March 29, 2004
Minimum Wage
Posted by Gordon Smith

Madison is in the middle of an active debate about the minimum wage. The city council has been debating a proposal to increase the minimum wage in Madison from $5.15 per hour to $7.75 per hour. The local newspapers are involved. See here and here. This Saturday, the Law School leaps into the fray with a program entitled "DO HIGHER WAGES EQUAL UMEMPLOYMENT? The Living Wage Debate: Just a Theory or a Growing Reality."

The positions are familiar: proponents argue that minimum wage employees need to earn a living wage, while opponents contend that employers will reduce hours or fire employees to shave excess labor costs. An additional wrinkle here is that Wisconsin Governor Jim Doyle is advocating a statewide minimum wage (though he has rebuffed the legislature's attempt to constrain municipalities).

As you might expect, the facts about the effects of a minimum wage hike are less clear than all of the participants in this debate would have us believe. This is not a particular area of expertise for me, so I will tread gently. A recent study of data from Brazil observes wage compression in the wake of a national minimum wage. In addition, the study finds that a minimum wage increase "does not always have a significant effect on employment and it is not always negative." Both the compression effect and the employment effect seem generalizable beyond Brazil. But do they translate to localized minimum wages?

One thing that seems obvious to me -- and is part of the motivation for Governor Doyle's proposal for a statewide minimum wage -- is that Madison will place itself at a competitive disadvantage vis-à-vis surrounding communities if it raises the minimum wage. Several communities, including my home town of Middleton, are well situated to attract businesses that are not captive to Madison, including restaurants. We will welcome them with open arms.

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