What keeps minimum wage rates in balance?

Question

I would posit that the minimum wage is determined more on a political than an economic basis. The fact is that there are more wage earners than business owners and, generally speaking, the wage earners prefer an increase while the business owners prefer a minimum wage decrease (perhaps even to 0). There are more wage earners to vote than business owners, and this makes it politically expedient, on the balance, to vote for a minimum wage increase.**First**, is this true?**Second**, if you find it to be true, why doesn't the minimum wage increase substantially more than it has over the years (focusing on the US)? What is the counter balancing force that causes minimum wages to seek equilibrium at some something between "poverty" and "living wage" level (again, in the US)? Or is even that assumption false?

Answer 1

I believe you are correct in stating that the minimum wage is a political rather than economic decision.  Economics can inform the decision, but it is a political decision in the end.  That said, the premise that more wage earners can use their sheer numbers over business owners to force minimum wages has not been historically true (until perhaps of late in some locations.)  I think the reason for that is the population has been trained that overriding the market is a bad idea and will lead to unemployment - simple supply and demand arguments make the case.  Several studies have shown, however, that this is not necessarily the case.  When employers have market power over labor (e.g., monopsony) then setting a minimum wage indeed does not cause unemployment.  

People argue both sides and the public hears the arguments and that causes confusion and likely political inaction.  I think that the rise of income inequality and large corporate profits have people rethinking the whole ‘minimum wage causes unemployment’ argument and listening to the idea that wages are kept artificially low due to greater employer power in the labor market.  

A good article to check out:  the Jan 22, 2014 explainer for The Economist “The Economist explains, Why some economists oppose minimum wages”.  You can also find good articles and research on both sides, for example see Oct 1993 study “Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania”, from The National Bureau of Economic Research, and the Sept 6, 2018 article “The New Wave of Local Minimum Wage Policies: Evidence from Six Cities” from the IRLE (Institute for Research on Labor and Employment).  On the other hand, in 2018 Forbes came out with a couple of commentaries arguing against minimum wages. The Cato Institute (originally the Charles Koch Foundation) also has studies arguing against the minimum wage.  There are more on each side of the argument.

Here’s my two handed economist answer: I think they both can be right.  Labor markets are local and definitely not uniform across the country so both arguments may be true depending on the specifics of the local labor market.  

One final comment - beware of phony-baloney “think tanks.”  There is a good article in The New York Times from Feb 9, 2014, “Fight Over Minimum Wage Illustrates Web of Industry Ties” where they look at the EPI (the Employment Policy Institute.) The EPI is often quoted in the minimum wage debate, but they are not really an unbiased think tank, they are essentially a front group funded by Washington lobbyists for the fast food industry, among others, and have been exposed for their biased reporting.  They cause further confusion by sounding official and unbiased, and I think that is their plan - cause confusion among the public and that leads to political inaction.  I hope this helps.  I think you’ll find that minimum wage arguments can be quicksand!