(the following post is from 4/13/2013. We posted this update in June, 2016.)
The Progressive View
by Derek Smith
In his most recent State of the Union address, President Obama called for raising the federal minimum wage from $7.25 to $9 per hour by 2015, and Congress has taken up the issue with the Fair Minimum Wage Act of 2013. This proposal is considerably behind Obama’s 2008 campaign platform, which suggested a minimum of $9.50 by 2011, and so has met with some criticism from both sides. Those on the left are mostly happy with it, save the more hardcore labor activists who believe it is too low—they particularly like to mention that the real value of the minimum wage is significantly below its 1968 peak, which, adjusted for inflation, would be the equivalent of $10.55 per hour today. But considering that the increase represents a nearly 25% raise, coupled with the fact that a minimum wage increase to $10.10 was already defeated by House Republicans, most liberals will take what they can get.
Much more opposition has come from the pro-business right, arguing that a minimum wage hike is a job-killer and counterproductive to economic recovery. But although that notion is often presented as an economic truism, the evidence is as usual a bit murkier.
Does a Higher Minimum Wage = Fewer Jobs?
Perhaps the most commonly argued objection to minimum wage laws is derived from basic economic principles of supply and demand—an increase in the cost of labor will cause businesses to hire fewer employees, reducing the number of minimum wage jobs available and ultimately harming low-income workers. While sound in theory, not all economic theories work as predicted in reality. Empirical evidence about the relationship between minimum wage increases and unemployment is somewhat conflicting, although a survey of recent studies mostly points to little or no correlation.
Making definitive claims about a causal relationship (or lack thereof) is tricky due to the huge variety of economic factors that affect jobless rates, but in an example of using the states as “laboratories of democracy,” we can examine states with different minimum wage laws to test the hypothesis. A regression analysis across the states shows essentially no correlation between states with higher minimum wages and unemployment; another regression looking exclusively at the unemployment rate for the 16 to 24 age range actually shows a very slightly negative correlation between higher minimum wages and youth unemployment. Since additional regional differences are not accounted for by these regression analyses, other studies have examined the changes in unemployment rates within individual states after minimum wage increases, and found no effect.
Why does practice diverge from theory in this case? The most common answer from economists who support minimum wage laws is that businesses may have many different ways to absorb increased labor costs that are preferable to reducing staff. These range from reducing costs in other areas, demanding higher productivity from workers, reducing employees’ hours, accepting a slight reduction in profit margin, passing increased prices to consumers, or slowing pay increases for middle- and upper-level employees. While some of these responses have a negative or undesirable component, no particular group suffers much, because most businesses will offset the increased cost through some combination of a little bit of each. Plus there are the positive effects of increasing workers’ productivity and improving business efficiency, as well as the positive effect of reduced turnover—if minimum wage employees get a raise, they’re less likely to quit, reducing recruitment and training costs for businesses.
Demographics of Minimum Wage Earners
The next most frequently raised objection to increasing the minimum wage is that it wouldn’t help poor households, but rather middle-class teenagers who are not financially dependent on their employment. This objection relies on the oft-cited statistic that of the nearly four million Americans earning minimum wage or less, more than half are between the ages of 16 and 24, and this group’s average family income is around $65,000. Yet only about 28% all of minimum-wage earners have not finished high school, and presumably some portion of these are high-school dropouts over the age of 18. Focusing on the higher average family income fails to take into account college students who are still part of their parents’ “financial household” but are nonetheless accumulating significant amounts of personal debt for their educations (on average, $27,000 for a bachelors degree). An additional estimated 284,000 minimum wage-earners (8% of them) are college graduates. So although the general discourse usually frames the minimum wage as a “poor issue,” there is an argument to be made that an increase could also help strenghten the middle-class’s dwindling ability to save for, pay their way through, or pay off debts for further education, and thus improve future job prospects.
