For decades, the minimum wage has sparked fierce debate…
…among economists and politicians
The covid-19 pandemic…
…and President Joe Biden’s push…
…to raise America’s minimum wage…
…have forced the issue…
…back into the political spotlight
Economists traditionally believed…
…that raising the minimum wage led to job losses
It’s often been feared the minimum wage…
…will end up hurting the very people you’re trying to help
Yet decades of research has led to a rethink
…and today 90% of countries…
…have some form of minimum wage
But there is still no agreement…
…on how high it can be without harming workers
Why does the minimum wage continue to be so divisive?
For more than a hundred years…
…worker revolutions and strikes fought for a minimum wage
In 1894…
…New Zealand finally introduced the first laws…
…around a national base pay
Since then, take-up of minimum wages…
…in the rest of the world has been varied
Though the concept is simple…
…workers are paid a legal base rate for their work…
…most economists believed…
…the minimum wage could destroy jobs
This idea comes from the most basic of economic models…
…supply and demand
Economics 101, if you make something more expensive…
…people will usually want to buy less of it
And if you make labour more expensive…
…then employers might want less of it
And what we call employers wanting less labour in the real world…
…is unemployment
America’s first federal minimum wage…
…wasn’t introduced until 1938
When President Franklin Roosevelt set it at 25 cents per hour…
…to help low-income workers during the Great Depression
But the federal minimum wage in America…
…isn’t tied to inflation…
…and so hasn’t kept up with rising prices
Over time, it’s lost value and stagnated
Today it stands at $7.25 per hour…
…meaning that in real terms…
…it peaked at around $12 in 1968
In response to the low federal minimum-wage rate…
…some state and county politicians…
…raised it locally themselves
By the early 1990s…
…instead of having just one US minimum wage…
…you’ve got differing minimum wages in different states…
…different counties, different cities
So almost this patchwork quilt of differing wage floors
In 1991, the federal minimum wage in America…
…went up to $4.25…
…about $8 in today’s money
By 1992, 24 states had the same minimum-wage rate…
…as the federal one
And five states had minimum-wage rates higher than it
This patchwork of different minimum-wage levels…
…gave economists an opportunity…
…to measure the real-world impact of the minimum wage
And this led to a study…
…that turned economic thinking…
…about the minimum wage on its head
In 1992, two economists from Princeton…
…David Card and Alan Krueger…
…looked at how changes to the minimum wage…
…affected employment at fast-food restaurants…
…in two states with differing policies
New Jersey, where the minimum wage for workers increased…
…and neighbouring Pennsylvania, where it stayed the same
Of course, what conventional theory will tell you…
…at the time is…
…the minimum wage has gone up in New Jersey…
…it hasn’t gone up in Pennsylvania
…what you’d expect to see…
…is employment in New Jersey to fall…
…relative to employment in Pennsylvania
But what Card and Krueger found is actually the opposite
Despite the wage going up in New Jersey…
…employment actually increased
This surprising result can be explained…
…by the idea of monopsony power…
…something that employers in the fast-food industry may possess…
…to a degree
In a monopoly, there is one dominant supplier…
…who sells to many buyers
A monopsony is the opposite–there’s one sole buyer of goods…
…or employer of workers
The classic example is a one-factory town
But all employers have a degree of monopsony power
In this case the fast-food company in an area…
…with less competition…
…the employer can set the wage for their workers
This means wages can be kept artificially low
Card and Krueger…
…found that a small wage increase didn’t lead to redundancies…
…because wages were already below market rate
And why did employment increase?
The higher wage may have attracted new workers…
…to the market
The study proved—for the first time…
…that raising the minimum wage doesn’t necessarily destroy jobs
This groundbreaking finding…
…challenged conventional wisdom on minimum wages in America…
…and saw similar policies spread around the world
China introduced a minimum wage in 1994…
…Britain in 1998, along with Ireland in 2000…
…and Germany in 2015
Card’s and Krueger’s finding…
…also led to a new focus on empirical—or “real world” data…
…as opposed to theory
Yet gathering empirical data isn‘t easy…
…and can give contradictory results
So far from providing clarity…
…the study only served to reignite the debate
So are you going to track the number of jobs…
…or are you going to track workers…
…because you know, they’re not necessarily the same thing
You’ve got to decide are you going to try and look…
…at the entire labour market or just certain groups…
…whether that be the low-skilled or teenagers…
…or some other sort of group?
Isolating the impact of the minimum wage…
…is far from straightforward
Take Seattle
It’s been at the forefront of the minimum-wage debate in America…
…since a historic law in 2014 was passed…
…that would set the minimum wage at $15 an hour…
…by 2021
Two studies of low-paid jobs a year apart…
…gave very different results
The first, published in 2017…
…looked at aggregate data…
…or averages of data on hours and earnings
It found that the increase in minimum wage…
…led to employers reducing hours in low-paid sectors…
…meaning employees overall lost out on monthly wages
The second, in 2018…
…looked at individual workers…
…and found that low-paid workers earned more on a weekly basis…
…after the minimum wage had been increased
But some of this gain…
…was because workers were picking up shifts…
…in other jobs
So in their first paper…
…they’re looking at aggregated number of hours…
…aggregated number of jobs, aggregated numbers about pay…
…but a year later in their second paper…
…they’ve got access to these individual tax records…
…so they can actually track what’s happening to individuals…
…and follow them
Both studies are accurate…
…but seemingly contradictory
This goes to the heart of the minimum-wage debate
Fundamentally, what these two studies show…
…is that the minimum wage is really an empirical question…
…rather than a theoretical one
It depends on what sectors people are working in
How easily replaced by machines they are
What sort of profit margins their employers have
What their pricing power is
And what policymakers and economists…
…need to keep in mind…
…is that they need to keep checking the data…
…keep looking at different types of data…
…and keep examining the evidence…
…of the impact these policies are having
And in America…
…the opportunity for another experiment…
…could be just around the corner
This time on a national scale
I’m Joe Biden…
…it’s time we had a $15 an hour minimum wage…
…so families can earn a living and get ahead
As president, I’ll make sure we get it done
Raising the federal minimum wage to $15 an hour…
…isn’t just about economics
This is about politics
This is a partisan dividing line…
…and you know, he may struggle to push this through the Senate
It would take America’s economy…
…into unchartered waters
And some economists still fear…
…it is too high for firms to handle…
…and could lead to job losses
If Joe Biden does manage to raise the federal minimum wage…
…to $15 an hour…
…that will obviously be a big historical moment
But I’m afraid economists and politicians…
…will likely be arguing about the impact for years to come
The world has little experience of an increase this large
Perhaps analysing the impact could help economists…
…finally reach a consensus on the minimum wage