Will A Higher Minimum-Wage Trickle-Up the Wage Scale?

by Don Boudreaux on December 4, 2006

in Work

Will a higher minimum-wage "trickle-up" to raise wages that are already above what the new minimum-wage will be?  That is, will a worker earning an hourly wage of, say, $7.50 today (when the federal minimum-wage is $5.15 per hour) see his wages rise as a result of Uncle Sam raising the federal minimum-wage to $7.25?  Today’s Washington Post — relying upon comments from staff at the Economic Policy Institute — reports that the answer likely is "yes."

Despite affirmative comments also from some actual DC-area private employers, I’m skeptical.

My priors tell me that a
hike in the legislated minimum-wage more likely will lower, rather than
raise, wages just above the minimum.  The reason is that, by
eliminating some jobs that demand only the exercise of the most
rudimentary skills, a higher minimum-wage will push some low-skilled
workers into labor-market segments that pay slightly more than the
(newly raised) minimum-wage.  That is, when jobs at which the typical
worker produces revenue of $7.00 for employers are eliminated by a
minimum-wage of $7.25, some workers who would have preferred to work
at, say, $7.00 per hour at those now-eliminated jobs will seek jobs
paying wages at or slightly above the minimum-wage of $7.25.

That
is, such workers would prefer to accept more demanding jobs at a higher
wages over being unemployed, even though their first preference is for
less-demanding jobs at wages lower than the new minimum-wage.

More
generally — and I confess that I cannot escape from believing that,
ultimately, wage rates are determined by workers’ productivity — I don’t see how raising the minimum-wage
leads to any consistent increase in the productivity of
workers’ earning wages higher than the minimum.  And because I don’t
see that their productivities rise as a consequence of raising
the minimum-wage, I don’t see that raising the minimum-wage will have a
positive ripple effect up the wages scale. (Indeed, as explained above,
I expect that the marginal productivity of workers in such labor-market
segments just above the most unskilled will fall because of an increase
in the supply of labor to these segments.)

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