Why we need a $15 minimum wage, and why it won’t hurt us

In recent years there has been debate over the minimum wage, from both the right and left.

In 2013 President Obama called for the minimum wage to be raised to $9/hr prompting criticism from many Republicans and conservatives that it would be detrimental to the economy, not a surprising response, but more recently Democratic Presidential candidate Bernie Sanders called for a $15/hr minimum wage, prompting criticism from some Democrats/those on the left who feel this number is too high. His opponent Hillary Clinton for example has supported a $12 min wage, but not 15.

The debate has gotten quite interesting. Some Republicans, such as Ted Cruz, oppose the minimum wage entirely. Some accept raising it moderately, perhaps to $9 or $10 an hour. Democrats/liberals are split on going to $12 or $15.

While the debate rages on, people have taken the matter into their own hands. In recent years there has been a nationwide push for a $15/hr min wage, drawing mockery or being waved off as a bargaining ploy to achieve something more reasonable. However, some cities such as Seattle, San Francisco and Washington DC have passed bills to raise their minimum wages to $15/hr. While this is understandable for such high cost cities, in more bold moves the states of California and New York have passed bills to raise their statewide minimum wages to $15. The fight for 15 must now be taken seriously, (and at the very least the need for some minimum wage increase) but the questions still remain:

Do we need a minimum wage? If so, what is a good number? Is $15 too high? What about worries that it’ll cost job loss, cause price increases, or the argument that it’s unfair burger flippers should suddenly make as much as many other Americans? Let’s look at each of these questions.

Yes, we do need a minimum wage.

First, there is the moral argument that if you are willing to work, you should be able to earn a decent living. It’s actually a very American idea, and indeed polls show over 70% of Americans, including a majority of Republicans, support the minimum wage being raised.[1][2] A recent poll showed only 8% favoring repeal of the minimum wage, while a plurality (30%) supported a $15/hr min wage.[3] A survey of 1000 business executives, done by Republican pollster and consultant Frank Luntz, found 80% support increasing the minimum wage.[4] Other polls have also indicated small business support for a higher minimum wage, with around 60% agreeing it should be raised to 10 or 12 dollars. [5][6]

Sound hard to believe? Well, besides moral reasons, there are realistic reasons to support a min wage. First, even if eliminating the min wage would create more jobs, it wouldn’t do much good if all these jobs paid $4/hr. How would people be able to afford the goods and services created by firms? Afford cars? Rent? Basic necessities? How would people be able to save for the future?

Some argue abolishing the min wage would lower prices, but I find this dubious. If you look at the min wage adjusted for inflation, (seen below) you see it’s been largely stagnant since 1989, yet the cost of living continued to increase over this time. It seems the cost of living and min wage are unrelated, and this makes sense if you think about some of our major expenses. Gas and food prices are dictated by global supply & demand, utilities are an extremely monopolistic market, healthcare costs have grown far beyond the rate of inflation for decades. Clearly theses costs are unrelated to the min wage, as are others like auto insurance. While the min wage will have some impact on prices, it’s obvious the cost of living will increase regardless, thus the min wage should rise over time to ensure working people have some degree of a solid living.

real min wageSecond, our economy has changed from a manufacturing to service economy. This is permanent and simply a result of a developing economy. For example, in Jan 2016 nearly 70% of jobs created that month, (105k of 151k) were in retail and food services/drinking places.[7] Service sector jobs are generally low paying, thus we’ve undergone a fundamental shift to a low wage economy. More proof of this is seen in a study, revealing the plurality of jobs created since 2009 (44%) were in low wage industries.[8] If this is simply how things are now, it’s unfair to leave these industries so low paying.

Third, a min wage hike is a stimulus. When people have more money, they will spend more money, stimulating the economy. This is especially true with lower earners, who tend to spend more of their money than higher earners.  A min wage hike would be a stimulus package that comes at no cost to the government. In fact:

A higher minimum wage will help the government budget. If people make more money, it will lead to higher tax revenue, without raising taxes, and it will also reduce spending on public assistance. One study conservatively estimates a $10.10 min wage would save the government $7.6 billion a year through less public assistance spending.[9]

OK, but doesn’t a minimum wage cost jobs or raise prices?

