Three Safeguards to Ease the Mind of $15 Minimum Wage Critics

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Advocates of raising the federal minimum wage to $15 an hour have the upper hand in the debate. Skeptics raise some good points, but all of their concerns can be addressed with simple tweaks to the policy.

When people argue about the minimum wage, they usually talk about whether or not it kills jobs. Economists used to think a minimum wage would create a lot of unemployment by driving a wedge between supply and demand. But over the past 30 years, a veritable mountain of high-quality economic evidence has confirmed that this rarely if ever happens, at least in the short term. The most likely reason is that most labor markets are dominated at least to some extent by powerful employers, so that supply and demand aren’t really governing the market in the first place. As a result, economists have become much more favorable to the minimum wage, with opinions roughly evenly split on the $15 number as far back as 2015.

But even if the danger of a $15 minimum wage is much less than economists used to think, that doesn’t mean it’s zero. There are three big dangers. Fortunately, there’s a fix for each of these.

First, there’s local variation in the amount of minimum wage that a place can bear. In San Francisco, wages and living costs are both very high, but in a small town in Mississippi, both are low. That means a $15 minimum wage will effectively be a much higher number in the small Mississippi town than in San Francisco, relative to what people already earn. And a much higher minimum wage carries a greater risk of job loss — if you don’t believe that, just imagine raising the minimum wage to $2,000 an hour.

Now, this problem is somewhat mitigated by the fact that the areas with low wages also tend to have fewer employers. That gives those employers more market power, which gives them a cushion that allows minimum wages to rise higher before they start forcing layoffs. But even after taking this into account, a $15 minimum wage is probably still dangerous for many low-wage areas. And that puts poor Americans in danger, since they’re the ones who tend to live in towns that don’t pay very much. This may have happened in Puerto Rico in the 1980s.

But that danger is easily dealt with. Just give low-wage areas a partial exemption from the federal minimum wage -- for example, make it $12 instead of $15. That will greatly reduce any danger of unemployment. It might even entice a few employers to shift to the low-wage areas, giving them some much-needed growth. In fact, President Joe Biden’s plan already includes a provision to tie future minimum wage increases to local wage growth; all he has to do is make a similar relationship apply to the initial increase as well.

A second worry is that a higher minimum wage could worsen recessions. In an economic downturn, some hard-hit companies try to preserve jobs by cutting wages until the recession is over. Minimum wage makes this harder. A 2014 paper by economists Jeffrey Clemens and Michael Wither found that the Great Recession hurt low-wage workers in states where minimum wages were high relative to local wages.

But this is also pretty easy to take care of. Just allow the government to lower the minimum wage temporarily in case of a severe recession. In fact, this process could be automatic: If real-time measures of recession, such as the so-called Sahm Rule (named after Bloomberg Opinion’s own Claudia Sahm) are flashing red, it could be an automatic trigger for a temporary minimum wage holiday. And if the government wants to make very sure that companies use the savings to keep workers employed, they could put in a provision that only gives the temporary minimum wage holiday to companies who keep workers on payroll.

A final danger of minimum wage is to small businesses. These businesses tend to be less efficient and have thinner profit margins, so they’re less likely to be able to handle a substantial minimum wage hike. Thus, minimum wages can potentially drive small companies out of the market and make big business more dominant. A solution is simply to allow small businesses to have slightly lower minimum wages. U.S. minimum-wage laws already allow exemptions for very small businesses. And Seattle’s hike to $15 allowed small businesses to take four extra years to phase it in.

So there are some real dangers of minimum wage. The kind of big layoff disaster that economists used to fear is highly unlikely, but Biden should include safeguards like these so that poor areas, recession-hit employers and small businesses are protected from the potential downsides of his minimum wage hike. These are not difficult tweaks, and they could help make sure that the $15 minimum wage doesn't suffer a backlash.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

©2021 Bloomberg L.P.

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