The Secret Effect of the Minimum Wage

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Here's the case for the minimum wage, in a nutshell: If we set a floor to wages, we can raise the income of the poor, which raises their buying power, which means they pay other people for more stuff, which helps the entire economy.

Here's the case against the minimum wage, a nutshell: If we set a floor to wages, we price some people out of a job (if an employer is willing to hire at $3/hr with the MW at $6/hr, he won't hire). That increases the unemployment rate, which means means the working class has less total income, which hurts the entire economy.

Economists and politicians are all over the map when it comes to which case is the most economically sound, or the most humane for low-income workers. But here comes NBER with some fresh conclusions about the secret impact of the minimum wage. In a nutshell: If the minimum wage does eliminate some low-income job opportunities, those left out do other things besides look for work. For example: they stay in school. The upside for employers is that fewer workers means more money to invest in new technologies:


Neglected, but significant, the long-run consequence of the minimum wage - which was made national policy in the United States in 1938 - is its stimulation of capital deepening. This took two forms. First, the engineered shortage of low-skill, low-paying jobs induced teenagers to invest in additional human capital - primarily by extending their schooling - in an attempt to raise their productivity to the level required to gain employment.

Second, employers faced with an inability to legally hire low-wage workers, rearranged their production processes to substitute capital for low-skill labor and to innovate new technologies.

This paper explores the impact of the minimum wage on enrollments between 1950 and 2003. I describe an upward ratcheting mechanism which triggers an "educational cascade." My estimate is that the average number of years of high school enrollment would have risen to only 3.5 years, rather than 3.7 years, for men born in 1951. Thereafter, enrollment rates would have trended down to about 3.2 years for the cohort born in 1986, rather than slowly rising to around 3.9 years. The cumulative effect of the minimum wage increases beginning in 1950 was to add 0.7 years to the average high school experience of men born in 1986.

Fascinating conclusion. But is it a positive conclusion? We should want a more educated workforce at every level. We should want capital investment to find new, more efficient technologies. But what if those new more efficient technologies are erasing the need for low-income workers. If you're not a high school-age man, but you are in the market for a minimum wage job, this report doesn't offer much solace.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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