Keeping Wages to a Minimum

“Minimum Wages” by William Wascher and UC Irvine economics professor David Neumark, released Nov. 7, offers a critical analysis of mandatory minimum wage. The book argues that the minimum wage law is ineffective and even harmful in its goals, a claim supplemented by 20 years of research from the pair of authors.
Their collaboration began when Neumark worked from 1987 to 1989 at the Federal Reserve, where Wascher is now the associate director of the Division of Research and Statistics. Since then Neumark has published dozens of articles on the topic, many with Wascher. Although Neumark said that the reason for creating the book was partly to “take stock” of years of research by consolidating it in one place, he also expressed dissatisfaction with the narrow focus often paid to certain implications of minimum wage.
“If you look at academic journals, as well as policy and debate, it’s all about the employment effects of minimum wages,” Neumark said. “We were very interested in getting people to look at outcomes beyond just that.”
Neumark said that research on the issue was once difficult, when few states had their own minimum wage.
“There was this old research on minimum wage that wasn’t very convincing, mainly because until recently all you had was increase in federal minimum wages,” Neumark said. “It’s very hard empirically to estimate the effect of a policy that changes at the national level, so that research was viewed as relatively indecisive.”
However, the period between 1981 and 1990, during which the federal minimum remained frozen at $3.25 an hour, resulted in several states passing laws to increase their own minimum.
“What that gave us from a research prospective were more interesting sources of variation,” Neumark said. “Now we could look at two states experiencing similar economic shocks of any other kind, except one raised the minimum wage and one didn’t.”
Today, the current federal minimum wage law, established 70 years ago, has been surpassed by the minimum of 23 states. California, with a minimum wage of $8.00, has one of the highest in the country.
Neumark explained why such a policy is often ineffective in targeting those individuals for whom it is intended: Low-income workers are often associated exclusively with low-income families.
“One of the points to get across to policymakers that is very valuable is that being a low-wage worker and being in a low-income family are two very different things,” Neumark said. “In general, young people earn low wages because they don’t have any skills yet … something like a third of minimum wage workers are in families in the top half of the income distribution. Who are they? They are young teenagers or college kids from relatively high-income families.”
According to Neumark, workers from low-income families may actually be harmed by minimum wage. Research indicates that it is workers from low-income families who typically are affected most by employment reductions.
Neumark believes this is because employers, who are forced to make employment cuts due to a minimum wage increase, prefer to keep younger workers, many of whom do not belong to low-income families. Other minimum wage workers, he suggests, may have a history of issues or circumstances that make them less attractive to employers.
One alternative to minimum wage that Neumark proposes is the Earned Income Tax Credit (EITC), which provides a subsidy to low-income families who fulfill certain criteria.
“The EITC has two great virtues. First, it encourages people to work. Because it raises the potential wage of people who aren’t working … it encourages people to enter the labor market. Second, it solves the other problem of [the distinction between] low wage workers versus low-income families. Because it’s based on income and distributed by the [Internal Revenue Service], we can target exactly who we want,” Neumark said.
Although Neumark’s opposition to minimum wage is not uncommon among labor economists, 73 percent of whom believe that minimum wage results in employment loss, according to a 2007 University of New Hampshire survey, he has both critics and supporters.
UC Berkeley economics professor David Card, whom Neumark calls his “main opponent” on the issue, conducted a 1992 study that showed no decrease in employment in the New Jersey fast food industry after a statewide minimum wage increase.
Here in Irvine, though, Neumark has gotten support from his department.
“I think his analysis is sound. He’s done a very good job of it,” said UCI economics department chair David Brownstone. “He’s definitely one the leading experts, if not the leading expert on the topic.”