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How to make a (modest) minimum-wage hike work

A caravan of fast food workers circle a

A caravan of fast food workers circle a McDonald's restaurant as they demonstrate for higher wages on Jan. 15, 2021, in Fort Lauderdale, Fla. Workers in 15 cities demonstrated to demand $15/hr from corporations like McDonald's and to challenge President-elect Joe Biden's administration to raise the Federal Minimum Wage to $15/hr in his First 100 Days. Credit: AP/Wilfredo Lee

Don't just ask whether it would be smart to raise the U.S. minimum wage. Ask when and how.

There are better and worse times to raise a wage floor, and there are better and worse policies to enact along with an increase. Thinking about both would help Congress decide whether it can raise the wage without stifling job growth and economic vitality.

One selling point of minimum wage increases is that they might boost the productivity of the workforce. This might happen because higher labor costs would make it more advantageous for some firms to invest in labor-saving technology. For example, automated checkout machines. It might also happen because some firms might hire more educated or skilled workers following a hike in the wage floor — they might no longer be willing to hire high-school dropouts, and could attempt to recruit high-school graduates instead.

Higher productivity is good for the economy writ large. But a boost in output per worker could be accompanied by hardship for workers with fewer skills or less experience if they are priced out of the labor market by a higher wage floor.

If a higher minimum wage were paired with a robust push to increase the skills of low-wage workers, employment reductions would be less severe. The wage floor would increase, but the number of workers who could command that higher wage in the market would also increase. Employment wouldn't fall as far, and the benefits of a higher minimum wage could be enjoyed by more workers.

Traditional, government-run job training programs have had disappointing results. But some newer training models are showing promise. Work-based learning programs, like apprenticeships, combine classroom learning and credentialing with on-the-job training. Employers post apprenticeship vacancies, which means that market demand plays a large role in making sure that the skills apprentices learn are actually valuable.

In addition, some sector-focused training programs have shown the potential to generate persistent earnings gains for workers, particularly when they focus on skills that are transferable and certifiable.

Large minimum wage increases might raise the wages of some workers while reducing the number of hours they can work each week. If hours fall more than wages rise, then paychecks will shrink. A team of economists found that this may have happened when Seattle increased its minimum wage to $13 per hour in 2016, on its way to $15.

In addition, higher minimum wages could lead businesses that employ low-wage workers to raise their prices. Often, some of the employees of these businesses are also among their customers. So the minimum wage can put more money in a worker's pocket one day and take some of it back at the cash register the next.

One way to support the incomes of workers who may not benefit fully from minimum wage increases would be to couple them with more generous earnings subsidies, like the earned-income tax credit. Unlike the minimum wage, which mostly benefits the middle class, the tax credit only helps low-income, working households. The amount of the credit is based on a household's annual income, not on wage rates.

Because the tax credit increases the financial rewards from working, it increases employment among low-income Americans. So it would support employment among workers who were displaced by a higher minimum wage.

In addition to the policy context, the economic environment in which a minimum-wage increase takes place shapes its impact on jobs. Between 2007 and 2009, the federal minimum wage increased from $5.15 to $7.25. This period overlapped with the deep recession caused by the 2008 global financial crisis. The economists Jeffrey Clemens and Michael Wither studied this increase, and found that it reduced aggregate employment rates by at least half a percentage point in states that were most affected.

This is a large effect, which suggests that raising the minimum wage during a recession — when companies are more willing to make permanent changes to their labor-cost structures and labor demand is depressed — leads to larger employment reductions than it would during periods of economic growth.

A bigger push for well-designed job training programs and more generous earnings subsidies would cushion the blow for workers who would be made worse off by a higher minimum wage. But they are not a panacea. Newer, more promising job training programs haven't been adopted on a large scale, and attempts to do so might not be successful. And earnings subsidies can only go so far. For them to be effective, the minimum-wage hike would need to be modest.

President Joe Biden's proposal to more than double the federal minimum wage to $15 per hour is not modest. Asking job training to turn a $7.25-per-hour worker into a $15-per-hour worker is asking too much. Asking the earned-income tax credit to support employment among many low-wage workers is asking for failure — for them to find jobs, there have to be enough employers willing to hire them at the higher wage floor.

Raising the minimum wage would inevitably create winners and losers. Wrapping policies around a modest increase would help those with lost income or fewer employment opportunities get back on their feet. Waiting until the economy is healthy would ensure fewer employment reductions to begin with.

But to avoid dealing workers in many states a devastating blow, the president will have to abandon the progressive pipe dream of doubling the minimum wage.

Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of "The American Dream Is Not Dead: (But Populism Could Kill It)."

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