For church leaders to be more effective in seeking the “welfare of the city” (Jer. 29:7), we should know what economic concepts mean, how they should be applied, and how they affect the local church. The purpose of the Economics for Church Leaders series is not to present a theology of economics, but rather to provide a basic level of understanding that will help church leaders think more clearly about how to apply their faith commitments to economics and public policy. See the Economics for Church Leaders page for other articles.
In 2016, the Democratic Party adopted a call to raise the minimum wage to $15 per hour as part of the party platform. Now, President Biden is including that proposal as part of new $1.9 trillion COVID-19 relief plan. On Tuesday, Democrats in both the House and Senate also reintroduced a bill to raise the federal minimum wage to $15 per hour. The proposal calls for gradually raising the pay rate by 2025.
A minimum wage is the minimum hourly wage an employer may pay to an employee. Under the Fair Labor Standards Act (FLSA), the federal minimum wage for covered, nonexempt employees is $7.25 per hour. Many states also have minimum-wage laws, so when the employee is subject to both state and federal minimum-wage laws, the employee is entitled to the higher minimum-wage rate.
Will the increases help lift people out of poverty? Do such wage hikes increase unemployment? Although the debate about this issue has raged since 1938, when President Franklin Delano Roosevelt introduced the first federal minimum wage, few Americans truly understand whether minimum-wage laws help or hurt workers.
Most people who support or oppose minimum-wage laws or increases share a common objective: helping the working poor. Because both sides have noble intentions, the merits of the debate on minimum-wage laws and minimum-wage increases should be judged by Christians on empirical evidence that it will help, rather than harm, the poor. While the interest of other stakeholders should be considered, our primary concern, as Proverbs 22:22 tells us, should be “Do not exploit the poor because they are poor.”
To help church leaders better understand the issue and how it affects the working poor, here are 10 mostly undisputed points you should know about the minimum wage.
1. The primary argument for a minimum-wage increase is that it increases the value of the worker’s labor.
The efficiency wage theory of labor holds that higher wages improve labor productivity by reducing worker turnover and the associated costs of hiring and training new workers, by reducing the incentive for workers to join unions, and by increasing the opportunity cost of being fired—thereby giving the worker incentive to be more productive. Under this view, small increases to the minimum wage will have no harmful effects on employment.
The assumption is that paying higher wages increases worker satisfaction, thus reducing turnover. However, this is a reasonable assumption only if there is a price disparity between similar jobs. Given a choice between working at American Eagle for $7.25 an hour and at the Gap for $10, most would prefer to fold sweaters for the higher wage. They will even be willing to work harder (thus increasing their labor value) to appeal to an employer paying the higher wage. If every store in the mall (and all other jobs in the area) is required to pay $10 an hour, then the decision to switch jobs will be based mainly on non-monetary factors.
There is another element often overlooked in discussions about minimum-wage increases. Because of the labor price differential, Gap can be choosier in its hiring; its willingness to offer a higher minimum pay gives creates an advantage over other employers, since Gap will have more applicants to choose from. Unless Gap’s store managers are incompetent, it will hire only people whose labor is truly valued at $10 an hour. In other words, Gap will get what it’s willing to pay for.
That is why some opponents of the minimum wage claim a government mandate negates the effects of the efficiency theory and can kill jobs. Not only will businesses willing to pay more lose their advantage in hiring, but those unwilling to pay more will fire/not hire people whose labor is valued at less than the minimum wage. Once minimum wages are raised, turnover rates also increase as people decide to stick with or leave a job based on other factors. And the people who will never be hired (low-skilled workers, new immigrants) are shut out of the labor market completely.
2. The primary argument against a minimum-wage increase is that it discriminates against those who have low skills.
Economist Milton Friedman once described the minimum wage as a requirement that “employers must discriminate against people who have low skills.” Anthony Davies explains:
The minimum wage prevents some of the least skilled, least educated, and least experienced workers from participating in the labor market because it discourages employers from taking a chance by hiring them. In other words, workers compete for jobs on the basis of education, skill, experience, and price. Of these factors, the only one on which the lesser-educated, lesser-skilled, and lesser-experienced worker can compete is price.
