How high is too high?
Economists get cold feet about high minimum wages
Governments are pushing the policy to its limits
IN THE BARRIO of Iztapalapa, on Mexico City’s eastern flank, the pavements stay busy even in the punishing afternoon sun.
Street vendors hawk snacks from metal carts; waiters from corner taquerías weave between tables and traffic; cashiers in the ubiquitous convenience stores ring up a steady stream of small purchases.
Young adults in knock-off sportswear mingle with stooped, gap-toothed old folk.
Outside a private-security firm, a sun-bleached façade is plastered with notices advertising for security guards at the legal minimum rate of 278.8 pesos ($15.20) per day.
Life in Iztapalapa can be hard.
But for many workers it might have been worse without the striking recent increases in the minimum wage.
Between 2014 and 2024 it doubled relative to median pay, from 37% of the middle income to 74%.
It is the most extreme example of a worldwide trend, encompassing places far richer than Mexico.
Over the same period Britain has increased its minimum wage from 47% to 61% of median earnings.
South Korea’s ratio has followed a similar trajectory.
Germany introduced its first minimum wage in 2015; it is now worth 51% of median pay.
New Zealand’s pay floor is almost at Mexican levels, relative to its much higher incomes.
Yet state and local legislators in Democratic areas have repeatedly raised local pay floors.
California’s is now $16.50 an hour, nearly double what it was a decade ago.
In Emeryville, a small city that is home to Pixar, an animation studio, the local minimum is $19.90 an hour.
All these initiatives make the federal minimum irrelevant, with less than 1% of workers across the country receiving it.
Compiling data from a range of sources, we estimate that America’s “effective minimum wage”—the wage floor covering the average worker—has reached around $12 an hour (see chart 1).
It will rise even higher if Zohran Mamdani, New York’s mayor-elect, follows through on a pledge to raise the city’s minimum wage from $16.50 today to $30 by 2030.
Governments’ embrace of high minimum wages is not a fad.
It reflects the favourable attitude of many economists towards the policy since the turn of the century.
Unfortunately, just as minimum wages are reaching new heights, the scholarly tide is turning again.
The latest research suggests minimum wages may have nasty side-effects after all.
Economists had traditionally disliked minimum wages on the basis of simple supply and demand: compulsory high pay destroys jobs and pushes workers to the informal sector.
In 1994 the OECD cautioned against the policy, favouring “direct” redistribution.
But the same year landmark research by David Card and Alan Krueger, two American economists, was published, finding that a minimum-wage increase in New Jersey had not affected fast-food employment compared with neighbouring Pennsylvania.
Others devised similar studies.
Most found that minimum wages reduced employment, but only by a little.
That “little” got smaller and smaller over time—as a database of research maintained by Arindrajit Dube of the University of Massachusetts, Amherst and Ben Zipperer of the Economic Policy Institute, a think-tank, demonstrates.
In the early 2000s the literature indicated that a 1% increase in wages caused by a higher minimum wage would lead to a 0.5% decline in employment.
By the late 2010s the effect had fallen to around zero.
Sceptics disputed the “new” literature, claiming it was statistically flawed.
“There is no consensus on the employment effects of the minimum wage,” summarised Alan Manning of the London School of Economics in 2021, even if the effect is “elusive”.
(One earlier study found that support for minimum wages rose with physical distance from Chicago, the home of free-market economics.)
But the pro-minimum-wage group had the ear of policymakers, who jumped at the chance to fight inequality without spending money.
A review for the British government, written in 2019 by Mr Dube, concluded that “research from...developed countries points to a very muted effect of minimum wages on employment”.
Sure enough, the higher minimum wages of the 2010s coincided with a jobs boom in which the employment rates of prime-age workers in the rich world hit all-time highs (see chart 2).
A counter-revolution was brewing, however.
It first stirred in a study of minimum-wage hikes in Seattle in 2015 and 2016.
Eventually published in 2022, the research tracking low-paid workers found that the policy caused a modest fall in their hours worked, even though they kept their jobs (and their pay rose overall).