In reality there is little evidence to suggest min wage hikes hurt employment or has drastic impact on prices.  Numerous studies have been done on  min wage hikes and employment, the most famous being Card and Krueger’s 1992 study. They looked at fast food restaurant employment in New Jersey and Eastern Pennsylvania, before and after NJ implemented a min wage hike while PA did not. This helped isolate the min wage hike impact on employment. They found no negative impact on fast food employment in NJ after the state’s wage hike.[10]

A better study was done in 2010 by Dube, Lester and Reich. One aspect of the study was looking at hundreds of bordering counties, where there was a min wage difference, all over the country from 1990 to 2006. (Seen below) They found no negative impact on employment from min wage hikes.[11]minwagestudy

Other studies have found the min wage to have no negative impact on teen employment, nor on employment even during a recession. One “meta study” took 64 studies conducted from 1972 to 2007, pooled all the data together, and found no negative impact on employment.[9]

During the 50s and 60s when the min wage was higher in real terms, we had a very strong economy with low unemployment. Germany recently implemented their first ever min wage and it had no negative impact on employment. Australia has a high minimum wage, currently $17.70 (AUD)/hr, and they haven’t had a recession in 25 years. How can all this be?

Several reasons. First, is the stimulus impact. People spending more boosts the overall economy, thus helping corporate profits and negating some of the cost.  Second, higher wages may reduce turnover, increase productivity (people working better), and draw more people into the labor force, creating competition for jobs and thus keeping pressure on employees to work harder.

This is nothing new, in 1914 Henry Ford shocked the world by doubling wages, and the result was less turnover, higher productivity, and Ford hailed it as a great cost cutting measure. 100 years later some are re-learning this lesson. McDonald’s recently gave some employees a $1 raise, as well as 5 days paid vacation, and the results have been reduced turnover and improved customer satisfaction.[12] In fact a number of studies have shown min wage increases lead to decreased turnover and higher customer satisfaction.[13]

OK,  but won’t a higher minimum wage just raise prices?

While there will be some price increase associated with a min wage hike, real life evidence suggests they will be very mild. One study estimates a 45% min wage hike would lead to a 2.7% increase in fast food prices.[14] Another estimates a $15 min wage would lead to a 4.3% increase in fast food prices.[15] A review of 30 papers on the topic found a 10% min wage increase would cause no more than a 4% increase in food prices, and .4% increase overall[10] while another study estimates a $1.75(24%) min wage hike would cause a .27% increase in prices.[16] While there is variation in results one thing is clear, a min wage hike will not cause drastic inflation. There will be small price increases, yes, however anyone who says a hamburger will just cost $20, or the min wage hike wont help low wage workers because price increases will wipe it out are simply mistaken.

OK, but what should the min wage be? Isn’t $15 high?

One study found a majority of people earning $12.16/hr and under require public assistance.[17] If you believe that someone who works shouldn’t need public assistance, (which would also reduce public assistance to the role of safety net, rather than necessity) than clearly $12/hr isn’t going to cut it. Especially if you believe working people should earn more than simply survival wages, but enough to enjoy a solid life. That every worker, everyone who chooses to get a job and be productive, should be able to enjoy a decent piece of the pie they help create, and not just surviving. So what is a good rate? $15 certainly would put many workers above the need for public assistance, but will it earn a decent living?

Using data from government/respected sources EPI has calculated the cost of living needed to attain a “modest yet adequate” standard of living for 618 areas of the US. Taken into account is rent, food, child care, transportation, healthcare (both private and public costs), taxes and other necessities such as clothing, personal care items, school supplies and telephone costs for some examples.[18] This has been put into a calculator format to determine the cost living needed for a range of families from single adult to 2 adults, 4 children.

