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This short thread summarizes my thinking the perennial question about minimum: "how high is OK?"
Tl;dr: we don't yet know, and that's ok.
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Tl;dr: we don't yet know, and that's ok.
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First of all, in the US, the $7.25 federal. minimum wage has been very low by by both historical and comparative standards. At the same time, we have seen quite a few states implement ambitious minimum wage policies (e.g., $13+ in MA, CA). But how high is too high?
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Funny enough, until recently, most of the min wage literature was focused on either testing the sign of the employment effect, or (at best) a minimum wage employment elasticity. These are not very helpful in answering "how high."
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One of the most common ways of measuring the bite of a minimum wage is using the Kaitz index - i.e., the ratio between the minimum and median wages. This is an imperfect measure. But it's quite useful.
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Naturally, then, one may want to know, how does the employment effect vary by the Kaitz index?
As far as I know - and somewhat incredibly - no one seems to have shown this until our 2019 QJE paper, which we show for overall low-wage emp.
https://academic.oup.com/qje/article/134/3/1405/5484905?login=true
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As far as I know - and somewhat incredibly - no one seems to have shown this until our 2019 QJE paper, which we show for overall low-wage emp.
https://academic.oup.com/qje/article/134/3/1405/5484905?login=true
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Basically, we seem to find that up to close to 60 percent of the median, employment effects were quite modest.
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But the evidence base has expanded further!
I was asked by the @hmtreasury to summarize and provide up to date evidence on high minimum wage in 2019.
I looked at more recent evidence at state level to see if we have a turning point yet.
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I was asked by the @hmtreasury to summarize and provide up to date evidence on high minimum wage in 2019.
I looked at more recent evidence at state level to see if we have a turning point yet.
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I found that these more ambitious policies had the intended effect of raising wages, but found no evidence of overall low-wage job loss using our same 2019 QJE methodology.
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This is not the only data point, of course. My report reviews all evidence, some of which suggests more negative employment effects. (While the median is very modest) But a particularly relevant data point comes from looking at how minimum wage raises affect low wage areas.
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Godoy and Reich (2019) look for heterogeneity of employment effect by local area wage levels. This is really useful and addresses core concerns we hear about how minimum wages may affect low-wage areas.
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Godoy and Reich find no evidence that even in low wage areas, where the Kaitz reached as high as 81%, employment was negatively affected, even as wages rose from the policy.
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So where does this leave us? Over 5 years ago, I wrote a piece for the @hamiltonproj where I used the evidence base at that time and said that raising the US minimum wage to 1/2 the median was a safe bet.
Our evidence base has changed since then. As has my recommendations.
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Our evidence base has changed since then. As has my recommendations.
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As my UK report suggests, we can afford to experiment upwards with the minimum wage. The UK is slated to go towards 2/3 median wage. $15/2025 in US is not too far away from that, by the way.
Moving to 2/3 median wage in US overall is not an absurd idea by any means.
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Moving to 2/3 median wage in US overall is not an absurd idea by any means.
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Yes, we need evidence-based policy. But we also need policy-based evidence! Without experimentation on policies, we cannot realistically answer what their effects are.
But a corollary: don't get ideologically attached to a policy, and be willing to move with evidence!
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But a corollary: don't get ideologically attached to a policy, and be willing to move with evidence!
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