Skip to main content

Opinion: Does minimum wage make sense? Yes, but...

By economist Alan Manning, Special to CNN
May 22, 2014 -- Updated 1226 GMT (2026 HKT)
STORY HIGHLIGHTS
  • Minimum wages are at the top of the political agenda in many countries
  • Economist Alan Manning says the concept of minimum wage is popular with voters
  • But there is a point at which minimum wage is so high that it destroys jobs, he says

Editor's note: Alan Manning is a professor of economics at LSE and director of CEP's community research program. His 2003 book, Monopsony in Motion: Imperfect Competition in Labour Markets explains the theory behind minimum wages. Read his blog here. The opinions expressed in this commentary are solely his.

(CNN) -- Minimum wages are on top of the political agenda in many countries.

U.S. President Barack Obama's proposal to raise the federal minimum wage from the current $7.25 to $10 per hour seems blocked by Congress, but individual states and cities are raising minimum wages within their jurisdictions -- Seattle's mayor, for example, proposes a new $15 minimum.

Alan Manning
Alan Manning

Germany looks set to introduce a national minimum wage for the first time, after months of fierce debates. In the UK, politicians from all the main parties are falling over themselves to find some way to inject new vigor into the UK's national minimum wage.

Even the free market redoubt of Hong Kong introduced a national minimum wage in 2011.

But it's not all travel in one direction. Last weekend, 76% of voters were opposed to a proposal to raise the Swiss minimum wage to what would have been the world's highest, about $25 per hour.

So, why this widespread enthusiasm for the minimum wage?

There is both economics and politics at play.

The minimum wage does help low-paid workers -- it raises their earnings without harming their job prospects.
Alan Manning

The main argument against the minimum wage is that it destroys jobs, harming those it sets out to help. But evidence suggests that this is often just a scare story.

When the UK introduced its national minimum wage in 1999, critics predicted hundreds of thousands of job losses. The actual impact seemed to be zero.

This experience and other studies have shifted the expert opinion on the minimum wage.

Few dispute that there comes a point at which minimum wage is so high that it destroys jobs. But this does not happen at the current levels of minimum wages in many countries.

The reason the minimum wage seems to have little effect on employment, is that total labor costs do not rise as much as one would expect as costs of turnover and absenteeism are reduced.

Moreover, the incentive to work rises as wages rise for low-skill workers.

Most workers earning are not in sectors where they would be facing international competition so prices rise a little bit.

Fast food workers demand higher wages
Obama: Minimum wage 'a simple issue'

And many low-paid workers are in an vulnerable economic position and are paid less than the value of what they produce.

So yes, the minimum wage does help low-paid workers -- it raises their earnings without harming their job prospects. It helps to reduce poverty.

But it alone cannot solve the problem of poverty.

Many people earning minimum wage, such as students, are not living in poor households.

And many poor households do not contain minimum wage workers.

Indeed, the poorest households are those with no-one in work.

So why the push for higher mimum wage?

Many people think there is something very wrong with an economic system in which someone who works hard is still unable to provide an adequate standard of living for themselves and their families.

Such views have always been common, but are much more common after the crisis when living standards are threatened and the link between growth and people's welfare seems to have been severed.

In some places, these political pressures seem likely to lead to minimum wages much higher than we have seen in recent experience, perhaps around 60% of median earnings.

This is the point at which many economists get nervous that the negative effects on employment must surely kick in but we do not have many studies to know whether these concerns are valid.

But it seems likely we may be about to find out.

Opinion: Three reasons why a $10.10 minimum wage is good for America
Read more: Raising minimum wage would ease poverty but cost some jobs
Read: Obama pushes for minimum wage increase

Opinions expressed in this commentary are solely those of Alan Manning.

ADVERTISEMENT
Part of complete coverage on
October 9, 2014 -- Updated 0804 GMT (1604 HKT)
Liberia, Sierra Leone and Guinea -- the three countries facing the biggest health crisis -- are also facing huge bills to try and contain the virus.
September 22, 2014 -- Updated 1316 GMT (2116 HKT)
Twitter has lost its position in the top 20 coolest brands for the first time in three years.
September 25, 2014 -- Updated 1554 GMT (2354 HKT)
As the crisis in Iraq escalates, CNN looks at how Iraq could crack down on ISIS' oil riches under the guidance of its new oil minister, Adel Abdul Mahdi.
August 29, 2014 -- Updated 0842 GMT (1642 HKT)
Recep Tayyip Erdogan is Turkey's new president . So can he revitalize its economic fortunes?
September 19, 2014 -- Updated 1724 GMT (0124 HKT)
Experts share their tips on cities they see as emerging financial hubs...they're not where you think.
October 9, 2014 -- Updated 1511 GMT (2311 HKT)
Growing numbers of us are willing to serve as bank, teacher or travel agent to people we have never met, and entrust them to serve us in turn.
August 28, 2014 -- Updated 1244 GMT (2044 HKT)
The European Union is stepping in to save its dairy from going sour.
August 18, 2014 -- Updated 1236 GMT (2036 HKT)
Europe's deteriorating relationship with Russia has hit the region's growth, even before new food sanctions begin to bite.
July 16, 2014 -- Updated 1634 GMT (0034 HKT)
With cyberattacks on the rise and here to stay, it's a modern-day challenge for people and businesses to get smarter about preventing them.
August 14, 2014 -- Updated 1324 GMT (2124 HKT)
Airstrikes, rebels seizing control of oil fields, plus a severe refugee crisis are a recipe for market panic. So why are Iraq oil prices stable?
September 19, 2014 -- Updated 1124 GMT (1924 HKT)
Peer-to-peer finance lets businesses bypass bank loans. Creative companies with quirky ideas find new lending models advantageous.
July 20, 2014 -- Updated 1524 GMT (2324 HKT)
Evidence points to pro-Russian separatists as perpetrators of the attack and Vladimir Putin is facing questions, David Clark writes.
September 3, 2014 -- Updated 0952 GMT (1752 HKT)
CNN's Jim Boulden looks on the future of online shopping.
August 5, 2014 -- Updated 1440 GMT (2240 HKT)
The biggest Ebola outbreak in history is taking its toll in Western Africa, hitting some of West Africa's most vulnerable economies.
ADVERTISEMENT