Those who cite these demographic characteristics also mention the fact that only 23% of minimum wage earners are at or below the povery line, whereas 65% make an income of 150% or more of the poverty threshold. But “at or above 150% of the poverty line” does not translate into “financially secure”—that would represent an annual income of $16,755 for a single-person household, or $34,575 for a family of four. There is also a remaining 12% in between these levels. So even if we consider everyone above the 150% line as doing alright, there are still almost a million-and-a-half struggling Americans who need higher wages, and would be likely to spend any increased income.
State-Level Minimum Wage Regimes
Although the federal minimum wage increase has decent popular support, it is likely to meet resistance from House Republicans, who in March unanimously rejected a proposed increase to $10.10 per hour. Even if a federal raise does not happen, many states have active bills to raise their minimum wages above the federal level.
Some of the more interesting bills seek to address potential concerns about youth unemployment or the impact on small businesses. A Minnesota bill would raise the minimum wage requirement for large employers (defined as having an annual gross volume of business of $625,000 or more) to $7.75 by 2015 while leaving the lower minimum wage for small employers at its current $5.25.
Other proposals, such as the bill “To Raise The Arkansas State Minimum Wage For Employees Other Than Part-time Student Employees” would allow employers to continue to pay younger part-time workers less, indexing their minimum rate to 65% of the standard minimum wage. This would help alleviate concerns about the potential negative youth-employment effects, and partially addresses objections toward minimum wage earners who are not primary bread-winners. Many states also have a lower “training rate” minimum that employers may pay a new employee for the first 90 days; some of these are specifically limited to employees less than 20 years old.
Regardless of what happens to the federal proposal, there will no doubt be a few states that set rates higher than the national standard, so we’ll be able to continue studying the broader economic consequences of minimum wage policies and come to a more informed conclusion. At the very least, minimum wage laws should be indexed to inflation. Hopefully enough states will try higher minimum wages, and perhaps with enough variations in exclusions for certain employees, that a better framework for federal policy will emerge.
The View from the Right
by Gregory Conterio
Minimum wage has remained a contentious topic in American politics from the very beginning, and continues as such today. First established nationally in 1938 by the FDR administration, the principle of a minimum wage has also always lent itself to sloganeering by both sides, and this continues today in the very name of the Fair Minimum Wage Act of 2013, with its direct implication that it seeks to remedy something that is fundamentally unfair. On the right, there has always been the mantra that the minimum wage kills jobs, and while there is evidence in support of this, it is not always clear or easy to discern. It may be easier to rally the masses with a simple slogan, but as with so many things, finding the truth requires a little deeper reading.
A perfect case in point is the survey of recent studies Derek linked to above, titled Why Does the Minimum Wage Have No Discernible Effect on Employment? by John Schmitt, published this past February. Judging by his own conclusions, Schmitt may have misnamed his own paper, which after reading I would say is mostly fair, although it is a little dismissive of Neumark and Wascher, two of the more prominent economists whose work demonstrates a consistent destructive effect on employment by minimum wage increases. Schmitt’s paper is a reasonable primer on the burgeoning topic of minimum wage research, but he restricts his review to only work done since 2000. His conclusion is that modest increases in the minimum wage do not appear to have a consistent, detrimental effect on employment, and hypothesizes this to be due to a number of mitigating factors:
- Reduction in hours worked per employee
- Reduction in non-wage benefits
- Reduction in training
- “Upgrading” to fewer, but more highly skilled employees
- Raising prices
- Improving efficiency
- Improved motivation for low skill workers (who are so happy at their new, higher pay, they work harder)
- Reducing pay of higher-skilled workers
- Accepting reduced profits
- Increase in demand (minimum wage increase as “stimulus”)
Several of Schmitt’s hypothetical factors are highly conjectural to say the least. Schmitt acknowledges for example that there is little or no supporting evidence for his contention that increasing minimum wage raises a workers motivation to work harder and more efficiently, or that it reduces turnover. But the most striking thing to me about most of these “channels of adjustment” as Schmitt calls them, is they are not positive outcomes. So apparently the good news is, after we raise the minimum wage, unemployment may not necessarily go up. Unfortunately, your hours and benefits will be reduced, we can’t afford to properly train you, and prices are going to go up, so you will have to tighten your household budget.
