The minimum wage is a contentious issue where efficiency, equity, and values collide. In this blog post, I will explore where to strike a balance from both academic and value-based perspectives.
The Minimum Wage Debate
One common misconception the public has about economics is that “economists dislike the minimum wage system.” While a 1992 survey showed that 79 percent of respondents agreed that the minimum wage system increased unemployment among young, unskilled workers, surveys conducted since 2013 reveal that a significant number of economists have become more supportive of the minimum wage system.
Let’s look at a survey conducted by the University of Chicago back in 2013. Regarding the statement, “Raising the federal minimum wage from $7.50 to $9.00 will make it harder for low-skilled workers to find jobs,” 40 percent agreed, 38 percent disagreed, and 22 percent were unsure. The minimum wage issue remains a subject of intense debate among scholars, and a clear answer has yet to be found.
The minimum wage issue is quite complex; simple theoretical analyses often overlook key factors, and with new research continually emerging, the debate remains fierce. It is difficult to cover all these details in a short article. In this blog post, let’s focus on the essential points that cannot be overlooked and explore them as simply as possible.
Theoretical and Empirical Analysis of the Minimum Wage
The minimum wage system is a policy that prohibits employers from paying workers less than a legally set hourly wage. A key advantage of this system is that it raises the income of low-wage workers, thereby contributing to the reduction of poverty and inequality. Conversely, one of the most significant arguments against the minimum wage is that it can actually make it harder for low-wage workers to find employment. Few scholars agree with the argument that raising the minimum wage exacerbates inflation, nor with the logic that increasing the minimum wage contributes to economic growth by raising the incomes of low-income groups. Therefore, let’s focus on the impact of the minimum wage system on low-income workers.
First, let’s examine the supply and demand aspects. In a market economy, labor is a tradable commodity. Companies that wish to use labor for a certain period of time and pay for it constitute the demand side of labor, while workers who provide labor and receive compensation constitute the supply side. An equilibrium wage is formed where supply and demand meet. One might speculate that if wages rise due to the minimum wage, companies will have to spend more on labor, so they will try to hire fewer workers to reduce those costs. Consequently, the theoretical argument against the minimum wage is that it reduces the demand for labor and increases unemployment.
But does this actually happen in practice? David Card, who won the Nobel Prize in Economics in 2021, and the late Alan Krueger analyzed employment levels at fast-food restaurants—which employ low-skilled workers and do not need to compete with imported goods—by leveraging the fact that while New Jersey raised its minimum wage from $4.25 to $5.05 in 1992, neighboring Pennsylvania did not. The results showed that a minimum wage increase does not lead to job losses. Following this study, numerous empirical analyses were conducted, and many economists came to believe that at least a “modest” increase in the minimum wage does not cause job losses “in the short term.”
If a theoretical hypothesis is refuted by actual data analysis, it is necessary to re-examine the theory. First, since the minimum wage system affects only low-income earners, its impact on those already receiving high wages is quite low. However, there is also an argument that in Asian countries such as South Korea and Japan, where wages are determined by seniority rather than job duties, the impact of the minimum wage system is greater.
Furthermore, while wages are influenced by supply and demand, they are also affected by various other factors. For example, there are high-income and low-income earners, as well as regular and non-regular employees. Furthermore, the characteristics of low-income earners—who are most affected by the minimum wage—are diverse. Therefore, even if the minimum wage is raised, the number of workers actually affected may be much smaller than expected.
Moreover, recent studies suggest that wages are determined not so much by the “principle of supply and demand” between workers and companies, but rather by “corporate dominance,” with companies’ market power playing a significant role. According to one study, in the U.S. manufacturing sector, the marginal value of labor is 53 percent higher than workers’ wages, revealing that companies pay workers only 65 percent of their contribution to production in wages. This suggests that companies have some leeway to offer workers higher wages and, therefore, will not immediately reduce their workforce even if the minimum wage rises.
The Minimum Wage Through the Lens of Efficiency and Equity
The minimum wage issue can also be understood as a conflict between efficiency and equity. If an increase in the minimum wage leads to a certain rise in unemployment, the total output of the economy as a whole will decrease. However, if the income of low-wage workers increases sufficiently due to the rise in the minimum wage, this improves equity.
Although this is a somewhat extreme assumption, how should we interpret a situation where jobs decreased by 1 percent in the process of doubling the minimum wage? Although jobs would have decreased, equity would have improved significantly, and one could expect that collecting more taxes from the public to assist those who lost their jobs would help mitigate the harm to low-income groups. In other words, it is sufficient to compensate for the harm caused by the minimum wage increase in other ways.
Therefore, the arguments of those who support raising the minimum wage can be divided into two categories. One is that the harm caused by the minimum wage increase itself is not significant, and the other is that while there is some harm, the benefits of the increase outweigh it. When the University of Chicago survey mentioned earlier reflected these views, the percentage of people supporting the minimum wage increase rose significantly to 62 percent. In other words, the issue of raising the minimum wage is linked not only to the harm it causes to low-income workers but also to a matter of values regarding how important equity is.
While we have examined relatively positive views on the minimum wage so far, these arguments are not always correct. Looking at the case of South Korea, the minimum wage rose significantly over a relatively short period during the Moon Jae-in administration, from 6,470 won in 2017 to 8,350 won in 2019. Therefore, the argument by opponents of the minimum wage hike that this could have a negative impact on employment has some merit. Furthermore, when advocating for a minimum wage increase, some emphasize moral justification rather than scientific evidence. An attitude that merely repeats that an increase is “just” or appeals to emotion is all too easily refuted by the argument that “if raising the minimum wage leads to job losses, low-income groups will suffer.”
Moreover, even without raising the minimum wage, various policy combinations are possible to reduce inequality. Inequality can be reduced by increasing general public welfare, expanding unemployment insurance, or providing earned income tax credits. Although these methods have the drawback of requiring government tax funding, they compensate for the limitations of the minimum wage. Therefore, rather than arguing that the minimum wage must be raised unconditionally, it is more important to consider various policy combinations aimed at reducing inequality and to deliberate on which methods can provide realistic and practical assistance.
I hold a relatively cautious stance on the minimum wage. Nevertheless, I believe it is necessary to consider the issue of the minimum wage positively, because there is a widespread misconception among the public that “economists dislike the minimum wage system.” As already explained, even among leading American economists, opinions on the minimum wage vary, and there are often more instances where they support raising the minimum wage.
A Nobel Prize in Economics was awarded to a researcher who discovered that raising the minimum wage does not lead to job losses, and there are many prominent economists within mainstream economics who are favorable toward minimum wage increases. Although there is a widespread prejudice that economics is a discipline of the right, in reality, there are many mainstream economists who are deeply concerned with issues of inequality and equity. This aspect is clearly evident in the debate surrounding the minimum wage.
I believe that the more interested one is in solving poverty and reducing inequality, the more one should embrace economics. This is because economics is the discipline that best explains the economic system of modern society, and it is through economics that we can propose the best solutions for ensuring equity while making people happier. In fact, many scholars are already pursuing this path; it is simply less well-known to us.