Needless to say there is great variation around the US to attain a modest yet adequate living. In rural Tennessee $49,767 is needed for a 2 parent 2 child family, equating to $11.96/hr. ($49,767 /2 workers = $24,883 per year/2080 hours (40 hrs/week X 52 weeks)). A single adult would need $11.75/hr ($24,444/2080). In Washington DC a single adult would need $20.24/hr ($42,119/2080) while a 2 parent, 2 child family would need $25/hr ($106,493/2 =53,246/2080). EPI states the median is Des Moines, IA which requires $15.32/hr for a 2 parent 2 child family, and $12.89/hr for a single adult. Perhaps in another post I will take a more in depth look at costs of living around the US, but for now I’ll say $15/hr seems to be a good middle point. It will strongly benefit many areas of the country and single adults, (enhancing the stimulus impact) while being of lesser benefit in other areas and for families, (though still a great improvement and more on families in just a bit).

Another, more uniform, thing to look at is productivity. Productivity is basically how much each worker produces. How good a worker you are and how efficiently our economy runs. EPI notes if the minimum rose with productivity, as it did from 1948-1968, it’d currently be $18.67/hr.[19]

mw1

Even if the minimum wage kept up with productivity at 1980 levels (when it went more or less permanently downward) the minimum wage today would be around $15.50

mw2

Personally I like this concept. First, we’re told that if we work harder, get more education, we’ll be rewarded, as productivity goes up so does pay. Second, there won’t be significant inflation as long as wages rise with productivity. Our productivity has continued to rise, we’re increasingly educated, so wages should rise. One could argue those at the minimum wage may not work in productive areas, but teachers, police officers, garbage collectors, child and elder care can’t really be much more “productive” yet we don’t continue to pay them wages from 100 years ago. Everyone has a role to play in our economy, and everyone should get a piece of its growth. By indexing to productivity, we’d ensure wages rise, without causing accelerating inflation, and would maintain a stable ratio of capital-labor share of income. By starting at 1980/leaving a gap I acknowledge the minimum wage while growing in lockstep with productivity, should be at a level to ensure owners, more experience/educated workers and those in more productive fields should get a larger share of growth. Following this, it seems $15 is a very good place to put it. This is high, but if we get there incrementally there should be little risk/negative impact, per previous studies.

OK, but it’s not fair that a burger flipper should make $15 that’s as much as I make!

There is validity to this argument, it would be unfair that someone working at McDonald’s could make the same as a college graduate starting their career. However, a rising minimum wage will raise other wages. Firms want to remain competitive, and maintain their internal wage structures. In other words, if firm X pays you $13/hr and you can now work at firm Y for $15/hr, firm X will need to raise your wage to $15 to keep you there. If you work at firm X for $16/hr and have been there for a few years, having worked your way there, you may be upset to be just above the new bottom wage, thus firm X may give you a raise too, to ensure fairness and incentive. For a visual demonstration of this here is a simple picture of what would happen to wage levels if the bottom is raised.

wage ratcheting

Basically, min wage hikes will “trickle up” the ladder. Is there any proof of this? Yes. One study of a large retail company found that in response to a min wage hike, it raised wages 30-40% across its entire workforce, despite only 5-10% of employees earning the minimum wage. Another found a 10% min wage hike caused a bump up in wages up to the 25th percentile (bottom 25% of workers). One from the UK found a min wage hike, despite impacting only the bottom 5% of workers, had a bump up effect up to the 25th percentile.[20]

EPI estimates a $12/hr min wage by the year 2020 would boost wages for 35 million Americans [21]. EPI has also estimated that a $15 min wage will boost wages for 3.2 million in New York, (about 37% of all workers in the state) for 98,000 workers, (about 27%) in Baltimore, and 114,000 workers in DC.[22][23][24] A UC Berkeley analysis estimates the $15 min wage in California would boost wages for 5.6 million workers, (37% of workers)[25] All of these studies have noted these results would especially benefit minorities, women, and the vast majority of beneficiaries are over 20, even 25, years old. A majority work full time and many have children. Those impacted often contribute around half of their families income, and in some cases over 20% of beneficiaries are the sole earner. Yet another analysis estimates a $15 min wage in Los Angeles will produce $9.2 billion in stimulus, creating over 64,000 jobs and generating $1.3 billion in additional government revenue.[26]