Another important point about Schmitt’s study is his emphasis on modest minimum wage increases. In the table he provides recounting all the increases in minimum wage from 1989 to present, the greatest increase by percentage was 13.6% in 2007. In 2008 and 2009, minimum wage increased again, by 12 and 10.7% respectively, representing a percentage increase of 29% since 2006. Now certainly a lot of other economic factors have contributed to the dramatic increase in unemployment since 2006, which persists through this day, but raising the cost of unskilled labor by nearly 1/3 during that same period has just as certainly been a factor. And the Fair Minimum Wage Act of 2013 proposes to raise it again by 20%. That is not a modest increase. And even if we assume for a moment that Schmitt is totally correct, and his channels of adjustment work to offset some of the potential job losses, the effects of those factors are uniformly harmful to the very low-skill workers who are supposedly being helped.
State to State Comparisons
The obvious problem with measuring unemployment rates between states with different minimum wage levels is that it is an apples to oranges comparison. Let’s take fast food restaurants for example, as this has been a common type of establishment focused on by economic researchers over the years. If you compare say, two Burger Kings, one in Southern California, and one in South Florida, where California has a higher, state-imposed minimum wage, directly comparing the unemployment levels in both states fails to take into account the different of the same products, the different taxation rates, differences in local seasonal sales patterns, the different state-mandated benefits, the dramatically different workplace cultures, and the local cost of living, among many other factors. Unless you take into account all the local factors affecting each store, a simple comparison of minimum wage and employment rates has virtually no meaning. This highlights perhaps the most challenging aspect of researching the overall effects of minimum wage increases, that being the need to capture a large amount of very granular data that varies considerably from one location to the next. Scientifically speaking, the only correct way to measure the surmised effect of a particular variable (minimum wage) is to isolate it from the effects of others, and this is an extraordinarily difficult thing to do in a case like this. This problem forms part of the basis for criticism of the Card and Krueger minimum wage study of 1992, cited by Derek above. State to state comparisons offer a seductive “laboratory” through which to try to measure the effect of minimum wage changes on employment, but the inability to capture and account for all the local variables which bear upon employment levels has presented a so-far insurmountable obstacle, which calls the conclusions of such studies into question.
Demographics
Without getting into too much parsing, the standard, accepted figures for minimum wage workers in America remain roughly what Derek cites above, about four million, and indeed half or more are young people just entering the work force. While Derek points out that a certain number of these are college students, no doubt accumulating student loans to pay off, the reality is those loans don’t come due until after the student leaves school, so any minimum wage jobs worked by such students are unlikely to go toward offsetting that debt. But let’s look for a moment at the “poor,” who are the real target of minimum wage increases. At current levels, a full-time minimum wage employee earns about $15,000 per year. At this level, they also qualify for a whole bucket-full of means-tested government benefits, including food stamps, housing vouchers, the earned income tax credit, Medicaid, and more. Should the minimum be bumped up to $9.00 per hour, their annual earnings increase by nearly $4,000, bumping them out of qualification for most of those benefits, effectively acting as a 100% tax upon the difference, leaving them exactly where they started. One might honestly ask, what’s fair about that?
The purpose of raising the minimum wage is ostensibly to help the poor, and the idea of simply giving them more money has a certain emotional appeal that is irresistible. That is exactly why Congress incorporated the word “fair” into the title of the bill, to heighten the emotional appeal. Certainly there are circumstances where basing your choices and decisions on emotion works out well, like running away in fear from man-eating predators, but for the most part, decisions based on emotion rather than reason tend to go badly. Based on the questionable benefits, and the inevitable harm, I think this is clearly true of this bill.
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