Wednesday, February 13, 2013

Raising the Minimum Wage: Sounds like a good idea after all.

President Obama proposed last night during his speech to raise the federal minimum wage base from $7.25 to $9.00. Naturally, those who oppose the idea had drafted their arguments just in time for the morning rush onto the social media streams.

Scrolling through twitter today, headlines screamed for and against the proposal, with those opposing sounding self-righteous. Look at the research, they suggested. You know, that research which shows how raising the minimum wage results in all sorts of consequences:  job reduction, higher costs and  increase in unemployment.

As Justin Fox points out on the HBR Blog Network, it is research based on what he refers to "models of economic textbooks". But a study conducted in 1992 reveals the opposite: , that an increase in minimum wage creates a demand in jobs.

As Justin Fox explains it:

This was surprising because the basic supply-and-demand model of economics teaches that, when you raise the price of something (in this case, low-skilled labor) demand for it will go down. There had been a number of philosophical objections posed to this approach through the years — among them the argument that employers possess more power and information than individual workers in most labor markets, allowing them to push wages below the optimal level in the absence of collective bargaining or government intervention. But Card and Krueger now had empirical evidence that the "textbook model," as they put it, didn't work. The New Jersey fast food restaurants did pass their increased wage costs on to customers in the form of higher prices — but they weren't enough higher to hurt business.

But whether one is for or against the minimum wage hike, one thing is for sure:  $7.25 an hour is not enough to feed any family. At the current rate, a full-time employee is making about $15,000 a year, which is not bad if you're a teenager living at home. But it is not nearly enough to cover family household expenses, let alone sustain today's basic standard of living.

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