fact is that along with the many changes in the national minimum over time, we now have dozens of states and localities with minimum wages higher than the federal minimum. If there were a problem with widespread job losses among intended beneficiaries, wed probably know. Instead, I want to focus on a broader aspect of the itch that the minimum-wage increase scratches: the problem of job quality. Often, in our national debate on inequality and real income stagnation, the locus of the problem is placed on the workers: theyre not skilled enough to meet employers demands, and their low wages reflect the limited value they add to output. Classic microeconomics actually embeds that very assumption: workers are paid their marginal product, the value of their individual contribution to the goods or services produced.

If you believe that, then youve no one but yourself to blame for your skinny paycheck. But thankfully, few believe it. Thats not to say that theres no role for value added in compensation. Of course there is. But it is one of many factors. One way to see this is to recognize that low-wage workers have become older and have achieved higher levels of education over time. The figure below shows the share of low-wage workers in 1979 and 2011. Fewer are teenagers or young adults, more are non-elderly adults, and more have at least some college education.