Ross Prof to Washington: Here’s Why Increasing the Minimum Wage Won’t Kill Business


As more than a thousand U-M students lined up to get tickets to see President Barack Obama speak in Ann Arbor on Wednesday as part of his push to increase the federal minimum wage to $10.10 per hour, one Ross professor hopes to elevate the discussion beyond standard DC political posturing.

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Ross’ Wallace Hopp, professor of technology and operations, says the amount of research done on the impact of minimum wage increases should be influencing more of the discussions happening right now.

“The overwhelming conclusion of this research [PDF] has been that the impact on employment from raising minimum wage is minimal,” Hopp said.

Here are some of Hopp’s points:

Minimum wage increases won’t destroy job creation

Hopp: Despite economic theory that suggests increasing the cost of labor should cause employers to decrease hiring, this has been observed time and again not to happen [PDF].

Many employers are already paying lower wages than they would pay in an efficient market, so legislation that forces them to pay a (modestly) higher wage does not result in laying off workers. Their labor is still cost effective.


Price impacts will also be small

Hopp: For most products, labor affects only a fraction of the total cost, typically less than 10 percent for manufactured products. So, a wage increase of 20 percent for a product whose cost is 10 percent labor would result in a 2 percent increase in total cost (10 percent of 20 percent).

Of course, that assumes all labor for that product is made up of minimum wage workers, which is hardly ever the case.

Hopp: So, unless the cost of a product or service is dominated by labor, and the labor is predominantly minimum wage level, the impact on total cost of a minimum wage hike will be small.

But, because employers know that higher prices will reduce demand, they will pass along only part of the increase in order to maximize their profits. Making the impact on prices even smaller.


How to move forward

Hopp: The fundamental question is whether the obvious benefits to low income wage earners justifies the small impacts on the economy. I’m not an advocating or opposing minimum wage laws. But I do think we should be looking at the research results [PDF] and engaging in an informed debate, rather than hunkering down into rigid positions chosen for ideological reasons.

But I guess that's why I'm in academia and not politics.

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