Does a higher minimum wage make people happier?

(J. Scott Applewhite/AP)
Joshua Tucker: The following is a guest post from political scientists Michael Krassa of the University of Illinois and Benjamin Radcliff of the University of Notre Dame.
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The minimum wage promises to remain one of the most hotly contested political issues in American politics. The Congressional Budget Office recently provided its nonpartisan judgment of the consequences of the Obama administration’s proposed increase. Their analysis suggests that a hike would do what both liberals and conservatives suggest: A higher minimum wage will cost some jobs but will also raise the standard of living for many millions of people. Such information is surely important, but it hardly answers the question that we should ask of all changes in public policy: Do they make the world a better place when both costs and benefits are considered?
What is needed is a single metric by which to make such an evaluation. Albert Einstein, in a famous essay from 1949, suggests that we consider changes in social and political practices in accord with the degree to which they contribute to making “human life as satisfying as possible.” Thus, why not judge the minimum wage, and by extension other regulations that affect the relationship between worker and employer, by this criterion: how do such policies affect the degree to which people actually enjoy their lives?
Arguments about the minimum wage reflect the fundamental ideological divide over how to maximize human well-being within the context of market democracy. The first approach suggests minimizing the role of government, leaving the market economy alone to produce the optimal outcomes that many believe it naturally creates if allowed to do so. This strategy, favored by conservatives, and especially by the “market fundamentalists” of the Tea Party, follows Ronald Reagan’s judgment that  “government is not a solution to our problems, government is the problem.” Hence, if we resist popular demands for more government services and protections — if we really do “free the market” — it will produce von Hayek’s vision of a “spontaneous order” that promises to create an efficient and just world.
Progressives, in contrast, focus on Franklin Roosevelt’s contention that if left to itself, the market creates so much want, insecurity and “economic tyranny” that the “pursuit of happiness” is really only possible when “the American citizen can … appeal to the organized power of the government.” This is, after all, what Thomas Jefferson famously claimed was a central purpose of government — to protect our right to pursue happiness. In this view, we need the “organized power of the government” as a necessary complement to efficient but pitiless market forces.
Can one approach be empirically demonstrated to contribute to greater levels of human well-being? The following graph is at least highly suggestive of an answer. It plots the mean level of life satisfaction in a nation against its minimum wage (for those industrial democracies that have a minimum wage). As is apparent, the slope relating wages to satisfaction is positive (and statistically significant at the .01 level), meaning that average levels of life satisfaction increase as minimum wage increases.

Wages are expressed in real 2012 U.S. dollars normalized for purchasing power parity (to adjust for the fact that the dollar buys more in some places than others, reflecting the cost of living). Satisfaction is the mean response (on a 1-10 scale) to the standard question “Taking all together, how satisfied or dissatisfied are you with your life as a whole these days?” with higher values representing greater satisfaction. The minimum wage data are from the OECD for the year 2005 (chosen to avoid the disruptions of the Great Recession). Satisfaction data are for the same year (or the closest for which data exist), using the massive collection of survey data at the World Database of Happiness (using question type 122f).
The relationship is dramatic and clear: As the minimum wage increases, people are in general more satisfied with their lives. To be sure that this result is not an artifact of failing to consider alternative explanations, we note that the same positive relationship continues to obtain if we add statistical controls for other factors, including as a country’s level of economic development (GDP per capita, again in purchasing power parity), which may affect both its level of happiness and the level of its minimum wage, and (simultaneously) short-term economic performance (the unemployment rate). Data are from the Penn World Table version 7.0 and the OECD Main Economic Indicators (2012), respectively. With these controls, the minimum wage is still positively associated with satisfaction in statistically significant terms.
Substantively identical results are also found if we use the average value of life satisfaction from 2000 to 2009 (rather than just the single year analysis noted above) compared to the mean value of the minimum wage for the same time period. Also as before, the relationship holds if we add statistical controls for GDP and the mean level of unemployment over the same period.
In sum: regardless of the size of the economy, immediate economic conditions or the time frame chosen, life satisfaction increases as the minimum wage increases.
This analysis includes only those Western industrial democracies that have a statutory minimum wage. What about those few that do not? In those countries — as in Scandinavia — labor unions typically represent such a large portion of workers that the setting of a minimum earnings rate is left by the government for the unions to negotiate with business. The result of this negotiation, of course, is almost always higher minimum wages 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, the countries with strong labor movements also tend to be the happiest countries in the world. Thus, the UN 2013 World Happiness Report lists Denmark as the happiest country in the world (with Norway and Sweden not far behind).  Denmark’s effective minimum wage is $20 per hour, thanks to its strong labor unions (with Norway and Sweden also having high de facto minimum earnings).
More detailed research, such as Radcliff’s “The Political Economy of Human Happiness” (Cambridge University Press, 2013), employing more elaborate econometric models, indicates that pro-worker labor market regulations are associated with higher levels of life satisfaction. Importantly, this relationship is found whether we consider variation across the industrial democracies or across the American states.
There is thus both theoretical and statistical evidence showing that political intervention  in the labor market is associated with greater human happiness. Other things being equal, people are happier in countries — and states — that actively protect workers. While there are naturally some negative economic consequences of regulation, the net effects of these policies seem to be demonstrably positive, insofar as we are concerned with the degree to which people find their lives to be satisfying.
Equally telling is the fact that the research finds this “happiness benefit” applies to everyone in society: the affluent and the poor, men and women, liberals and conservatives, people who belong to unions and those who do not.
While we know that correlation is not causation (some of the relationship between minimum wage levels and societal happiness may be confounded by unobserved factors), the evidence suggests that certain labor market regulations indeed work to better the happiness of all.
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