Good News for Low Income Workers

Good News: this headline from Politico this week contains good news for low-wage workers — “McDonald’s halts lobbying against minimum wage hikes“. As the largest fast food provider and one of the largest low-wage employers in the country, McDonald’s withdrawal from this lobbying effort is expected to have a significant impact in the struggle over raising the minimum wage. A struggle which, historically, workers have been on the losing side of: the current minimum of $7.25/hr was set 10 years ago, and in inflation-adjusted dollars, is just 61% of its peak value, in 1968.

Really good news: raising the minimum wage is fair, AND does not hurt employment. This may sound contrary to our conventional wisdom, in which we assume that people get paid what their skills are worth, and that increasing the cost of labor will reduce the number of jobs. But those views are based on the assumption that our labor markets are highly competitive markets, with lots of vendors offering similar jobs for competing wages. In reality, our low-wage markets tend to be quite concentrated: in both food service and retail trade, the two largest low-wage industries, the top five companies control approximately half the market. Combining this concentration with the low labor supply elasticities measured in these industries, I found that the competitive market wage in these industries would be at least $12/hour in my recent paper, Working Poverty: Low Skills or Low Wages?, a wage rate that brings a worker supporting a family of three out of poverty.

Furthermore, with labor markets this concentrated, economic theory actually predicts that raising the minimum wage would maintain or even increase employment, something that numerous empirical studies have shown. In other words, concentrated markets behave almost oppositely from what we tend to expect: wages don’t reflect skill or contribution to the company, they reflect the firm’s maret power, and correcting such a market failure increases employment, not reduces it. In fact, correcting this market failure simply returns money from windfall profits to the workers from whom it was annexed via market power, eliminating half of family poverty at the same time.

Sad news: one of the best champions for raising the minimum wage, Princeton professor Alan Krueger, sadly passed two weeks ago, at the age of 58. He co-authored in 1994 one of the most influential studies on the minimum wage, showing that hikes in the minimum did not reduce employment, and continued work in the area for decades (see, for example, Theory and Evidence on Employer Collusion in the Franchise Sector). His work inspired numerous others (self included) to examine labor through a market
power lens, and that will continue to make a difference for years to come. RIP Dr. Krueger.

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