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Raising the federal minimum wage: Nobel Prize economics

October 29, 2021

This piece represents the opinion of the authors.
Sophie Burchell

It is time to raise the minimum wage to $15 per hour to ensure that more low-wage workers have enough money to cover basic living expenses. Federally, the minimum-wage is currently $7.25 per hour and has been like that for the past ten years. Meanwhile, costs of living have skyrocketed across the country. There have been several pushes to raise the federal minimum wage, such as the fast-food workers campaign, “Fight for 15,” but none have succeeded in passing the issue.

In high-school economics classes, we learned that when it comes to the effects of minimum wage on unemployment, “raising the minimum wage will increase unemployment.” In these classes, this phenomenon is often exemplified by a diagram that demonstrates the ways that raising the minimum wage will either create a surplus of workers or cause employers to hire fewer workers, leading to an overall increase in job loss. This theory is still used in politicians’ discourse today, which we can see in Senator Ted Cruz’ strong opposition to minimum-wage increases. He uses this economic theory to support his theory that raising the minimum wage is particularly harmful to the most vulnerable.

However, this economic theory has drawn increased criticism over the years, with more researchers proving its limitations. Its limitations have been overshadowed in an effort to further destabilize the labor movement and the working-class. The idea that one must sacrifice something for the benefit of society has been perpetuated while the rich are busy accumulating even more wealth.

In a 2021 NBER working paper, UMass Amherst economist Arindajit Dube et. al. debunked these theories, showing through machine learning that there is no evidence of substantial changes in unemployment as a result of minimum wage increases.

While raising the minimum wage is still a controversial issue, this year, the Nobel Prize in Economic Sciences was given to three economists who used real-life experiments to examine economic questions. The three Nobel laureates are David Card, a professor at University California, Berkeley, Joshua Angrist, a professor at Massachusetts Institute of Technology and Guido Imbens, a professor at Stanford University in California.

Professor Card, alongside Professor Krueger, showed through a comparative study that raising minimum wage doesn’t actually affect unemployment. The two studied the effects of a raise in minimum wage in the fast-food industry in New Jersey and Pennsylvania. In 1992, New Jersey’s minimum wage rose from $4.25 per hour to $5.05 per hour while in Pennsylvania it stayed constant. By comparing employment growth at stores across states, they found proof that the minimum wage increase did not reduce employment. They dispelled the conventional economic theory that raising the minimum wage leads perfectly competitive employers to reduce employment opportunities.

Determined to look beyond the minimum-wage, Card and Krueger tried to understand the ways immigrants affect the labor market and the relationship between school funding and quality. In 1990, Professor Card published a study, often cited in debates over whether immigrants impact the jobs of native-born Americans. Their research examined a large 1980s influx of immigrants from Cuba to Miami due to the Mariel boatlift. The results showed that the arrival of immigrants from Cuba actually had little impact on Miami’s job market. Card and Krueger offered a solution to labor economists when they try to estimate the impact of immigration on employment rate—it is hard to isolate the direct impact of immigration from what might be a result of other factors. The two suggested that the best approach was to compare Miami with similar cities in which there were no sudden increases in immigration.

What is interesting about Card’s research lies in not only its conclusions but also the methods he employed to reach those conclusions. Card won the Nobel Prize along with two other economists, Joshua Angrist and Guido Imbens exactly because of this methodology. This year’s Nobel Prize honors recipients who conduct studies based on natural experiments. The Royal Swedish Academy of Sciences commented, “the framework they created has radically changed how researchers approach empirical questions using data from natural experiments or randomized field experiments.” This is true to the extent that these three Nobel laureates are known as leaders in the “credibility revolution” that has swept the field of economics in the past generation.

This credibility revolution is a change in the way that economists use data to assess theories. It is shifting the effects of policies through elaborate statistical methods that control other factors, to exploiting “natural experiments,” or situations in the real world that simulate a controlled experiment. Though not always the case, studies using this new approach support the argument for a more active government role in addressing inequality.

Card’s work, specifically, has large implications for research in the field of labor economics and has played a role in determining public policy. His research has been instrumental in advocating on behalf of the working-class despite the weakening of this stance over the years.

Regardless of the great amount of research advocating for a minimum wage increase, the federal minimum wage remains to be $7.25 per hour, which doesn’t cover the living costs in any states. According to EPI research, raising the minimum wage to $15 will lift the pay of 32 million workers, giving them the chance to actually afford a better living state.

Now, more than ever, it is the time to think about raising the federal minimum wage and designing a formula to calculate it on a yearly basis. Having a stable formula that takes into consideration the productivity of the workforce as well as the living costs will not only give more purchasing power to the workers but also help businesses plan around those costs.

Radu Stochita is a member of the class of the Class of 2022, and Song Eraou is a member of the Class of 2023.

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