And although low-wage workers, on average, were not turfed out of work, the hiring of them slowed.
By the third quarter of 2016 Seattle had 7.4% fewer low-paid jobs than a modelled counterfactual.
This effect was lost in the overall employment figures because the city’s highly paid professionals were in such high demand.
The same year a working paper by Erik Hurst of the University of Chicago and three co-authors argued that it takes time for the costs of minimum wages to show up, as firms adjust their business models.
But eventually a large increase “reduces the employment, income and welfare of precisely the low-income workers it is meant to help”.
Modest rises in the minimum wage might also create false confidence.
Offsetting the market power of big employers, which might otherwise suppress wages by hiring too little, means that modest minimum wages create jobs.
But as the pay floor rises too high, employment suffers after all.
The threshold beyond which a blanket minimum wage distorts the American economy is below $8 per hour, according to research published in June by David Berger of Duke University and two co-authors.
One problem they find is that pay floors are one-size-fits-all: “A minimum wage that eliminates [market] power at one firm causes severe rationing at another.”
Other research sets out the distortions minimum wages can cause that do not show up in raw employment numbers.
Big increases in the wage floor lead employers to make working schedules less predictable, according to a recent working paper by Hannah Farkas of Columbia University, in effect making the job worse as it pays more.
They lead to more workplace injuries, according to a paper published in 2024 by Qing Liu of Renmin University of China and his colleagues, perhaps because bosses push their workers harder.
And they can cause firms to reduce their investment, according to a recent working paper by DuckKi Cho of the University of Sydney—a finding that will disappoint those who speculate that high minimum wages have the benefit of forcing companies to focus on raising productivity.
Governments might tolerate a distorted economy in pursuit of higher pay.
After all, minimum wages can be transformative.
In Mexico income poverty fell from 50% to 35% between 2018 and 2024, meaning some 15.8m people had climbed above the poverty line.
Although the law covers only the roughly 45% of workers who toil in the formal economy, it is believed to have dragged up pay in informal jobs too.
Yet minimum wages are a relatively wasteful way to redistribute cash.
Many low-paid workers live in middle- or high-earning households which are in less need of help—think of a part-time second earner, or a rich kid with a holiday job.
And when minimum wages rise, prices often go up in tandem.
This disproportionately harms those on low incomes, according to Thomas MaCurdy of Stanford University, who in work published in 2015 found that the effect on prices in America was more regressive than a typical state sales tax.
That effect is especially relevant today, with voters unhappy about high prices.
Even the correction of market power may benefit higher earners the most.
Minimum wages cause a chain reaction of greater bargaining power that goes up the wage distribution, according to a recent working paper by Mark Bils of the University of Rochester and two co-authors, using data from Brazil.
High earners gain most because it is specialised professionals over whom companies tend to have the most market power.
For example, an ageing computer programmer who knows his own firms’ systems backwards might struggle to find a comparable job, whereas a burger-flipper can move easily from McDonald’s to Wendy’s.
When the effect of minimum wages cascades through the labour market, the programmer sees his next-best option improve a lot, and can therefore negotiate a big pay bump.
The burger-flipper might just lose his job.
More is rarely enough
Does the new body of research chime with reality?
For all that minimum wages have reduced poverty and inequality, they have failed to defuse the left-wing populism of the likes of Mr Mamdani.
Employment may have boomed, but there is still widespread discontent over weak economic growth.
And wonks are getting nervous.
In Mexico, the government promises continued double-digit annual increases.
It is a popular policy; one Iztapalapa cashier says life on the current minimum wage is “very difficult”.
Yet economists fret that the minimum is as high as it should go.
Britain is planning to scrap a lower rate for 18- to 20-year-olds, leading even the country’s most prominent left-leaning think-tank, the Resolution Foundation, to warn the government that it should “tread carefully”.
After years of incautious rises in the minimum wage, that is sound advice for policymakers everywhere.
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