What Are We Really Buying With A Minimum Wage Hike?

Minimum wage debates are stale. Opponents say higher minimum wages kill jobs, while supporters say maintain higher minimums reduce poverty and spur spending, benefitting everyone. But many economists believe both arguments are true: higher minimum wages do cost some jobs, but they also raise the standard of living for large portions of the population.

With four states — Arkansas, Alaska, Nebraska, and South Dakota — taking up measures to raise their minimum wages, it’s worth asking: How can we can decide whether or not higher minimum wages are, on balance, a good idea or not? How about by considering financial well-being? Simply put, do average individuals living in nations that have higher minimum wages have higher levels of financial well-being?

We decided to but this question to the test.

To measure well-being, we turned to a 2013 Gallup report, aptly-titled “Global Well-Being.” In the report, Gallup provides an index of the share of a country’s populating that are financially “thriving” (as opposed to “struggling” or “suffering”) built from asking survey questions about the degree to which you have “enough money” to do the things you need to do and “how often you worry about money.” Gallup explains that the overall definition of financial “thriving” is straightforward: such people “are generally satisfied with their overall standard of living.”

Here is a graph that shows the relationship between Gallup’s financial well-being index and minimum wages across countries.

We have included the regression line to show the trend relating wages to well-being. The relationship between minimum wages workers and overall well-being for nations is positive, meaning of course that well-being increases as the minimum wage increases.

For all you stat wonks out there, the relationship is also statistically significant at the .001 level. The minimum wage data come from the OECD and are expressed in real 2013 U.S. dollars normalized for purchasing power parity, which adjusts for the fact that the dollar buys more in some places than others, reflecting the cost of living.

But wouldn’t wealthier, more developed nations tend to have both higher average financial well-being and higher minimum wages? And wouldn’t nations with low unemployment levels have higher financial well-being regardless of their minimum wages? To ensure these factors did not confound the analysis, we controlled for them statistically. Adding variables for a country’s level of economic development as measured by GDP per capita, again in purchasing power parity, and, simultaneously, the unemployment rate, we found that the strong, positive relationship between minimum wages and overall financial well-being still holds.

We also find the same results if we take a longer-term perspective, presuming that current conditions reflect not just the immediate level of the minimum wage, but its longer term average. Thus, financial well-being is strongly predicted by the average minimum wage from 2000 to 2009—and this relationship holds if including the time-equivalent economic controls noted above.

Here’s the bottom line: Regardless of the size of a country’s economy, its current economic situation, or the time frame chosen, people lead better lives as the minimum wage increases.

This analysis includes only those industrial democracies that have a statutory minimum wage. What about those few that do not?

In those countries — mainly in Scandinavia — labor unions represent such a large portion of workers that the setting of a minimum earnings rate is left to the confederated unions to negotiate with business. The result, of course, is almost always higher minimum earnings than are found in countries with statutory minimum wages (such laws generally existing as a necessary complement to labor markets precisely because union coverage rates are low). Not coincidentally, countries with strong labor movements also tend to have the highest levels of human well-being. This is reflected in the present data: the three countries in the world with the highest levels of financial well-being are Sweden, Austria, and Denmark, all countries with strong unions and high de facto minimum earnings (e.g. Denmark’s effective minimum wage is about $20 per hour, courtesy of its labor unions). If we were to include these countries in the analysis by including their de facto minimum earnings, the reported relationships would only be strengthened.

Some might argue that correlation is not causation, and that some of the relationship between minimum wage levels and financial well-being may be confounded by unobserved factors. True. But on balance, the evidence suggests that higher minimum wages do indeed work to the financial betterment of society as a whole.

Michael Krassa is professor of political science at the University of Illinois-Urbana. Benjamin Radcliff is professor of political science at the University of Notre Dame and a member of the Scholars Strategy Network.