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Higher Minimum Wages? What does the Data Say?

By Andrew White | January 25, 2021 | 0 Comments

Humanity in InsightData and Analytics

Minimum wage is back in the news. More precisely the idea of a federally mandated minimum wage of $15 is being promoted by the new administration. Is this good? Is it bad? As a D&A expert and an economist, what do we know?

First, there is conflicting data. Both sides of the argument can furnish any number of studies each reinforcing their arguments. What are the arguments?

  • Increasing minimum wages increase unemployment.
  • Increasing minimum wages increases pay and therefore wellbeing of employees and does not increase unemployment

There are research projects and papers that show how firms that increase wages have not reduced their workforce, thus the latter argument is supported. But if you look at the small print, assumptions, and the wide environment surrounding the firm, you will find mitigating circumstances that undermine the case. For example, the firm in question might operate close to a state border where employees from the neighbor state has a very different median or minimum wage, so workforce behavior is very different to what might take place if the firm was located somewhere in the middle of the state.

On the other hand, there are plenty of other reports and surveys that show how firms have reduced their workforce after having had to increase minimum wage. While on paper this seems irrefutable, the wider aspects of the research need to be explored. For example, it is quite common that such firms being surveys were already paying a wage very close to the original minimum wage, which is quite common in food service industry.  As such any enforced increase in costs will naturally lead to actions to take costs out of the business, else business may suffer serious financial constraints.

Related to these two situations is another idea: that increasing wages over market levels can increase profits.  This is different to a minimum wage, but it talks to forecasting what happens when we tinker with natural wage rages.  See WSJ How Higher Wages Can Increase Profits. This idea speaks to what is known as the efficiency-wage theory. The idea is that if you increase wages over and above what the market pays, employees are happier and feel more loyal and increase output, and even productivity. This leads to an increase in profits. Again, there is data that suggests this has happened; that does not mean it happens in every case.

So much for trying to be data driven. Given that data can always be produced that supports every case, what else can we do? This is where we need to understand that being data driven does not actually mean only using data, or assuming all data is fact. We need to apply some humanity to the analysis. In this I would offer two angles.

First, if you actually ask individual business owners the question, “What would your do of you had to raise minimum wages?” or “What is your view on increasing wages over market levels?”, the response you get will show that ‘it depends’ wins out almost every time. There is no complete knowledge over what will happen.  There will always be unique conditions or challenges, even combined, that leads to each firm considering their own response.

Even beyond the scope outlined so far, there are also externalities and politics to contend with. The state of the economy and the likelihood of policy changes would also weigh on the conditions in which a leader has to frame a response. In a growing economy that is free and regulated for an effective real-safety net (i.e. small government, small business) the need for a minimum wage might be less. In a slow growth, heavily regulated economy (i.e. big government, big business) the need for a minimum wage might be higher. While these are considerations, we are all human and we perceive things differently, and there is no perfect knowledge we can all draw on.

I suppose the bottom line here is that despite the data, personal and public rhetoric and perspective will always decide the response; data just helps guide it.



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