The Minimum Wage and the Laws of Economics I can't open the paper these days without stumbling onto something about the minimum wage, which I take to be a good thing as it's a simple, popular way to help address the problem of very low-wage work in America. It's not a complete solution; it's not the only solution - it is, in fact, a relatively small-bore policy that sets an important labor standard: the government will compensate for the severe lack of bargaining clout among our lowest-wage workers by setting a floor below which we won't allow their wages to fall. It's also that case that we need to look carefully these days at any policies that will help offset income inequality and wage stagnation, especially ones with low budgetary costs, or in this case, virtually none. That's one reason that I expect President Obama to amplify these points in an economics speech on Wednesday in Washington. I will not rehearse the age-old arguments about unintended consequences, primarily job loss among affected workers. The economist Arindrajit Dube, who himself has made important contributions to our understanding of this issue, does so admirably in a recent comprehensive review. The fact is that along with the many changes in the national minimum over time, we now have dozens of states and localities with minimum wages higher than the federal minimum. If there were a problem with widespread job losses among intended beneficiaries, we'd probably know. Instead, I want to focus on a broader aspect of the itch that the minimum-wage increase scratches: the problem of job quality. Often, in our national debate on inequality and real income stagnation, the locus of the problem is placed on the workers: they're not skilled enough to meet employers" demands, and their low wages reflect the limited value they add to output. Classic microeconomics actually embeds that very assumption: workers are paid their "marginal product," the value of their individual contribution to the goods or services produced. If you believe that, then you've no one but yourself to blame for your skinny paycheck. But thankfully, few believe it. That's not to say that there's no role for "value added" in compensation. Of course there is. But it is one of many factors. One way to see this is to recognize that low-wage workers have become older and have achieved higher levels of education over time. The figure below shows the share of low-wage workers in 1979 and 2011. Fewer are teenagers or young adults, more are non-elderly adults, and more have at least some college education. Now, you could argue that low-wage workers have to be more skilled than in the past to meet their job requirements. But there's no evidence to support that - to the contrary, there's some evidence that computerization has led to lower numeracy requirements for certain low-wage workers, like cashiers. And besides, if they're more skilled, they should be adding more value, and thus making more money, not less. Thus we can conclude that at least part of the problem with the low-wage labor market is the quality of the jobs, at least from the perspective of compensation, not the quality of the workers. Sure, soft skills - showing up on time, dealing maturely with peers - are as important as ever, but people with shortcomings in those areas show up in all sectors. Typical low-wage workers don't lack the skills to do their jobs. They lack the bargaining power to be paid decently for the work. Relative to most others in the job market, they're least able to press for a share of the profits they're helping to generate. In earlier periods, many lower-paid workers did better on this front. There were more unions - not always in their sector, but setting wage norms that were followed throughout the economy. There were tighter labor markets, which gave them clout they lack in slack markets. And there was a higher minimum wage - its real value in today's dollars was $9.30 in 1968 compared with $7.25 today. Legislation in Congress would raise the minimum to a nominal $10.10 by 2016. When you think of it this way, a lot of the cramped economic debate opens up. Since workers are not really paid their precise marginal product, you wouldn't expect them to be laid off because of a moderate, mandated wage increase. In periods of high profitability, you'd expect some of the wage increase to be paid for out of profits. In a real-world context, you'd want a policy taking direct aim at deteriorated job quality and thus helping to offset the acute lack of bargaining clout among low-wage workers. Does that mean completely ignoring the "laws" of supply and demand and setting the minimum at any level we want? Workers may not be paid their "marginal product," but there is some rough correlation between their pay and the value of their work (the great labor economist Richard Freeman gets at this by using the flat edge of the chalk to draw demand curves). History teaches that moderate wage increases - say, those including not much more than 10 percent of the work force in their sweep - have nothing like the job-loss effects that opponents claim (which isn't to say "zero," but the beneficiaries far outnumber those hurt by the policy). The larger points here are twofold. First, policy makers must be mindful not only of the quality of the people in the work force, but also of the quality of jobs they inhabit. And second, be very wary of those who use the "rules" of economics, particularly at the micro level, to tell you why we can't enact a progressive policy change. More often than not, we won't know the impact until we try it, and in the case of the minimum wage, we know that moderate increases have their intended effect.