The following article was developed by Green Comma as a discussion resource for use in grades 9–12 classrooms as well as in freshmen college classrooms. The principal writer is Douglas Houston, a lawyer living in Cambridge, MA, who frequently collaborates with Green Comma’s managing director, Amit Shah.
All opinions are the writers’ own.
Cavuto: “So do not raise the minimum wage?”
Trump: “I would not do it.”
— Republican debate on Fox News, Nov. 10, 2015
Democrats Add $15 Minimum Wage to Platform, July 2016
With such diametrically different opinions from the two major political parties who control the legislative offices in the country, what are the voters, the citizens who labor under the laws, supposed to think? Green Comma attempts to provide the overview of understanding this economic and fair labor rights issue.
Minimum Wage, a living wage?
Cecil Euseary, a 52-year-old worker at a fast-food chain in Detroit; Shamar El-Shabass, a 50- year-old worker at the same fast food chain in Wilmington, Delaware; Jewel Walker, a 19-year- old at the same fast food chain in Los Angeles; Laugudria Screven, a 23-year-old worker at a different fast food chain in Riverdale, Georgia; and Houston Illo, a 28-year-old worker at a drugstore chain in Burlington, Vermont have in common.
They’re all minimum-wage workers, and none of them can survive on those wages alone.
Cecil works for $8.15 an hour, the minimum wage in Michigan and says that if he wasn’t living in a relative’s house he’d be out on the street. But even with that housing subsidy, when he recently became ill, he couldn’t afford the $53 medicine the doctor prescribed. He doesn’t have a car, walks to work, watches sports on TV and visits his sister and brother for entertainment.
Shamar lives with his wife, who can’t work for medical reasons, and his youngest daughter in a one-bedroom apartment. He had a job with Cease Violence, a community organization, for $15 an hour, during which he started catching up on his bills, but the funding dried up. With his current $8.25 an hour job and his $850-a-month rent, he is constantly falling behind — his cable TV was cut off and he can’t afford a car. He is under constant pressure to get more time from his creditors. He is “trying to make an honest living; trying to stay out of trouble; trying just to survive; without selling drugs,” but he feels in “bondage” and understands why people turn to crime. He sees the city of Wilmington “moving up,” constructing nice new buildings, and doesn’t see why he is not benefiting from all the spending.
Jewel works full-time as a wheelchair assistant at Atlanta’s airport, but to get by she has to commute 30 miles to the suburbs, taking two buses and a train, to work a second job as a cashier at a fast-food restaurant. Jewel ends up putting in a 52-hour work week, seven days a week. And with that income she cannot afford a car or move out of her father’s home.
Laugudria’s wage of $7.50 an hour as a cook is not enough to live on, given his $360 rent, so he travels 25 miles twice a week to sell his plasma for $50 a visit, which leaves him tired. And he still can’t afford to eat sometimes more than one meal per day. He’s also aware that people on the street are making more money stealing and selling drugs, and wonders, “sometimes it feels that you’ve got to break the law to survive in this world.”
Houston stocks shelves for Vermont’s minimum wage of $9.15. She recently graduated from college, and as she says, “It took me all summer to find anything, and that’s what I came up with. . . . I took that job because it was better than not working at all.” Her salary just covers rent; her parents have to help her out with food, gas, and car payments.
On November 29, 2016 thousands of workers demonstrated for raising the minimum wage as part of the “Fight for $15” movement in New York, Los Angeles, Chicago, Cleveland, Detroit, Minneapolis, Oakland and other cities.
The subject has so many parts. It clearly has an economic part — it’s about wages. But it has a larger economic element that rests on basic principles like supply and demand, the market place of labor, the costs of production. It ends up involving political issues like foreign trade, and the pressure to find cheap labor outside this country. It has social and ethical issues — what is a fair wage, and whether that is any business of the government. It has legal issues — if it is the business of the government, how does the government get involved.
John Schmitt, for the Center for Economic and Policy Research, writes “the employment effect of the minimum wage is one of the most studied topics in all of economics.”
One of the first things to understand is that there is no one minimum wage. Any state or even city can set a minimum wage. That doesn’t mean it will be lawful, nor does it mean it will be enforced. The federal government last set a minimum wage in 2009 of $7.25, but various states have different minimum wages and some cities have minimum wages. The issue of which wage rate prevails becomes a Constitutional law issue.
The Federal Government’s Constitutional Authority to Regulate Wages
The Constitutional law issue is worth exploring because as the Tea Party and other politically conservative groups have sought to limit the federal government’s authority on many issues, they have sought to do the same with the federal government’s authority to set a minimum wage. So where did this authority come from and when?
