Why Warren Buffett Is Torn on the Minimum Wage
Economists can't agree on the right ways to fight inequality.
Around this time last year, Warren Buffett seemed stumped by the question of minimum wage. "I thought about it for 50 years and I just don't know the answer on it," he told CNN. He hinted at the direction he was leaning—if minimum wage could be raised without hurting employment, he'd support raising it to $15, the number now targeted by many labor activists. This past weekend, Buffett took a stronger position on the issue at Berkshire Hathaway's annual shareholder meeting.
"I don’t have anything against raising the minimum wage but I don’t think you can do it in a significant enough way without creating a lot of distortions," said Buffett in Omaha. According to Buffett, those distortions would cost the economy jobs, and Berkshire Hathaway's vice chairman Charles Munger went on to say that they would hurt the poor.
If Buffett feels conflicted, he's in good company: American economists have not yet reached consensus on the issue. As The Economist highlights, the kind of distortions minimum wage will (or will not) cause is still debated among economists. David Card, Alan Krueger, along with Arindrajit Dube and Michael Reich have all found from restaurant case studies that a higher minimum wage does not hurt employment, while David Neumark and William Wascher have found it has a negative effect.
An oft-quoted case study in the debate is the British minimum wage introduced in 1999. David Metcalfe, an emeritus professor at the London School of Economics, found that it gave more than a million workers a 10 to 15 percent raise when it was introduced. Moreover, he wrote: "This issue of the association between the minimum wage and employment is one of the most contentious in economics. But we now have evidence from over 25 British studies so we no longer need to rely on our prejudices. The conclusions are clear-cut—the minimum wage has not had an adverse impact on jobs."
Of course, the U.S. is not the U.K., but Democrats are now pushing for the federal minimum wage to be $12 an hour by 2020, and research from the Economic Policy Institute says we can afford it. The case for city-by-city minimum wage will also likely continue as the impact of variable cost of living factors into the debate.
Buffett, for his part, thinks that the issue of inequality is better served by raising the Earned Income Tax Credit (EITC)—a subsidy for low-income families. (This is a point Buffett has made before.) Supporters argue that raising the EITC gives workers a similar boost to raising the minimum wage, but does so without saddling employers with additional costs, theoretically preserving jobs. Additionally, the EITC has also shown to have positive emotional and psychological benefits for low-income workers.
But this "either-or" thinking has been criticized in the past—not only is the battle to expand the EITC an uphill battle politically, this false choice is too often used to quell complaints that the minimum wage is too low. Instead, it might be useful to start thinking about how the EITC and raising minimum wage might work together. Neumark also supports a more generous EITC, and found that the interaction of a higher EITC and minimum wage benefitted some groups but not others:
My work with Mr. Wascher has explored the interactions of higher minimum wages and a more generous earned-income tax credit. We indeed find that a combination of these two policies leads to higher employment and income among single women with children who are eligible are for the credit. At the same time, the combined policies lead to more adverse employment effects on specific groups—like teenagers and less-skilled minority men—who are not eligible for the earned-income tax credit and have to compete with the new labor market entrants who are eligible for it.
While economists might not be in agreement about the impacts of raising the minimum wage on employment, a substantial number of them seem to support raising it just the same. Last year, more than 600 economists including seven Nobel prize winners and eight former presidents of the American Economic Association signed a letter to Congress urging the federal minimum wage to be raised to $10.10 by 2016. It's not $15, but it's a lot more than $7.25.