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How new research is shaking up the debate about a $15 minimum wage

The wonky minimum wage debate giving House Democrats a headache, explained.

protester holds up a Fight for $15 sign Scott Olson/Getty Image

As a $15 minimum wage becomes a rallying cry for presidential candidates and popular movements across the nation, House Democrats have yet to pass the minimum wage hike they campaigned on.

While the majority is unified in believing the federal minimum wage should be higher, they don’t yet agree on the magic numbers. A $15 minimum wage bill that was on the fast track to the House floor just a couple of weeks ago now looks stuck. A dozen Democrats have signed on to an alternative plan that would raise the minimum wage more gradually in some areas of the country than the version endorsed by top Democrats, which would increase the federal minimum wage to $15 everywhere by 2024.

The backdrop to all of this is a longstanding debate among economists about the merits of hiking the wage floor in America. It used to be taken for granted that raising the minimum wage would lead to a reduction in low-wage jobs. Employment among teenagers especially would go down. Landmark research undertaken in the 1970s had proven it.

But progressive economists have challenged these assumptions with new data. Dozens of Democratic-held cities and states went have increased the minimum wage floor over the years anyway, well above the long-obsolete current federal minimum of $7.25 an hour. A new highly anticipated study suggests the worst-feared consequences of minimum wage hikes did not come to pass. Employment did not decrease in places where wages went up, and there was actually a residually positive effect on wages for other lower-income workers.

The academic debate isn’t over, obviously. Some economists wonder whether there are other, possibly temporary factors in the labor market that are keeping employment afloat even with these minimum wage hikes. Maybe the economy in some places is hot enough to withstand the negative effects.

In the meantime, House Democrats are working to put aside those wonky differences and push through a plan they consider to be a pillar of their economic agenda.

The new economic thinking about the minimum wage

The idea that minimum wage hikes lead to job losses for less skilled workers became mainstream with a 1981 report by the Labor Department. The general rule has been that for every 10 percent increase in the minimum wage, there would be a 1 to 2 percent reduction in low-skill jobs.

David Neumark, writing at the Federal Reserve Bank of San Francisco, summarized the longstanding consensus like this, while also citing more recent studies, in 2015:

The overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.

But since the 1990s, a competing strand of thinking has gained a foothold, using its own studies to argue minimum wage hikes did not have the adverse effects that had been feared. It started with David Card and Alan Krueger, who studied worker pay at fast-food joints in New Jersey, in 1994. The new research from UMass Amherst’s Doruk Cengiz and Arindrajit Dube, the Economic Policy Institute’s Ben Zipperer, and the University College London’s Atilla Lindner is the latest volley from that latter school of thought.

They looked at 138 times a state had raised its minimum wage and studied for employment effects — and they didn’t really find any. Sectors in which jobs can be more easily moved overseas, like manufacturing, did experience a drop. But the general trend was negligible. The two-sentence summary:

We find that the overall number of low-wage jobs remained essentially unchanged over five years following the increase. At the same time, the direct effect of the minimum wage on average earnings was amplified by modest wage spillovers at the bottom of the wage distribution.

(It’s worth noting there is a very technical methodological debate among economists that we won’t delve into, except to say those researchers who have found no employment effects use a study design of which other economists are skeptical.)

Left-leaning economists have an explanation for why this could be: Companies with real market-setting capability had been paying their workers below-value wages. Think of a one-company town. Workers don’t have other options (except to move), so the company has a ton of leverage in setting pay and can negotiate pretty low wages and make more money for the business. When the minimum wage is raised, they have to increase their workers’ pay, but they don’t suddenly become insolvent.

“In those cases, the reason minimum wage won’t have large employment effects is it’s just eating into economic profit,” Ernie Tedeschi, an analyst at Evercore ISI who worked in the Treasury Department under President Obama, explained. “Employers are skimming less off the top.”