The tenth Amendment to the Constitution provides that “[t]he powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” This means that the powers of the federal government are enumerated, and if they are not enumerated, the federal government does not have the authority. That authority is left to the States.
However, Article I, Section 8 of the Constitution grants Congress the power “to regulate commerce. . . among the several states.” This is called the “Commerce Clause” and is that clause that has allowed the federal government to regulate (or interfere, according to some) in much of what occurs within the several states.
The origins of the Fair Labor Standards Act of 1938 has dramatic roots in the Great Depression and the sweeping progressive legislation of Franklin Delano Roosevelt.
Two years after Roosevelt signed the Fair Labor Standard Act of 1938 (“FLSA”) the act was challenged and the Supreme Court in US v. Darby, 312 US 100 (1940), upheld the right of the federal government to regulate wages based on the Commerce Clause.
Who is Covered?
Employees may be covered by the federal minimum wage laws because their employer is a business covered under the FLSA, or they may be covered individually. Businesses are covered by the law if they have at least two employees and an annual business volume of $500,000 or are providing medical or nursing care, schools, or government agencies. Individual employees of smaller businesses are covered if the employee works in commerce between states (“interstate commerce”), or if they are engaged in commerce or in the production of goods for commerce, or are domestic workers (housekeepers, babysitters and cooks are normally covered.)
Although that means that the federal government can only regulate wages that are connected to interstate commerce, the Commerce Clause has been applied broadly. So for instance, if an employer uses the mail or phone calls across state lines, that would involve interstate commerce. There are other ways employees may be covered by the federal minimum wage. As of 2009, “more than 130 million American workers are protected (or “Covered”) by the FLSA, which is enforced by the Wage and Hour Division of the U.S. Department of Labor.” However, the federal minimum wage does not cover all workers in the United States.
Who is Exempted from Minimum Wage Laws and Why?
There are several ways an employee might be exempt from the federal minimum wage law. In fact, according to the Pew Research Center (9/8/14), 1.5 million hourly workers earned the federal minimum wage, and 1.8 million earned less than that because they were exempted. That 3.3 million workers at or under the minimum wage represents 4.3% of the 76 million hourly paid workers, and 2.6 % of all wage and salary workers.
The largest group of workers exempted from the federal minimum wage is “tipped employees” of which the largest subgroup work in the food services industry. Their minimum wage is
$2.13 / hour, which has not changed since 1991. Other groups of workers are exempted as well, for instance, full-time students and certain disabled workers. The exceptions to the rules are narrowly construed against the employer. The exceptions apply both to the minimum wage laws as well as the overtime pay laws. For instance, farmworkers employed in small farms are exempt from both the minimum wage and overtime pay provisions. Young workers employed in small farms, with parental consent, are also exempt from child labor provisions.
While there is a federal minimum wage, which as stated does not necessarily cover everyone, there are also state minimum wage laws. The question arises, which one prevails if they are different? The higher wage prevails.
How are the States Involved in Setting Minimum Wages?
How does the FLSA interact with state or city minimum wage laws? The states, as expected, are divided as to how they treat minimum wage. As of August 1, 2016, according to the US Department of Labor, Alabama, Louisiana, Mississippi, Tennessee, and South Carolina were the only states with no state minimum wage laws. Georgia and Wyoming were the only states with minimum wage laws below the federal level. Fourteen states had state minimum wage levels the same as the federal rate, and the rest were above the federal rate. For a list of the state minimum wage rates, as of August 1, 2016, see this link at the US Department of Labor’s website.
State Decisions on Minimum Wages
In November 2016 Arizona, Colorado, and Maine voters approved ballot measures to incrementally raise their minimum wages to $12 an hour by 2020 and Washington’s voters approved a measure to increase wages to $13.50 an hour by 2020. The State of New York raised the minimum wage in New York City to $15.00 by 2019. Washington DC raised its minimum wage to $15.00 by July 2020. California passed a bill raising the minimum wage to $15.00 by 2022 for employers with more than 25 employees and 2023 for those with 25 or less, with other caveats based on the economy. Oregon passed a law raising the minimum wage and eventually indexing increases to inflation based on the consumer price index.
A chart of State minimum wage rates and recent legislative changes can be found on the website of the National Conference of State Legislatures.
The city of Seattle passed a city law that raises the minimum wage for some employees to
$15 /hr beginning January 1, 2017, and for all worker in 2021.
