Mt. Vernon Register-News

Opinion

December 11, 2013

Pitfalls of pay increases

Three jurisdictions in the Washington metro area — the District of Columbia, and Maryland’s Montgomery County and Prince George’s County — have voted recently to raise their minimum wages to $11.50 over a three-year period. At least 20 states and some major localities have already increased their minimum wages above the federal level of $7.25. A handful of states have chosen to index their statutory minimum wages to measures of inflation over time.

States and localities are motivated, at least in part, by federal gridlock: President Obama proposed increasing the minimum wage this year, but Washington’s paralysis has eliminated the prospect of a reasonable federal increase anytime soon. Minimum-wage increases seem to combat the disturbingly high earnings inequality that has arisen in recent decades. They seem to help low-wage workers in particular. But these efforts, while often popular, can backfire.

As a labor economist, I generally support modest and periodic increases in the federal minimum wage, along with some state increases above that level. The biggest concern among economists is that imposing pay increases on employers will reduce the hiring of low-wage workers and raise unemployment. But in four decades of research by economists, this appears to be a small or nonexistent effect. And, under some circumstances, indexing the statutory minimum to the rate of inflation is not a bad idea.

Some of the recent actions to raise wages, however, give cause for concern. Many proposed increases are very large and very local. For instance, the increases in the Washington region will raise the minimum wage more than 50 percent in the two Maryland counties and nearly 40 percent in the District of Columbia, even after adjusting for inflation. This comes on top of the sizable federal increases — about 35 percent after inflation — that occurred between 2007 and 2009.

Increases this large could generate larger employment losses than in the past as employers seek to minimize payroll costs. And the smaller the geographic area in which such increases occur, the greater the risk that employment growth will shift across a municipal or state border as employers relocate to areas with lower minimum wages. It’s noteworthy that the previous state and federal increases on which most research is based generally do not share these characteristics, so that body of research is a less useful guide to the changes in employment that may soon occur.

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