The History of Economic Thought on the Minimum Wage

I was in the audience at the State of the Union address in February 2013 when President Obama announced, “Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.” The thought that ran through my head at that time was, “Wow, it’s remarkable that economic thinking has come full circle on the minimum wage.” Let me take you on a quick tour of 75 years of the history of economic thought on the minimum wage. This history demonstrates that periodically raising the minimum wage to help low-wage workers is not only the right thing to do, it is also the smart thing to do. Economists were largely supportive of the minimum wage when it was enacted as part of the Fair Labor Standards Act (FLSA) in 1938. Economists in the 1930s and 1940s understood the logic that said demand curves sloped downward, but they also were aware that labor markets were imperfect, and that workers lacked bargaining power. The fact that wages and working conditions varied for workers of equal skill and training in a locality suggested that employers had some discretion to set pay. Companies were more than passive wage takers, as the simple theory of labor demand requires. Economists from Princeton’s Richard Lester to the University of Chicago’s Paul Douglas—who became a distinguished Senator from Illinois—supported minimum-wage hikes. They recognized that there was nothing optimal in the way that employers set wages, and that the economy would function better if the minimum wage set a floor below which wages could not fall. An adequate wage floor would also improve employee morale and bring more workers into the job market. When employers have monopsony power over workers because of frictions in the job market, a skillfully set minimum wage could provide a standard that clears the market, and raises the purchasing power of households to buy, as