Is there an economic case for a $20 minimum wage?

What we know, and don't know, about the effects of an aggressive wage hike

A protester.
(Image credit: Illustrated | Scott Olson/Getty Images)

For years, a building movement has demanded a federal minimum wage of $15 an hour. Last week, House Democrats did their part, passing a bill that would ratchet up the national minimum to $15 an hour by 2025. Now, only a week later, Rep. Rashida Tlaib (D-Mich.) upped the ante, calling for a $20 national minimum wage.

Simply getting the Democrats to endorse $15 an hour took years of political work. The mainstream argument from economists and policymakers is that minimum wage hikes destroy jobs by raising the cost of labor for businesses. Is there a case for once again pushing the envelope as hard as Tlaib recommends?

The answer is complicated.

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"When we started it, it should have been $15," Tlaib said in her remarks. "Now I think it should be $20… $18 to $20 an hour at this point." It wasn't clear if Tlaib meant the minimum wage should be cranked up to $20 an hour by 2025. But assuming she did, then as far as keeping up with inflation is concerned, Tlaib has a point: The movement for $15 an hour began in earnest in 2012, but in 2019 dollars that would be $16.95. By 2025, it will be close to $20.

Of course, simply adjusting for inflation is a rather crude approach, and only one of several options. Another is to ask what the minimum wage would be if it had kept up with productivity growth. There's a basic intuitiveness to this idea: Productivity growth increases the money that a company can distribute among its workers and owners, so making sure the minimum wage keeps pace is a way to divvy up the money in an equitable fashion. Indeed, from 1948 through 1968, the minimum wage did just that.

The problem is that federal law sets the minimum wage in nominal dollars; it doesn't automatically increase with inflation, productivity, or anything else. In more recent decades, Congress has badly slacked off about raising it, and today's minimum wage is actually lower than 1968's once you adjust for inflation. In fact, if Congress had kept step with productivity growth, the minimum wage would've been $18.42 in 2014. And that's according to a conservative measure of productivity growth. By other productivity measures, the minimum wage should be $22.49 by 2024.

Many, many studies have been done on the effects of minimum wage hikes over the years. The bulk of the evidence suggests minimum wage increases don't actually affect employment all that much. That's because minimum wage increases give customers more spending money, which can offset the effects of more expensive labor. Businesses can also have disproportionate bargaining power, which can allow them to depress workers' pay below the "equilibrium market rate." A recent paper by the Congressional Budget Office, which projected the Democrats' bill would increase wages for 27 million workers but also eliminate 1.3 million jobs was a strikingly pessimistic assessment of the overall literature.

But it's also true that the majority of minimum wage hikes that showed little or no job losses didn't go higher than 50 to 60 percent of the median wages of the affected area. That led economist Arindrajit Dube, one of the top experts on minimum wages, to recommend sticking to that threshold. As of last year, the median hourly wage for the whole country was $18.58. But assuming it keeps increasing at its recent pace, $15 an hour should be in the 50-to-60 percent range of the national median by 2025. A $20 minimum by 2025 would be well above that line though.

There's also the issue of regional variance. Some states and cities and places have median wages that are significantly higher than the national median, while others are significantly lower. Some commentators recommend a less ambitious national minimum that allows states and cities to "top off" their own minimum wages above the national floor.

The thing is, none of these approaches — increasing the minimum wage along with productivity, or holding the minimum wage to half the median wage — are based on an underlying economic mechanism. They're rules of thumb based on theory and the historical record. Pushing the minimum wage for the country, for a state, or for a city well above half the median is uncharted territory, but that's it.

The basic worry is that, for any given worker — or for any given group of workers in a particular area — there's some upper limit for how much a business can pay them beyond which it's simply no longer financially sustainable: the employer can't bring in enough revenue to justify the expense.

But there's also a kind of hopeless circularity to the whole debate. We really don't know how to measure how productive a worker is except by how much they're already paid. Perversely, already-low pay becomes a justification for a lower minimum wage. But low pay could be the product of any number of factors beyond productivity, like workers' loss of bargaining power due to the death of unions, the abandonment of full-employment policies, or the rise of employer monopsonies. (The latter of which are more common in the rural areas that would supposedly be hurt most by an overly-aggressive national increase in the minimum wage.)

It's worth noting that economic growth was actually much more robust back in the 1948-1968 period when the minimum wage kept pace with productivity. It turns out the national minimum wage also held to the half-of-the-median rule during this time. That raising today's minimum wage back to productivity growth would aggressively violate the half-of-the-median standard is because inequality has become so much worse at the individual and regional level. But then, did inequality increase due to factors outside of the minimum wage? Or did inequality increase at least in part because policymakers allowed the national minimum to atrophy?

Fundamentally, no one — up to and including the leading economic experts — has any idea what would happen if we raised the federal minimum wage to $20 an hour by 2025. What does seem certain is that businesses' lobbying power is far greater than that of workers in American politics today. Which means U.S. policymakers are much, much more likely to set the minimum wage too low than too high.

Even if Representative Tlaib's demand for a $20 an hour minimum wage is a bad idea on the merits — which is not at all obvious — it's probably still good political strategy.

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