In January, the National Bureau of Economic Research released a paper that examined the research literature and summarized findings on the effects of minimum-wage laws. The authors’ key conclusions were:
- There is a clear preponderance of negative estimates in the literature.
- This evidence is stronger for teens and young adults as well as the less-educated.
- The evidence from studies of directly affected workers points even more strongly to negative employment effects.
- The evidence from studies of low-wage industries is less one-sided.
The authors conclude that most of the empirical evidence indicates that minimum wages reduce low-skilled employment. “It is incumbent on anyone arguing that research supports the opposite conclusion to explain why most of the studies are wrong,” they add.
3. Economists disagree about the effects of small increases in the minimum wage.
It’s true that economists disagree about the effects of the minimum wage on employment and the living standards of minimum wage earners. But almost all of the disagreement is about relatively small increases (less than 20 percent). A 20 percent increase in the current federal minimum wage ($7.25) would increase it to $8.70 an hour. An increase to $15 an hour would be an increase of 108 percent.
Almost all economists agree that significant increases to the minimum wage or attempts to bring it in line with a “living wage” ($12 to $15 an hour) would lead to significant increases in unemployment. A survey of economists taken in 2019 found that more than two-thirds (88 percent) think an acceptable federal minimum wage should be less than $15, with 74 percent opposed to raising it to $15 (strongly opposed, 61 percent; somewhat opposed, 13 percent).
The survey also found that a strong majority of economists believe a minimum wage of $15 will have harmful effects on youth employment levels (84 percent), the number of jobs available (77 percent), and adult employment levels (56 percent). When asked what effect a wage of $15 will have on the skill level of entry-level positions, four in five (83 percent) believe employers will hire entry-level positions with greater skills.
Economists are divided on whether a wage of $15 will help or hurt poverty rates. One-third (38 percent) think an increased wage will lead to increased poverty rates, while 27 percent think it will be reduced, 19 percent say it will be unchanged and 16 percent are unsure. Two in five (39 percent) think the minimum wage should remain at $7.25 or be lowered, with two-thirds (66 percent) believing the minimum wage should be $10 an hour or less.
Before the pandemic began, the nonpartisan Congressional Budget Office estimated that joblessness would increase by 1.3 million if the national minimum wage was increased to $15 an hour.
4. The minimum wage is not necessarily the same as a poverty wage, a living wage, and a family wage.
There is considerable debate—and confusion—about whether raising the minimum wage would bring it to the level of a poverty wage, a living wage, or even a family living wage. We can define these three related concepts as:
- The poverty wage is what’s needed to move an individual or family above the poverty threshold.
- The living wage is what’s needed for an individual to cover minimum food, health insurance, housing, transportation, and other basic necessities (clothing, personal care items).
- The family wage is the “living wage” necessary to cover a family of four (one working adult, one non-working adult, and two children).
The living and family wages vary by geographic location. To consider an example, let’s use Dallas and San Francisco as our representative cities. Dallas has a median household income of $52,210, while in San Francisco it’s $96,265.
The poverty wage per hour is the same for both cities: $6 for an individual and $12.38 for a family of four. But the living wage in Dallas is $12.38 for an individual and $26.76 for a family of four, while in San Francisco it is $20.82 and $59.86, respectively.
A national minimum wage of $15 would be more than enough for a living wage in Dallas but not nearly enough in San Francisco.
Advocates of a living wage should recognize that, because costs vary across the country, the federal minimum wage can never be a sufficient instrument to provide a national living wage.
5. Raising the minimum wage has almost no effect on reducing poverty.
David Neumark, a scholar at the Federal Reserve Bank of San Francisco, notes that numerous studies have shown no statistically significant relationship between raising the minimum wage and reducing poverty. That finding may appear counterintuitive. After all, if poor people have low wages then increasing their wages should help reduce their poverty. To some extent, this is true. What it misses is that minimum wages target individual workers with low wages, rather than families with low incomes. The reason that distinction is important is that most workers who earn the minimum wage are in higher-income families.