This is the strongest reason to support a rising minimum wage: It will benefit far more than those at the minimum wage. While there are numerous reasons for wage stagnation since 1973, it isn’t coincidence this coincides with minimum wage stagnation since 1973. As EPI said, if the idea of an $18.67/hr minimum wage seems staggering it’s only because the median wage is now so low ($16.30/hr). If the median wage grew with productivity, as it used to, it would currently be over $28/hr.[19] I expect the “ratcheting” up of wages would be significant with a $15 minimum wage, since 42% of Americans make under $15/hr[27] and you would expect those who make a bit above $15 would see raises as well. So to those who ask how is it fair a fast food/retail worker should suddenly make as much as you, I’d say you will see a raise too.

In conclusion, we need a higher minimum wage, and $15 an hour would be a level that makes up for much of the decades of wage loss we’ve seen, and would boost wages for possibly half of American workers, providing a large “bottom up” stimulus to the economy. It should then be indexed to something, inflation, cost of living, productivity, to ensure wages rise continuously. Providing a more living wage would not only benefit tens of millions of Americans, it would reduce the need for welfare and raise revenue. If done in steps, there will be little to no negative impact on jobs, and very minor impact on prices as evidenced by numerous studies.

 

References/Sources

1: http://money.cnn.com/2014/06/09/news/economy/minimum-wage-poll/

2: http://www.raisetheminimumwage.com/pages/polling

3: http://www.huffingtonpost.com/entry/minimum-wage-poll_us_570ead92e4b08a2d32b8e671

4: https://www.washingtonpost.com/news/wonk/wp/2016/04/04/leaked-documents-show-strong-business-support-for-raising-the-minimum-wage/

5: http://www.businessforafairminimumwage.org/news/00573/national-poll-small-business-owners-favor-raising-federal-minimum-wage

6: http://thehill.com/blogs/congress-blog/labor/249857-small-businesses-support-boosting-minimum-wage

7: http://www.bls.gov/news.release/archives/empsit_02052016.pdf

8: http://www.nelp.org/content/uploads/2015/03/Low-Wage-Recovery-Industry-Employment-Wages-2014-Report.pdf

9: http://s4.epi.org/files/2014/safety-net-savings-from-raising-minimum-wage-final.pdf

10: http://cepr.net/documents/publications/min-wage-2013-02.pdf

11: http://www.irle.berkeley.edu/workingpapers/157-07.pdf

12: http://fortune.com/2016/03/09/mcdonalds-wages/

13: http://www.raisetheminimumwage.com/pages/business-case

14: http://www.peri.umass.edu/fileadmin/pdf/research_brief/PERI_fast_food_wages.pdf

15: https://www.purdue.edu/newsroom/releases/2015/Q3/study-raising-wages-to-15-an-hour-for-limited-service-restaurant-employees-would-raise-prices-4.3-percent.html

16: file:///C:/Documents%20and%20Settings/user/My%20Documents/Downloads/cflaugust2013-313-pdf.pdf

17: http://www.epi.org/publication/a-majority-of-low-wage-workers-earn-so-little-they-must-rely-on-public-assistance-to-make-ends-meet/

18: http://www.epi.org/publication/family-budget-calculator-technical-documentation/

19: http://www.epi.org/publication/lagging-minimum-wage-reason-americans-wages/

20: http://equitablegrowth.org/research-analysis/raising-minimum-wage-ripples-workforce/

21: http://www.epi.org/publication/raising-the-minimum-wage-to-12-by-2020-would-lift-wages-for-35-million-american-workers/#epi-toc-1

22: http://www.epi.org/publication/raising-new-york-state-minimum-wage-to-15/

23: http://www.epi.org/publication/raising-baltimores-minimum-wage-to-15/

24: http://www.epi.org/publication/raising-the-d-c-minimum-wage/

25: http://laborcenter.berkeley.edu/15-minimum-wage-in-california/

26: http://economicrt.org/publication/effects-of-a-fifteen-dollar-an-hour-minimum-wage-in-the-city-of-los-angeles/

27: http://nelp.org/publication/growing-movement-15/