While, as with New York, a state may pass a law raising the minimum wage in a city, a state may pass a law that has the opposite effect, blocking a city’s attempt to raise the minimum wage. In October 2016 the Kentucky Supreme Court held that Lexington and Louisville could not increase their minimum wage to $10.10 because it violated state law. A similar case is being considered in Alabama concerning Birmingham’s attempt to raise that city’s minimum wage. Spencer Woodman in “Congrats on that New Citywide Minimum Wage. Now Republicans Are Going to Try to Kill It” and Jay-Anne Casuga and Michael Rose in “Are State Workplace Preemption Laws on the Rise?” examine various states’ laws preventing their cities from increasing the minimum wage. It should be noted that states’ efforts to prevent minimum wage increases is not confined to the south or to Republican legislators. In 2014 Rhode Island’s Democratic law makers passed a state law preventing its cities from raising their minimum wage.
The Case of Alabama
Let’s take a closer look at Alabama’s effort to limit their cities’ efforts to raise the minimum wage, which serves as a microcosm of both the national effort to raise the federal minimum wage and the efforts to block that increase. For instance, the reasons for raising the minimum wage seem clear against a pretty stark economic background. Christine Owens, executive director of the National Employment Law Project, released the following statement concerning Birmingham’s effort to raise its minimum wage, “Currently, an estimated 18.9 percent of Alabamians live below the poverty line, with over a quarter (27.5 percent) of children living in poverty. In Birmingham, the poverty rate is an outrageous 31.0 percent, with nearly half (49.2 percent) of the city’s children living in poverty.”
A state study by “Voices for Alabama’s Children” in their 70 page 2015 Data Book, on pages 49 -53, report similar alarming statistics:
· 27% of Alabama’s children live in poverty, nearly half of which are living in extreme poverty (household incomes of less than $12,000 / year).
· 44.6% of African American children live in poverty; almost the same percentages of Hispanic children live in poverty.
Clearly the state legislators blocking Birmingham’s attempt to raise the minimum wage are aware of these facts, but press their argument despite the problems such poverty inevitably causes. For example, the state legislators must address the need for an educated workforce in this hyper-competitive business climate, health issues like obesity and drug abuse, crime, and social unrest. And finally, there is the issue of fairness. Does that amount of poverty indicate a serious unfairness in the social order? The arguments against the increase, according to the news reports, were fairly limited.
Addressing the possibility that Alabama’s legislature were somehow discriminating against Birmingham’s 73.4% African American population, the State’s attorneys argued that there were many reasons for the state to prevent cities from changing their minimum wages, including economic theory ꟷ other states had passed similar laws, and Alabama’s law prevented all its cities from raising their minimum wage, regardless of their racial makeup.
Alabama Republican state senator, Jabo Waggoner, warned that if Birmingham raised its minimum wage it would devastate businesses there, cause increased unemployment, and send the regional economy into a slump. Others argued that letting individual cities dictate minimum wages results in a confusing patchwork of different wage rates that would discourage new business investment.
Christine Owen’s Testimony, the Need for a Raise, an Unlikely Advocate
Christine Owens testified before the House of Representatives Education and Workforce Committee on December 9, 2016 and explained The National Employment Law Project’s goal in one sentence, “Our goal is to ensure that work is an anchor of economic security and a ladder of economic opportunity for all of America’s working families.” Though her testimony was not focused on the minimum wage, her arguments concerning the issues she did cover are the same and instructive. She opened with a review of the 2008 economic crisis, the jobless recovery into 2010, where 8 million jobs were lost and unemployment reached 10 %. The nation has added more than 13 million new jobs since its low point and unemployment is at 5%.
And then she addressed some of the problems by introducing a quote from Republican Congressman Ryan’s remarks about the wage stagnation of the American worker, “They are going nowhere fast. They never get a raise. They never get a break. But the bills keep piling up — and the taxes and the debt. They are working harder than ever to get ahead. Yet they are falling further behind.”
According to Owens, there is no dispute that for most of America’s workers, wages have declined for the past 35 years, with increased income inequality. The Bureau of Labor Statistics provides that for the years 2007 to 2014 the bottom 88% of the wage earners have experienced wage stagnation or decline, while the upper 22% have experienced increased compensation, with the trend increasing more in 2014 than in 2007.
Wages and Productivity
Owens presents her organization’s statistics, that wages have become stagnant or decreased as workers have become more productive and attained more education. Though these statistics begin to get into the statistical morass that minimum wage ultimately ends up in, they are necessary in the analysis of fair compensation. One of the key arguments for how wages are “unfair” is that wages are intuitively and logically connected to productivity. If one is more productive, one should be paid more. The same with education. If one is more qualified, one should be paid commensurately. Between 1973 and 2014, worker productivity rose 72%, yet wages, adjusted for inflation rose 8% and nearly all wage growth was between 1995 and 2002.
