Fall 2021

Is $15 an hour the answer?

A U of M economics professor is studying whether raising the minimum wage is the best way to lift low-wage workers

Minneapolis and St. Paul are slated to raise the minimum wage to $15 per hour in 2022 and 2027, respectively. Congress also introduced the Raise the Wage Act of 2021, proposing to increase the federal minimum wage to $15 per hour by 2025.

What impact could such increases have on workers, employers, and consumers? We asked Jeremy Lise, Carter-Schwab Professor of Economics at the University of Minnesota and a research consultant and senior scholar with the Federal Reserve Bank of Minneapolis. As an affiliate of the Heller-Hurwicz Economics Institute, he has been studying the pros and cons on behalf of Minneapolis and St. Paul.

Jeremy Lise
Heller-Hurwicz Economics Institute

How did you get interested in the minimum wage issue? 

It came about through collaboration with two colleagues at the U and the Fed. We became aware of the city’s proposal. As part of that proposal, the city wanted an analysis of the impact of this change on workers, businesses, and consumers. There are a lot of interesting questions associated with that, and we thought we could bring something useful.

From what you’ve learned, what could a $15 per hour minimum wage mean for workers?

Theoretically, it depends on how competitive a market is. In a very competitive market, we expect to see an increase in wages accompanied by a decrease in workers’ hours. That could be a net gain for workers or a bit of a net loss.

What could it mean for employers?

For the employer, what matters is total labor costs. I would expect that if there were higher wages, there would be lower benefits. That’s something we hope to learn from our analysis. Another thing we’re looking out for is whether businesses relocate outside the city.

Would a higher minimum wage reduce employee turnover?

There is evidence in some areas that have had increases in wages that turnover has gone down. That can be beneficial when recruiting costs are high relative to the change in wages.

One thing we have seen in case studies in industries like home health care, which hires a lot of low-wage workers, is a restructuring of how work is done—for example, going from a lot of part-time flexible positions and overtime to fewer but more steady full-time jobs. That way, firms would avoid the costs of overtime and the hassles of having three people do a job as opposed to one person.

Would it affect some industries more than others?

It would affect industries that have a large share of workers who are closest to the minimum wage threshold, such as the restaurant industry, retail, home health care, service. The interesting thing about this project is we can learn to some extent how competitive various markets are within the city. You might expect, for example, that restaurants are very different from retail.

Ten years for Heller-Hurwicz

A global recession, growing unemployment, a shrinking middle class, evidence of climate change, a frayed social safety net. Those factors dominated the economic climate in 2011.

That same year, the University of Minnesota’s Heller-Hurwicz Economics Institute was founded as a way to help solve those problems by connecting economic research that was happening on campus with lawmakers, government officials, business leaders, and others. The Institute’s goal: to inform economic research and policy that promotes the public good, says Professor V.V. Chari, founding director of the Institute and Paul Frenzel Land Grant Professor of Liberal Arts in the University’s Department of Economics.

Funded primarily through donors and foundations, the Institute’s many accomplishments include producing policy briefs and research papers, bringing together thought leaders for events, and providing testimony before the Minnesota Legislature and Congress, as well as:

• Supporting promising graduate students through fellowships

• Recruiting and retaining faculty through endowed positions

• Providing undergraduates with research opportunities

• Providing seed funding to support faculty research

• Attracting underrepresented students to economics through scholarships.

“Our work would not be possible without donor support,” Chari says.

Would the wage increase make goods and services more expensive?

That’s a concern. To some extent, the increases in cost have to be passed on to the consumer. One way is through increased prices. We’re not at the point in our analysis to be able to say to what extent we will see that.

We know from recent studies that industries that are very competitive are less likely to pass on those increasing costs—for example, in a case where the consumer’s alternative is to buy the identical product or a close substitute from an online retailer. In areas where goods are very tradeable, we expect to see that accommodated by some restructuring between capital and labor. If we go the other extreme to very nontradeable goods, say restaurant meals, we would expect a larger part of the increased labor costs to be passed on to the consumer.

Is raising the minimum wage the best way to help the working poor?

The earned income tax credit, for example, has a similar goal of increasing the take-home pay of people who are under a particular income threshold. It has the advantage of the cost being spread throughout the population through the income tax system as opposed to being borne by the workers and firms in the area that have an increased minimum wage. To the extent that this could be a preferable policy to minimum wage, I think it deserves some careful thinking.

How far along is your study?

We have issued baseline reports, and will release our first analysis in November using the data that we have on employment, hours, and wages of workers and wages that are paid by firms. We are working with the Department of Revenue to bring in information from businesses—revenues, changes in labor, total wage expenditures. That second part will be available in a year or so.

How has the Heller-Hurwicz Economics Institute, which receives support from donors, and your endowed professorship enabled you to do this work?

It’s made a big difference. The support I’ve had has allowed me to hire graduate and undergraduate research assistants. It frees up some of my time to train the next generation of researchers.

Kim Kiser is editor of Legacy magazine.