This would be a boon for people advocating for a higher minimum wage. States have managed to increase people’s pay without costing people jobs. House Democrats consider raising the minimum wage a foundation of their economic platform. The bill increasing the federal minimum wage to $15 by 2024 passed out of a House committee in March, on its way to the floor, a top priority for the new majority.

But not everybody is sold yet on a nationwide $15 minimum wage — including those dozen House Democrats.

Why some people are still wary about raising the minimum wage

It’s not as if politicians like Alabama Rep. Terri Sewell, the author of the alternative Democratic House bill that sets a minimum wage on a more regional basis, oppose higher minimum wages. But they see reason for caution in the research that had previously found employment losses.

“Any statement other than ‘this is a contested area of academic research and we don’t know the answer yet’ is highly misleading,” Neumark told me. “And $15 is really unknown territory.”

Economists who are skeptical of the new research showing no job losses question whether the methodology being used is tuned to pick up the right signals in the economy. Or, they posit, there is something else happening in the labor market to offset whatever negative effect the minimum wage hikes have had. A strong local economy, for example, could prove resistant to the labor market pressures of a higher minimum wage.

Tedeschi gave an example of what motivates this kind of thinking. “Seattle has a really good economy. If you raise the minimum wage in a really hot labor market, companies can take it.”

But there are concerns about leaving certain places behind with a more piecemeal approach. Tedeschi noted that 21 states default to the federal minimum wage, which is currently stuck at $7.25 and has barely budged for years. The risk of regional variance is that the disparities that already exist just get locked in.

“If it’s being driven by state and local policy, lots of people are left behind,” he said.

The tension is real here: The areas that most need a strong federal minimum wage, where local political leaders aren’t likely to increase it on their own, could also end up the most vulnerable to adverse effects. Because it’s not as if there is no limit to how much you can raise the minimum wage.

Tedeschi noted that some researchers believe there is a kind of magic threshold for a minimum wage: As long as it’s no more than 60 percent of the median wage in a given area, then there will be negligible harm to the job market. But if it’s higher than 60 percent, it could become too much of a burden. A notable study in Seattle found that an initial wage hike from $9.47 to $11 didn’t reduce jobs, but employment for the lowest-skilled jobs did start to drop after a subsequent increase to $13.

Democrats agree on goals, but they’re still learning to legislate

House Democrats had been coalescing behind a $15 minimum wage plan, with a bill passing out of committee in early March. The plan, supported by House leaders, would increase the minimum wage to $15 everywhere by 2024. It has more than 200 co-sponsors.

But there is now a competing bill, introduced by Sewell, vice chair of the moderate and “pro-growth” New Democrat Coalition, and sponsored by a dozen of the more moderate House Democrats. (Sewell is also, notably, from Alabama, where the cost of living lags far behind places like New York and San Francisco, which have hiked their minimum wages to $15.) Sewell’s bill would eventually raise the minimum wage everywhere to $15 — but not nearly as quickly as the bill that had been moving through the House.

Half of the 12 co-sponsors on Sewell’s bill are new members from competitive districts. They tend to be more moderate. The Sewell plan probably doesn’t have a future on its own, but it is still indicative of the problem the House has had in getting 218 Democrats to support the $15 by 2024 bill.

This is not the first time more moderate first-term members have given House leadership some trouble while leaders tried to pass a symbolically important bill. When the House passed a universal background check bill recently, two dozen Democrats joined a Republican motion to amend the bill with an anti-immigration provision. Almost all of them were new members from swing areas.

The embarrassing episode soured what was supposed to be a nice moment for the new Democratic majority. Now the minimum wage hike, another top Democratic priority, has gotten stuck.

It’s not as if the Republican Senate was going to pass the bill and send it to President Trump. But Democrats do hope to pass a minimum wage hike as soon as 2021 if they can. Before they could do that, they clearly still have some internal divisions to figure out (and they very well may, even this Congress). That’s the lesson of their practice run so far.