Minimum Wage Jobs, Not Only for the Young
Owens supplies statistics that rebut minimum wage opponents who claim that minimum wage is only a “starting wage” for young workers. Nearly half of those who would benefit from increasing the minimum wage to $12 are over 40 years old. “Two-fifths of 2008’s minimum wage workers were still in near-minimum wage jobs a full five years later. Hence, inaction on the federal minimum wage is consigning more and more adult workers to lifetimes of working harder but failing farther behind.”
Owens paints an equally bleak picture of the traditional method of improving one’s employment opportunities. Education as a means of advancement is not working as well as it used to as a result of the wage stagnation and decline. A college diploma no longer guarantees a good wage and a job with a more certain path to promotion and upward mobility. Increasingly, the necessary path to promotion and a more certain economic future is a graduate degree.
College-educated workers are now forced to settle for lower paying jobs. Houston Illo’s story is not uncommon. The common phenomenon of workers in their late twenties and thirties unable to leave their parent’s home is not just a result of the recession and the housing crisis, but a result of wage stagnation and depressed wages. As young college-educated workers are forced to take lower-paying jobs, less educated and trained workers are forced “into even lower-paying jobs or out of the labor market altogether.”
You Decide: Arguments for and Against Raising the Minimum Wage
The arguments against raising the minimum wage fall into several categories ꟷ some are based on economic theory, the free market rules. Other reasons are microeconomic ꟷ how will it affect businesses, and some are political ꟷ the government shouldn’t get involved. Unfortunately, the reasons often depend on data, and the data seems to always be in contention.
1. The first and most popular argument is that minimum wage increases will cause employers to take to steps to reduce costs that will ultimately hurt the low wage worker. The most drastic example of this would be an increase in unemployment. This is an attractive argument because it is intuitive; if the cost of labor increases, the business will have to reduce labor costs by cutting workers. Or, alternatively, businesses will not be able to adjust to increased labor costs and will fail, resulting in layoffs and increased unemployment. The other benefit to this argument is that it appears to take into consideration the worker. The worker will be worse off if he or she succeeds in getting higher wages.
And, of course, those who argue this have their data to support it. But as mentioned earlier at the end of the second paragraph of A Couple of Facts, “the employment effect of the minimum wage is one of the most studied topics in all of economics.” John Schmitt’s 29-page academic article, “Why Does the Minimum Wage Have No Discernible Effect on Employment” written for the Center for Economic and Policy Research is a worthwhile read. His conclusion is in the title, and the article is a review of the research from 2000 until 2013 “to determine the best current estimates of the impact of increases in the minimum wage on the employment prospects of low-wage workers.” No doubt his 2013 article is not the last word.
Advocates on both sides are “estimating” which means they are projecting, using past data, data from elsewhere, and assuming certain facts. For instance, Professor Steve Hanke of Johns Hopkins University in “Let the Data Speak: The Truth Behind Minimum Wage Laws,” studied 28 European Union countries, and found that the 21 countries with minimum wage laws have average unemployment of 11.8%, while those without minimum wage laws have 7.9% unemployment. One can reasonably ask, is the only difference between these 28 countries that some have minimum wage and some do not, or are there other differences? For instance, do the countries with lower unemployment have more robust economies, or more manufacturing, or is their work force better educated, or do they have more robust labor unions that maintain higher wages through negotiations? To delve into all of the arguments, both pro and con would take a shelf of books and is beyond the scope of this brief review.
Several other arguments follow the general argument that any increase in wages will ultimately hurt the worker. Businesses, if they don’t have to lay people off or close, will have to reduce costs by cutting workers’ hours. David Neumark, Mark Schweitzer, and William Wascher argue this point in their “The Effects of Minimum Wages Throughout the Wage Distribution.” And they point out that this effect hurts the lowest wage workers, not those making more money.
Another possible way in which businesses may cut costs is eliminating insurance and other benefits that the low-wage worker currently enjoys. In addition, the increased minimum wage will result in a greater tax liability for the low-wage worker.
Exacerbating the increased unemployment as a result of raising the minimum wage will be a push to automate, and to outsource labor to other countries. Finally, there is a 2013 Boston College study that the increased unemployment, resulting from the raised minimum wage, will result in more crime and drug use.
2. The second general argument against raising the minimum wage is that an increase would hurt consumers, because businesses, if they are to survive, will have to pass on the added labor costs to the consumer, and so will increase prices.
