Critics of a higher minimum wage want to tax you more.
When the government this week increased the minimum wage by 50 cents an hour, to $15.25, it claimed it would increase wages for 152,700 low-paid workers.
Critics said the increase would cost jobs.
But the research shows that raising the minimum wage to modest levels doesn’t necessarily increase unemployment — and might even reduce it.
The pioneering academic study of the minimum wage was published by economists David Card and Alan Krueger in 1993.
Coincidentally, at the same time that the government was announcing its increase the IMF published a profile of Card in its house magazine Finance & Development. The IMF historically has been seen as the high priests of orthodox economics, so the story is not coloured by a pre-existing progressive outlook.
Prior to their research, economists had always struggled to isolate the effects of a minimum wage increase from other economic conditions. For example, minimum wages are often raised in economies that are booming.
In the 2000s, the Labour government increased the minimum wage every year, while unemployment fell to record lows.
But most of the time you can’t just fence off one part of the economy and study it in isolation. The study by Card and Krueger was a breakthrough because they were able to analyse the effects of increasing the minimum wage in nearly ideal conditions.
In 1992, New Jersey increased the minimum wage in the fast food industry from $4.25 to $5.05 an hour. Neighbouring Pennsylvania kept it unchanged. Classical supply and demand theory said that if the price of something went up, then demand would surely fall, so it would have predicted that the New Jersey minimum wage increase would have meant the state lost jobs compared to Pennsylvania.
The opposite happened. Card and Krueger found New Jersey’s fast-food restaurants actually increased jobs by 13 percent compared to like businesses in the other state.
The fallacy in predicting the minimum wage is to consider a single business in isolation. It’s true that a cafe might hesitate to take another worker when the hourly rate increases. Down the road a widget-maker might replace a job with a machine.
But happens across the economy the introduction of those machines, and the skills to operate them, lifts overall productivity. Some minimum wage jobs get replaced by higher-skilled, higher-earning workers — who in turn have more disposable income to buy a flat white at the cafe.
People often believe that the government can’t increase wages just with the stroke of a pen — that if it tries, there is a tree off between wages and jobs. But the evidence is that a higher minimum wage doesn’t just help people who earn the least. It increases wages across the whole economy and possibly even creates jobs.
Up to a point.
There is obviously a level at which the increases become uneconomic, and there is still uncertainty about where that line sits. But we do now that the lower the minimum wage is set below the amount you need to live on, the more taxes have to rise on middle and high earners.
Here’s why: If a person earns $15.25 an hour and has a family, they will likely receive a taxpayer income top up.
Although John Key once called Working For Families ‘communism by stealth’, these days there is a broad political consensus around it. No one serious disputes that people should get a helping hand if they go out to work but don’t earn enough to support their families. People should have enough income to live on.
The lower the minimum wage, and the more people earning the minimum wage, the more taxpayers will have to spend to top up wages through Working For Families.
Therefore, everyone who opposes increasing the minimum wage to levels high enough to live on is really calling for higher taxes on everyone else. The money to top up low wages has to come from somewhere.
This is not ideology, as Barack Obama would say. It’s maths: Lower wages result in higher wage subsidies to reach the minimum income families need.
Higher minimum wages are not just good for the people who receive them, they’re good for everyone. They help to increase wages across the board by driving more skills and investment into the economy and raising productivity, which raises wages for all of us.
It’s not good enough that there were 153,000 hard working New Zealanders who were earning less than $15.25 an hour before the latest increase was announced.
If you want to cut taxes, or you want the government to spend more on services like schools and hospitals, then the top priority has to be lifting wages.
This column was first published in the New Zealand Herald.