Good morning Hank, it’s Tuesday! So you’ve started a lot of businesses: Crash Course, Sci-Show, DFTBA Records, VidCon, the ceaseless juggernaut that is 2D glasses. And Hank, your companies employ dozens of people, none of whom work for the federally mandated wage of $7.25 per hour.
But Hank, let’s imagine that your next project is a fast food restaurant, Corn Dogs and Sodium. What impact would raising the federal minimum wage have on you and your employees?
At first glance, it seems like a no-brainer: any minimum wage is terrible, both for Corn Dogs and Sodium, and for its employees.
The econ-101 argument goes like this: the free market is going to set wages where they need to be. Like, if you want to pay $5/hour for Corn Dogs and Sodium employees, but no one takes the job for $5/hour, you’re gonna have to pay more. You’ll increase your wages until you can attract the kind of employees you need to, you know, batter and fry and serve encased castoff pig meat.
And we know that economies tend to grow less when governments set and control prices, so higher minimum wages restrict economic growth.
Plus, unemployment will go up because if the minimum wage is $10/hour, Corn Dogs and Sodium can only afford to hire one person. But if there was an unrestricted wage market, then they could attract two people who would be willing to work for $5/hour each!
So in the end, setting a minimum wage is an attempt to alleviate poverty that actually increases it.
However, Hank, surprisingly enough, it turns out that actual labor markets are a lot more complex than the models of labor markets created by college freshmen.
This brings us to a famous study by two economists: David Card and Alan Krueger. So, in 1992 the state of New Jersey raised its minimum wage 18.8%. Pennsylvania, right next door, did not raise its minimum wage. Card and Krueger had the bright idea to go to the border of New Jersey and Pennsylvania and do employment surveys on either side of it.
And what they found was that restaurant employment in New Jersey actually increased when the minimum wage went up.
Since then, a bunch of other studies have confirmed Card and Krueger’s findings. While some have found that there actually are negative effects to employment when you raise the minimum wage, although it’s surprisingly and consistently mild.
Why? Well, a bunch of reasons.
For one, the minimum wage is probably near where the market would set it. But also, low wage workers tend to spend most of their pay raises, which leads to increased economic activity, which in turn leads to more jobs. And higher wages also mean less turnover, which leads to lower cost of training and hiring and firing.
On the down side, higher wages are also associated with higher prices for goods and services that rely on low-wage labor, which means that your corn dogs, Hank, would probably be a little more expensive.
But Hank, the larger question is if raising the minimum wage actually reduces poverty. And on that front, there is growing consensus that, at least in the medium run, it does. A number of big studies have shown that raising the minimum wage 10% reduces the number of people in poverty by about 2.5%. Even many opponents of the minimum wage acknowledge this.
But it’s important to note that that won’t always work! At some point, raising the minimum wage will lead to inflation and slower job creation. It’s just not clear where that point is.
But it’s just as disingenuous to call the minimum wage a job-killer as it is to say that the minimum wage is going to fix economic inequality.
In short, Hank, in economics, there’s no such thing as a free lunch, but when it comes to reducing poverty without affecting employment, higher minimum wages seem at least to be the cheapest lunch available.
But ultimately, Hank, now that I’m, I guess, an employer, I’m more persuaded by the personal argument. We found that paying a living wage, which we would do even if we opened Corn Dogs and Sodium, leads to happier, more productive employees. Now I know that’s hard to quantify, but it’s also what’s allowed VidCon and DFTBA Records to retain employees for years and years, and grow sustainably.
Now Hank, obviously I am not an economist–although I did win a bronze medal in economics at the Alabama State Academic Decathlon Tournament in 1993. But our strategy has worked out pretty well for us so far, and it’s also working for much larger companies like Costco!
Hank, the United States is a rich country, and I think there’s a growing body of evidence that the US doesn’t benefit from having poor workers. Of course, raising the minimum wage isn’t going to fix that problem, but I hope at least we can begin to have a nuanced conversation about the problem.
Hank, I’ll see you on Friday.