Again, several other arguments flow from this general argument. A rise in consumer prices is considered inflationary, and therefore raising the minimum wage will result in inflation. Connected to this inflationary pressure is how it would be felt disproportionately around the country. Raising the minimum would disproportionately hurt the poorest areas of the United States. Given Mississippi’s cost of living at 83.5% of national average and Hawaii at 168.6%, any wage increase would be felt more in Mississippi than Hawaii. Mississippi employers would be increasing wages proportionately more while being less able to pass that cost on to buyers because the increases in prices would also be proportionately more.
Added to the other inflationary effects, raising the minimum wage would Increase housing costs. Raising the minimum wage would put more money in workers’ pockets, who would then seek better housing, resulting in an increased demand for better apartments, which in some communities, like Los Angeles, are in short supply. A higher demand for better apartments will increase the rent for those apartments.
3. Somewhat related to 1. above is the argument that raising the minimum wage will have an effect on young people trying to enter the job market. This is not job loss, but the creation of new obstacles to unskilled hires. Companies won’t pay workers with no skills a higher minimum wage. In addition, there are consequential downsides to young people’s difficulties finding a first job. There are studies that “those experience unemployment at an early age have years of lower earnings and an increased likelihood of unemployment ahead of them.”
Similarly, raising the minimum wage will disadvantage low-skilled workers. The same employers who will be reluctant to hire teenagers at a higher minimum wage with no work experience will be reluctant to pay older unskilled workers a higher minimum wage. Also putting unskilled workers at a disadvantage as a result of raising the minimum wage is the scenario that higher skilled workers, currently out of the workforce because they will not work for $7.25, will now reenter the work force given the incentive of higher pay, and replace lower skilled workers. All of the above scenarios has likened to “cutting off the bottom rung of the employment ladder,” reducing the likelihood of upward mobility.
Some advocates against raising the minimum wage argue that the increase will result in a decrease in high school enrollment and an increased dropout rate. Young people, attracted by the raised minimum wage, will leave school earlier and join the work force. Admittedly this would seem to contradict the argument in the paragraph above.
4. Significantly distinct from the already mentioned objections to raising the minimum wage is the economic theoretical argument that the government shouldn’t set prices. This derives from the principle that the U.S. is a market economy, and that prices are set by the market, not by a central price setter, like the government. Setting a minimum wage disrupts the balance of the market and how it allocates labor demand and supply, prohibiting the creation of new jobs. “Natural” market forces are most efficient for taking into account regional and market differences in supply and demand.
Connected to the argument that the government shouldn’t set the wage is that any “setting” of a wage is arbitrary, which encourages market instability and uncertainty. Why is one amount chosen over another, rather than letting the market find the “correct” value, based on “natural” market forces.
Mike Patton’s November 26, 2014 Forbes article, “The Facts on Increasing the Minimum Wage” begins with an opinion of the conservative Chicago economist, Milton Friedman, “…people whose skills are not sufficient to justify that kind of a wage will be unemployed.” Although he agrees we really don’t have a free market, he seems to suggest that the market should dictate the minimum wage.
So how do we set a wage? Patton states that “most agree that a worker should be paid what he or she is worth.” This is defined as being “commensurate with the skills required for the job.” After positing two workers: a 16-year old burger flipper at McDonalds and 30-year old single mom working as certified nursing assistants, Patton continues that since the “status” of both workers is irrelevant to their “worth” as defined above, neither should have an increase. And this is despite the current concern that “it’s all about the poor, suffering, and needy and how the government will fix all of our woes.” The real point Patton is trying to make is that the question of wage is separate from and completely unrelated to the worker’s need.
This notion of insisting on the market setting the wages is taken to its logical conclusion by Mark Perry of the American Enterprise Institute in a December 8, 2015 article, “Simply put, we would rather see unskilled workers employed at a market wage — even if that wage is only $5, $6 an hour — that allows them to gain valuable work experience and on-the-job training, than to be unemployed at $0.00 an hour.” Admittedly this is a completely partisan opinion, but Professor Perry is an economist who teaches in the University of Michigan.
The argument that employee wages should be free to adjust to the market is somewhat disingenuous, since few economists would claim that prices for goods and services of all kinds do not exist in a free market. Businesses of all kinds have vast lobbying groups in Washington that try and succeed in influencing the federal legislators as to laws, rules and regulations. The banking industry, energy, communications, media, food, farming are all regulated and are able to influence and sometimes write their own regulations as well as receive tax breaks and subsidies.
