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What Does an Increase in the Minimum Wage Do to the Economy?

As Obama and others press to raise the federal minimum wage about $7.25, skeptics say such a move could bruise the economy. Who’s right? Let’s the consult the data!

The fight for minimum wage is on.

From Capitol Hill to Main Street, the question of how much money our lowest-paid workers should earn is being answered with an emphatic “more.” President Obama supports a bill to increase the federal minimum wage to $10.10 per hour over the next two years. In a speech on Wednesday, he rallied progressive troops once again for the cause. That same day, a group of 53 members of Congress wrote a letter urging McDonald’s and other fast-food outlets to “super-size” their struggling workers’ paychecks. And fast food workers in hundreds of cities walked off the job Thursday to protest their poverty-level wages.

To which skeptics say: won’t raising the minimum wage take a damaging toll on businesses’ bottom lines, hurting our fragile economy? Armed with new research (PDF), proponents are challenging that conventional wisdom.

Currently, approximately 3.6 million workers make at or below the federal minimum wage of $7.25. While it’s at a nominal high, the real value of the minimum wage (adjusted for inflation) has been plummeting since the 1970s. And the difference between the minimum wage and average hourly earnings has also reached record lows, well below international standards.

Wage hike supporters argue the social benefits far outweigh any perceived economic costs.

And about those costs. New data, advocates say, show that an increase in the minimum wage actually prevents rampant job turnover, boosting companies’ productivity, and will increase demand for products and therefore sales. The idea is that well-paid workers tend to stick around longer, which saves a company money spent training and recruiting new employees—and when those workers have more money to spend, they just might spend them on more burgers, or knick knacks or whatever.

But the left isn’t the only side with studies. Opponents’ main complaint—bolstered by research of their (PDF) own (PDF)—is that raising the minimum wage will cost jobs. The “cruel reality,” as House Republican Jason Chaffetz explained on CNN’s Crossfire this week, is that employers will say, “If it’s going to cost more for labor, I’m going to hire less people.”

But several new studies discount that logic, arguing instead that little to no impact on employment would come from a wage increase. Princeton professors David Card & Alan B. Krueger started the change in thinking with their breakthrough paper that concluded, “minimum wage lead to increases in pay, but no loss in jobs.” A 2010 study published in the Review of Economics and Statistics showed a ten-percent increase in the minimum wage affected the restaurant and retail employment by less than one percent. And as a recent op-ed in The New York Times by one of the 2010 study’s authors points out, even (PDF) more (PDF) research (PDF) came to the same conclusions.

Likely armed with this data, President Obama recently rejected the theory that wage increases lead to unemployment. “We all know the arguments that have been used against a higher minimum wage,” he said in a speech on economic mobility Wednesday. “Some say it actually hurts low-wage workers—businesses will be less likely to hire them. But there’s no solid evidence that a higher minimum wage costs jobs…”

While rejecting every study with more conservative conclusions might be a reach, Obama isn’t the only one who thinks raising the wage is worth a negligible effect on the job market. The tide seems to be turning toward the left. Currently, 19 states and D.C. have set the minimum wage higher than the federal rate. New Jersey’s recent vote for a wage hike will go into effect next year and make it the 20th.

A look at unemployment numbers in these states also suggests that those with higher minimum wages aren’t suffering disproportionately from low job numbers. The correlation between states’ minimum wage and unemployment is a low .3, meaning a high minimum wage doesn’t really affect the unemployment rate. Only eleven states with minimum wages over the federal rate had higher unemployment in October (the most recent data available) than the record low national average of 7.0.