Minimum wage

Barry Ritholtz rebukes minimum wage critics: What Minimum-Wage Foes Got Wrong About Seattle

Much of the hand-wringing was based upon a deeply flawed University of Washington study. As we noted in 2017, the study’s fatal flaw was that its analysis excluded large multistate businesses with more than one location. When thinking about the impact of raising minimum wages, one can’t simply omit most of the biggest minimum-wage employers in the region, such as McDonald’s and other fast-food chains, or Wal-Mart and other major retailers. These are the very employers that were the main target of the minimum-wage law; indeed, the law established an even higher minimum wage of $15.45 an hour for companies with 500 or more employees.


There were two other glaring defects in the first study that are worth mentioning. The first is that its findings contradicted the vast majority research on minimum wages. As was demonstrated back in 1994 by economists Alan Krueger and David Card, modest, gradual wage increases have not been shown to reduce employment or hours worked in any significant way. Ignoring that body of research without a very good reason made the initial University of Washington study questionable at best.

The minimum wage is one of those topics where there are a lot of opinions and studies but hardly a consensus or definitive answer. Both sides can summon evidence of how minimum wages hurt/help the economy and employees. Someone can cite a study, and someone on the opposing side can show how the study is methodologically flawed and does not actually indicate or show what it purports to do.

But in the realm of economics, it’s undeniable that all actions have consequences and trade-offs, and that incentives motivate the behavior of individuals and firms. Even if raising the minimum wage does not lead to a decline in employment, it may cost workers in other ways:

1. Fewer hours worked

2. Higher prices for consumers, offsetting some of the extra purchasing power from higher wages

3. Loss of employee compensation. Amazon raised minimum wage to $15/hour, which got a ton of press and Bernie Sanders even praised Jeff Bezos, but Amazon simultaneously eliminated stock compensation for those same employees, which got much less press. Due to loss of such compensation, such Amazon workers fear that may be even worse-off.

4. Gives companies an incentive to increase automation and outsourcing in the future, even if in the short-run unemployment does not rise.

One of the worst arguments one encounters when debating minimum wages is, is that increased consumer spending justifies a higher minimum wage, because any increased consumption should be enough to offset the additional costs to employers. This argument is wrong because ‘increased consumption’ is a macro phenomena whereas raising the minimum wage affects firms (at the micro level), so these are two separate systems, not a single system that cancels out. The firm bears the immediate cost of higher wages and has to hope the ‘increased consumption’ pays off in the future.

For example, if Subway pays workers $5/ hour and earns $5 profit for each sandwich sold and then suddenly doubles wages to $10/hour, unless subway raises prices, the only way Subway can recover that loss is if subway gets 2x the business, which is an unrealistic assumption. Even though low income consumers have 2x the purchasing power, they have many choices besides Subway, so maybe Subway will get a small uptick in additional sales, but not enough to offset the loss unless everything stays the same and customers buy 2x the stuff as before. Also, consumer will pay more in taxes and their tastes and preferences will also change, further offsetting this. .