5. Those arguing against raising the minimum wage questioning the data indicating benefits from such an increase. Mike Patton in his Forbes article claims that the benefit to the economy will not be as great as claimed, and goes through a simple calculation to prove his point. By multiplying the number of minimum wage workers by the increase in wages, he figures an additional $40.8 billion in money spent in the domestic economy, which he then figures is only additional .23% of total US GDP (Gross Domestic Production) of $18 trillion, “This increase, even if completely spent (which is doubtful), would not be very significant.”
It can be argued that other worker’s wages, earning marginally greater than the minimum wage, will increase as the minimum wage increases and that the increase in spent money from all these workers will have a ripple effect in the economy as demand increases for goods and services. But the point is not to criticize Patton’s figures, but to demonstrate how difficult it is to resolve the data problem.
There are several examples of areas where contradictory data and conclusions exist. There are multiple studies on whether crime would increase or decrease, and there does not seem to be a certain answer. Apparently there is some question as to whether productivity will in fact increase with increased minimum wages. And finally there is the biggest and what would seem to be the most basic question, whether raising the minimum wage will increase or decrease unemployment, and how long would that change last, whichever way it goes.
Mark Perry in that same December 8, 2015 article offered Seattle’s restaurant statistics after they raised their minimum wage to $15 / hour. However, there seems to be a significant amount of disagreement concerning Seattle’s restaurant prices and unemployment after the wage increase. For instance some claimed there was a reduction in restaurant trade as a result of higher prices, but others claimed the full story was that there was a reduction in restaurant trade outside of Seattle as well, where there was no increase in wages.
You Decide: Arguments for Raising the Minimum Wage
The arguments for raising the minimum wage are equally dependent on statistics and projections, difficult to prove with certainty until they are put in place.
1. One of the most consistent arguments for raising the minimum wage is that it will spur economic growth. Of course, it goes without saying that an excess of spurred economic growth can mean inflation, see 2. above. A 2013 report by David Cooper for The Economic Policy Institute projects that a wage increase from $7.25 to $10.10 would create $35 billion in added wages for 27.5 million workers, which would inject $22.1 billion into economy creating 85,000 new jobs over three years. (Apparently this was a worthwhile increase for Cooper, whereas Patton, above, calculated a $40.8 billion increase in GDP as being “not very significant”.)
An article by Daniel Aaronson and Eric French for the Federal Reserve Bank of Chicago predicts a $1.75 rise in minimum wage would increase household spending by $48 billion the following year and increase gross domestic production in the near term, presumably resulting in job growth.
Two studies concerning increases to the minimum wage in New Jersey, one in 1994 by Card and Krueger, and one in 2009 by Doucouliagos and Stanley confirming Card’s and Krueger’s findings, found no decrease in employment as a result of an increase in minimum wage. Paul Krugman, the Princeton economist and Nobel Laureate who writes for the New York Times believes that since most minimum-wage jobs are in the food-service industry, raising their wages will not lead to outsourcing and therefore layoffs, because those service jobs can’t be outsourced.
Clearly the issue of whether it will reduce employment is key. Seven Nobel laureates in economics, along with 68 other economists signed a letter saying it wouldn’t, or if it did it would be negligible. Past increases in hourly pay have had “little or no negative effect on the employment of minimum wage workers, even during times of weakness in the labor market,” the economists wrote. “A minimum wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings.” John Schmitt, mentioned above, concluded his review of the academic research between 2000 and 2013 on the employment effect of raising the minimum wage, “the weight of the evidence points to little or no employment response to modest increases in the minimum wage.”
2. Certainly an important goal for increasing the minimum wage would be to decrease poverty, which advocates of the increase claim would be achieved. A 2014 Congressional Budget Report argues that increasing it to $9 would lift 300,000 people out of poverty, and raising it to $10.10 would lift 900,000 out of poverty. It should be noted that the study also predicted “some jobs for low-wage workers would probably be eliminated…” A study by Professor Dube of the University of Massachusetts in 2013 estimated that assuming a raise to $10.10, “(g)iven the roughly 275 million non-elderly Americans in 2013, the proposed minimum wage increase is projected to reduce the number of non-elderly living in poverty by around 4.6 million, or by 6.8 million when longer term effects are accounted for.”
Additional arguments for raising the minimum wage follow from a result of reducing poverty. It would reduce income inequality. Among the 35 member countries of the Organization for Economic Cooperation and Development (OECD), considered the developed nations, the U.S. is the third- or fourth-highest nation in income inequality, behind Chile, Mexico and Turkey. In 2013 the top 1 percent of families nationally made 25.3 times as much as the bottom 99 percent.
