One of the biggest news stories at the moment is an attempt by House Democrats to raise the federal minimum wage to $15/hour. This is almost double the current minimum wage of $7.25/hour, which was last raised in 2009.
So what will happen if the bill passes? Will the economy grow? Will people be fired? Will there be inflation? Will minimum-wage workers be better off? Will society as a whole be better off?
I would probably have a better answer for you if I were a macroeconomist. But the bad news is there probably isn’t way to say for sure. The impacts of any economic (or non-economic) policy are difficult to determine in advance. That’s because there are a lot of moving parts in an economy. And the moving parts are interconnected, like gears in a machine – anything that moves one part moves another and that moving part might cause the first one to speed up, slow down, or entirely change direction. Except that these moving parts are people, not gears, and people are a lot less predictable than gears are.
To give a simple example (that will quickly stop being simple): let’s say minimum-wage workers whose income increases spend some of that income on groceries. Grocers, realizing that more people have more money to spend, might raise their prices. But if a grocer raises his prices, he might lose customers to another grocer….unless other grocers also raise prices, which they might…unless they think they’ll be more competitive if they don’t, which they might be…unless they fire workers to keep their prices low, and people don’t want to shop in an understaffed store when they can afford to shop somewhere else….unless they can’t afford that, because $15/hour doesn’t go that far when all the grocers raised their prices.
Sorry…where were we?
The point is that how the gears people will ultimately settle down into their new patterns is very hard to figure out theoretically. For one, once you’ve set up the math to account for all those feedback loops, it might take a supercomputer a few days to run those calculations for you. But the accuracy of your prediction also depends on how well you identified everyone who would be affected by your policy and how they would respond. One wrong assumption and your whole prediction will be off, no matter how fancy the math. That’s why there can be (and is!) so much disagreement about how a policy will turn out, even among smart people who are doing rigorous work.
That means we are often left with…just trying a policy to see what happens. The good news is that new policies usually start as pilot programs in cities or states and are adopted more widely if they have the desired effects. But even this isn’t perfect. Policy is often (though not always) endogenous, or chosen by the people who put it in place. And people choose a policy when they think it will solve whatever problem they are trying to solve. To the extent that there is something about pilot communities that made the policy particularly effective or appropriate there, the policy may have different effects once it’s implemented elsewhere.
That’s why, even though cities like San Francisco and New York have had positive experiences with raising minimum wage, we can’t entirely rely on these examples to predict how a national wage hike would go. For starters, both cities have remarkably high cost of living; elsewhere, wage hikes might more dramatically increase consumption. California and New York also have relatively robust safety nets in place for low-income residents – including rent control – which might affect how much costs change (or don’t) in response to a widespread increase in private income.
None of this is to suggest that increasing the minimum wage would be a bad idea. We can’t entirely predict what a $15/hour minimum wage will do, but that’s as true for those who are predicting bad outcomes as it is for those who are predicting good ones. Not implementing a policy also has risks and costs. So what can we do? At a certain point, once we’ve gathered the best evidence we can, we simply have to fall back on our values. What outcomes do we care about and how much do they matter to us? Does the potential for achieving them outweigh the risks of implementing a policy that is ineffective….or even harmful? Ideology comes into play here. So does acceptance of risk. And so does careful policy design that includes safeguards and a plan for a worst case scenario.
If you support the $15/hour wage and you’re frustrated about the pace of change, that’s entirely reasonable, and reflects how you have balanced the risks and benefits. But remember that those who have pushed back against the policy and slowed the pace are not necessarily trying to undermine wage hikes or minimum-wage workers. They may have simply struck a different balance in the presence of uncertainty…and that’s reasonable too.
Wait! We can explain! 