Is Raising the Minimum Wage Good Policy?

In 1938, in the midst of the Great Depression, the federal government introduced the minimum wage as part of the New Deal’s Fair Labor Standards Act. The act required employers to pay their employees at least 25 cents an hour.

By 1948, the minimum wage had been raised to 40 cents per hour, as shown in the yellow line in the graph below. (There also were lower minimum wages for workers who receive tips and for teenage workers.)

In 1968, Wisconsin added its own minimum wage, shown in green in the graph. Although the state minimum started as less than the federal minimum, it has mostly tracked the federal wage.

Today’s $7.25 federal (and Wisconsin) minimum wage was adopted in 2010 and has not been raised since.

The two lines in the above graph show the nominal value of the state and federal minimum wages while ignoring the effect of inflation. A given amount of dollars bought a lot more goods and services in 1948 than the same amount dollars in 2024.

For the next graph, I converted the nominal value of the minimum wages into their equivalent values in 2024 real dollars. In real terms the real value peaked in 1968. Its nominal value of $1.25 was worth $13.84 in today’s dollars.

In the years following 1968, the nominal value of the minimum wage increased from time to time, but not enough to keep up with inflation. It is worth noting that in 1968 Lynden Johnson was president. Raising the minimum wage was part of his War on Poverty.

The historic view of the minimum wage by economists was that it was not an effective tool against poverty. In this view, it would increase the income of those poor people fortunate enough to keep their jobs, but their gain would be offset by others who would lose their jobs and become even poorer. This understanding was supported by standard economic theory: as the price of something (in this case labor) goes up demand for it goes down.

The first serious challenge to this belief came from a study by economists David Card and Alan B. Krueger. On April 1, 1992, New Jersey’s minimum wage increased from $4.25 to $5.05 per hour, while Pennsylvania’s minimum remained the same, at $4.25. Card and Krueger reported that:

Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent. We also compare employment growth at stores in New Jersey that were initially paying high wages (and were unaffected by the new law) to employment changes at lower-wage stores. Stores that were unaffected by the minimum wage had the same employment growth as stores in Pennsylvania, while stores that had to increase their wages increased their employment.

Following the release of the Card and Krueger study, there were numerous similar studies of similar pairings matching jurisdictions increasing their minimum wage against neighboring jurisdictions that left it alone. Some, like Card and Krueger, found increased employment, some found decreased, and others found no significant effect.

An attempt to summarize the research concluded that the minimum wage had no discernible effect on employment. “The most likely reason for this outcome is that the cost shock of the minimum wage is small relative to most firms’ overall costs and only modest relative to the wages paid to low-wage workers. … probably the most important channel of adjustment is through reductions in labor turnover, which yield significant cost savings to employers.”

Last year, the Kent A. Clark Center for Global Markets at the University of Chicago asked a panel of academic economists to respond to the following statement: “The distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy.” Here is the response weighted by the confidence of the economists.

The next graph plots the result of a different approach to the issue of whether the benefits outweigh the costs. It compares the real minimum wage over time against the unemployment rate. In the early post-war period, the wage was steadily increased until its peak of $13.84 in 1968. Yet there is no evidence of a noticeable increase in unemployment.

Following that peak, the real minimum wage was allowed to lag inflation, effectively decreasing its value. If anything, unemployment increased as the real minimum wage decreased.

In its August 2020 survey, the Marquette Law School poll asked a sample of Wisconsin voters whether the minimum wage should be raised to $15 per hour. The next graph summarizes the results according to the respondents’ political orientation, using green for those agreeing and red for those disagreeing. 59% of those with an opinion supported the proposal.

An overwhelming majority of Democrats supported the proposal, as did a smaller majority of Independents. A majority of Republicans opposed it. Even so, a quarter of Republicans were in support.

For Democrats this means that raising the minimum wage should be a very attractive issue: one that unites one’s base, while splitting the opposition’s supporters.

The evidence points to a conclusion that raising the minimum wage is good policy. For Democrats, it is also good politics.