Raising the minimum wage (and redesigning the Earned Income Tax Credit) would reduce this income inequality according to Isabel Sawhill and Quentin Karilow. Jason Furman, Chairman of the council of Economic Advisors said on January 14, 2014 that “(t)he minimum wage doesn’t just matter for poverty, it matters for what President Obama has called the defining issue of our time, which is inequality…there have been a range of studies which have found that as much as one third to one half of increases in certain types of inequality has been due to the erosion in the value of the minimum wage.”
Raising the minimum wage would help reduce income inequality among the lowest paid workers. Because women, African Americans and Hispanics are paid proportionately less and make up a greater proportion of the minimum wage sector, raising the minimum wage would disproportionately benefit these classes of workers. Women make up 47% of the workforce but 63% of minimum wage workers. African Americans make up 12% of the workforce, but 17.7% of the minimum wage workforce. Hispanics make up 16% of the workforce, but 21.5% of the minimum wage workforce.
It is argued that raising the minimum wage would have a “ripple effect,” raising the wages of those immediately above the minimum wage. Benjamin Harris and Melissa Kearney, writing for the Brookings institute estimate that raising the minimum wage would raise not just the 3.7 million earning minimum wage, but a total of up to 35 million who make 29.4% of the workforce. Researchers at the White House Council of Economic Advisors found that increasing it to $10.10 would raise wages for 28 million, about 9 million due to the ripple effect.
There are several consequences of reducing poverty for the minimum wage workers. The current minimum wage is not enough to afford everyday essentials. Using data from Oxfam America, a majority of U.S. workers earning less than $10 say they just meet or don’t meet their basic living expenses, and 50% say they are frequently worried about affording basic necessities such as food. A 2015 study by the Alliance for a Just Society found that a worker earning $7.25 would have to work 93 hours a week to make ends meet “or skip necessities like meals and medicine.”
These reports back up the anecdotal evidence above. Not only is the current minimum wage unable to supply everyday essentials, it is unable to provide housing, again as told by the stories above. According to a 2015 report from the National Low Income Housing Coalition, a worker must earn at least $15.50 to afford a “modest” one-bedroom apartment. In Rawlins County, Kansas, with some of the most affordable housing in the country, a living wage including housing for one person with no dependents is estimated to be $9.22.
What would seem to be an obvious consequence of reducing poverty is the creation of a healthier population and prevention of premature deaths. Two studies from California, one by Rajiv Bhatia and the other by the UC Berkeley Center for Labor Research and Education, found those earning a higher minimum wage would have enough to eat, be more likely to exercise, less likely to smoke, suffer from fewer psychological problems and prevent hundreds of premature deaths.
Additional social benefits to decreasing poverty by increasing minimum wage include increased school attendance and decreased high school dropout. Rajiv Bhatia’s study in California found that teens living in poverty are twice as likely to miss three or more days of school per month. And increasing income can improve school performance — students could work fewer hours for the same income, giving them more time to study. A study by Alex Smith found that an increase in the minimum wage would lead to a decrease in the likelihood that teens from poor families would drop out of school.
Another consequence of reducing poverty is a reduction in crime. An April 2016 report by the President’s Council of Economic Advisors stated the following “Drawing on literature that finds that higher wages for low-income individuals reduce crime by providing viable and sustainable employment, CEA finds that raising the minimum wage to $12 by 2020 would result in a 3 to 5 percent crime decrease (250,000 to 510,000 crimes) and a societal benefit of $8 to $17 billion dollars.”
3. A consequence of reducing poverty, but different enough to warrant a separate heading as an argument for increasing the minimum wage is the benefit not to the low paying worker, but to the commonweal, by a reduction in government welfare spending. The Center for American Progress reported in 2014, raising it to $10.10 would reduce SNAP (or food stamps) spending by $4.6 billion. The Economic Policy Institute estimated an increase to $10.10 would reduce those dependent on government assistance by 1.7 million and reduce government spending by $7.6 billion.
As a consequence of the reduction in government welfare spending, a raise in the minimum wage would help reduce the federal deficit, not only by lowering spending on public assistance programs, but also by increasing tax revenue.
In addition, as Aaron Pacitti points out in a April 27, 2015 article in the Huffington Post, since businesses are allowed to pay poverty level — wages to 3.6 million people, 5 percent of the workforce, these workers can and must rely on federal income support programs, which means taxpayers are subsidizing these businesses. This should be a welcome argument to those who are free-market advocates and suspicious of government subsidies to businesses.