6. The minimum wage redistributes wealth from the low-skilled poor to the more-skilled working poor and middle class.
Many supporters of increasing the minimum wage mistakenly believe that increases in wage rates are transfers of wealth from employers and investors to workers. But as Davis explains, the money to pay for the increased wage must come from at least one of four places: higher prices for consumers, lower returns to investors, lower prices to suppliers, or a reduced workforce. Empirical research has shown that the primary effect of minimum-wage increases is reduced employment, which essentially transfers the wealth (in unearned wages) from the less-skilled to the more-skilled working poor and middle-class teenagers.
7. Minimum-wage increases disproportionately affect African Americans.
Employment among African American men between the ages of 16 and 24 is disproportionately responsive to the minimum wage. A 10 percent increase in the minimum wage would reduce employment by 2.5 percent for white men between the ages of 16 and 24, 1.2 percent for Hispanic men between the ages of 16 and 24, and 6.5 percent for African American men between the ages of 16 and 24. Economists William Even and David Macpherson estimate that in “the 21 states fully affected by the federal minimum wage increases in 2007, 2008, and 2009,” young African Americans lost more jobs as a result of minimum-wage hikes than as a result of the macroeconomic consequences of the recession.
8. Few people actually earn a minimum wage.
Workers earning $7.25 per hour or less represent 1.9 percent of all hourly paid workers. Among those paid by the hour, 392,000 workers earned exactly the prevailing federal minimum wage of $7.25 per hour, while about 1.2 million had wages below the federal minimum. According to the Bureau of Labor Statistics, about three-fifths of all workers paid at or below the federal minimum wage were employed in the leisure and hospitality industry, and almost entirely in restaurants and other food services. For many of these workers, tips may supplement the hourly wages received.
9. The typical minimum wage worker is a white Southern teenage girl who works part-time and has never been married.
The overwhelming majority of minimum-wage earners are young. Among employed teenagers (16 to 19) paid by the hour, about 6 percent earned the minimum wage or less (only about 1 percent of workers age 25 and older earn the minimum wage or less). They are statistically more likely to be women, never married, working part time, and living in South Carolina, Mississippi, or Louisiana.
10. Minimum-wage laws have historically been used to discourage immigration and oppress the poor and minorities.
A minimum wage was seen to practice eugenics through two channels: by deterring prospective immigrants and by removing the “unemployable” from employment. As Thomas C. Leonard explains, progressive economists in the early 1900s believed that “the job loss induced by minimum wages was a social benefit, as it performed the eugenic service [of] ridding the labor force of the ‘unemployable.’” More recently, businessman and political activist Ron Unz has argued that increases in minimum wages are necessary to reduce both legal and illegal immigration. As Unz says, “Critics of a rise in the minimum wage argue that jobs would be destroyed, and in some cases they are probably correct. But many of those threatened jobs are exactly the ones that should have no place in an affluent, developed society like the United States, which should not attempt to compete with Mexico or India in low-wage industries.”
Addendum: What About Matthew 20?
Is Jesus’s parable of the workers about minimum wage laws? Some people, such as David Barton of Wallbuilders, believe the parable in Matthew 20:1–16 presents Jesus’s opposition to government minimum-wage laws.
Such a reading is a gross misinterpretation of Scripture. Our task as interpreters of parables is to find how the relevant meaning of the story applies in our context. And while Jesus frequently referred to money and economics in his parables, the point of any parable is never to teach us about monetary or economic policy.
The illustrations used in parables are not meant to be normative, though I believe they can be instructive. For example, since Jesus would not use a commendable example that was based on injustice or evil, we can assume that there is nothing inherently wrong about negotiating with people to pay different wages—even for the same type of labor. That does not mean we must take this illustration as a normative basis for personal ethics, much less as a direct claim about government policy.
Also, the statement in verse 14—“Don’t I have the right to do what I want with my own money?”—has to be read in a broader context. As the Bible makes clear, we don’t have an absolute right to do what we want with our money (cf. Mark 12:17), so it can’t mean that the landowner can do anything he wants. What about the broader context? We don’t know what the economic context even is—probably because it was unimportant to Jesus’s point. We don’t know, for instance, if in this parable the denarius was the government required “minimum wage” for a day’s labor.
There is nothing in Scripture that directly supports or forbids a government from instituting a minimum wage. Indeed, as Justin Taylor has asked, “If we think that Jesus is doling out economics lessons here, why couldn’t we make the case instead that he was a socialist, paying everyone the same wage no matter how long they work?”