Arin Dube's Testimony on the Minimum Wage

Yesterday Arin Dube gave a testimony at the Senate HELP committee hearing on minimum wage and indexation. His written testimony is almost 20 pages long, but the one page executive summary included below notes the key points on inequality, employment, turnover and frictions, prices, poverty, and complementarity with EITC. [There is also a video of the hearing.]

Executive Summary

1) The minimum wage has failed to keep pace with productivity, while top pay and corporate profitability have grown rapidly.

• A falling minimum wage has contributed to rising inequality, explaining around half of the rise in inequality in the bottom half of the pay distribution, and more so for women.
• Raising and indexing the minimum wage would reduce the gap between those at the bottom and the rest of the workforce.

2) Minimum wages have not kept pace with cost of living.

• Adjusted for inflation, the real minimum wage has fallen from a high of $10.60 in 1968 to $7.25 in today’s dollars.
• Harkin-Miller would bring minimum wage s up to $9.38 in today’s dollars.
• Indexation makes the adjustment process much more predictable. Even some economists who are skeptical about minimum wage policies support indexation.

3) Minimum wages have also lost ground in comparison to median wages.

• The minimum fell from a high of 55% of the median wage in 1968 to 37%.
• Harkin-Miller would likely raise the minimum to 50% of the median wage—close to the average for other OECD countries, and the U.S. historical norm during the 1960s and 1970s.

4) For the range of minimum wage in creases we have seen in the U.S. over the past two decades, recent evidence based on credible methodologies do not find job losses of any sizable magnitude.

• The academic disagreements are over no job losses or small job losses for highly impacted groups.
• While some studies continue to find negative effects, these are often artifacts of regional trends and other factors unrelated to minimum wage increases.
• Studies comparing similar neighboring areas right across the border account for these problems and find no impact on jobs either for sectors like restaurant and retail, or groups like teens.
• Employment effects do not seem to vary by the phase of the business cycle or whether the state indexes its minimum wage to inflation.
•  Most surveys and meta-analyses have also concluded that employment effects are small.
• This is why more economists today tend to support increasing and indexing than oppose it— even though there is scholarly disagreement on the precise impact.

5) While employment may not fall from moderate increases in minimum wages, both separation and hires fall, lowering the turnover rate.

• In the increasingly popular economic models with search frictions, lower quits and layoffs, along with increased search activity by the unemployed, can explain why employment response is small.
• Lower turnover can also increase productivity.
• Outside of the simple Econ 101 type environment, increasing workers’ pay can improve the functioning of the low wage labor market.

6) Based on existing evidence, we can expect some increases in restaurant prices from a minimum wage increase. However, the overall price level is unlikely to change noticeably, and there is little risk of wage-price spirals from indexation.

7) The best evidence suggests that minimum wage increases lead to moderate reductions in the poverty rate, especially together with the Earned Income Tax Credit.

• There are strong theoretical rationales—and empirical confirmation—that minimum wages and EITC are complementary policies when it comes to helping low-income families.
• A high minimum wage prevents wage reductions that can result from an EITC.
• Since the EITC is indexed to the CPI, minimum wage indexation will prevent erosion of EITC benefits for minimum wage workers.