4. One of the arguments for raising the minimum wage is based on a notion of intent. If the minimum wage was intended to provide a wage related to a worker’s standard of living or value of work, then the wage is not fixed by a dollar amount, but must be tied to the value that compensation represents. It must therefore be adjusted to the value of the dollar, in other words adjusted for inflation. The minimum wage has not kept up with inflation. Minimum wage in 1968 was $1.60 which equals $11.16 in 2016 dollars. As for arbitrariness, tying minimum wage to inflation would increase it in a way that is not arbitrary, but ties it to a predictable, verifiable, and accepted value, based on the intent of the minimum wage.
Somewhat connected to the intent of the minimum wage and how it is arrived at, some economists have argued that if wage is compensation for work performed, and can be measured in productivity, then improvements in productivity and economic growth have outpaced the minimum wage. Center for Economic and Policy Research estimates minimum wage would be $21.72 in 2012 if it had kept pace with increases in productivity since 1968. Institute for Policy Studies estimated that since 1968 personal income has doubled, so if minimum wage was tied to income growth it would be $21.16.
Again, in tying minimum wage to something verifiable and widely accepted, the Economist magazine stated in 2015 that the U.S. is an outlier among advanced economies. Most countries and many states calculate minimum wage based on a percentage of Gross Domestic Product (GDP). Given a GDP of around $53,00 per person for the nation, the minimum wage should be around $12.
5. Increasing the minimum wage would benefit the employer, so the argument goes. Some reasonably argue that the government doesn’t know their business better than they do and they don’t need the government making business decision for them. The idea that the government uses rules and regulations to nudge good behavior from its citizens is hardly new. Again, it seems intuitive that paying workers more, encourages greater productivity and reduces turnover, which costs the employer money. A 2014 study by Institute for Research on Labor and Employment found that turnover rates decrease in restaurant workers and teens when minimum wages were increased. As for the question of whether raising the minimum wage would increase productivity, a recent raise in Britain’s minimum wage prompted discussion of the connection and a review of the literature, but there seems to be too much contradictory data to make a definitive statement as to productivity and the raising the minimum wage. On the other hand Steven Greenhouse of the New York Times wrote an article on a comparison between Walmart and Costco, the conclusion of which was that Costco’s higher wages result in higher productivity of its workers. This in turn saved Costco money.
The California Experiment
The California increase in minimum wage presents an interesting opportunity to see how a national minimum wage increase might work out, in part because the increase is significant, and because California’s economy is the sixth-largest economy in the world. Michael Wang wrote in “Here’s How California’s Minimum Wage Increase Will Impact the Retail Industry” about how it might play out. The first annual increase from $10 to $10.50 starting Jan. 1, 2017, then up to $11 on January 1, 2018, and $1 more per hour annually until it reaches $15 on January 1, 2022. In the first year it will increase one worker’s wage to $1,040 / year for a 40-hour week. For a 15 worker shop that is an extra $15,600 to labor. By 2022 that number will reach $156,000. (Wang’s article has a misprint, reflecting that amount at 2020). Wang then proceeds to work out how the employer would work out the increased labor costs.
One way is to cut jobs and require increased output from the remaining workforce. While an employer could opt to decrease the number of hours for each worker, the more logical approach would be to keep the most experienced and productive workers at their current schedules. This creates increased competition for fewer jobs, albeit higher-skilled jobs. Another likely option is that prices will rise. When the retailer passes the increase down to the consumer, that will in some cases negate the worker’s higher income. And of course, there’s always the option for California apparel manufacturers to increase production overseas.
One potentially neutral result that often accompanies increases in labor costs is innovation to improve efficiency and reduce headcount. The truth is, Wang Concludes, nobody knows exactly how everything will unfold for California’s retail industry. Wang acknowledges that it is possible that the increased minimum wage will result in less employee turnover and increased consumer spending, which could help offset higher operational costs. It is also possible that a significant number of retail jobs will be cut, and some companies will close.
What is as interesting as the financial and economic calculations is what California’s current political leader said in explaining how he arrived at raising the minimum wage. Governor Jerry Brown said it might not make sense economically, but it is necessary from a moral and political standpoint, as it “binds the community together and makes sure that parents can take care of their kids in a much more satisfactory way.” These are exactly the arguments that Patton, Perry, Friedman, and some of the other advocates for not raising the minimum wage say are irrelevant, and yet Governor Brown seemed to acknowledge it was paramount, which may indicate the greatest divide in this debate. While so much of the debate is by academics over data, and where their conclusions are cherry-picked by the various leaders on both sides in an effort to rationalize their position, the Governor is acknowledging it may not make economic sense, but there is a higher order, a moral path, to follow, allowing all workers a right to make a livable wage.
