Recently an avid reader of business publications asked me if I thought we (the federal government) should raise the minimum wage. To answer morally, yes! We have about 2.5 million workers who earn only $7.25 an hour, the federal minimum. In most parts of or country, these workers would live in poverty if single and clearly could not support a family.
This is immoral in the richest country in the world. We have the sad distinction of having the largest income inequality among all industrialized nations (measured by the GINI coefficient).
As an economist, the answer is more complicated. President Truman once said that he most needed a one-armed economist. He hated always hearing after an initial economist’s answer, “but on the other hand”. Here are several other hands.
Our first minimum wage was created by the Fair Labor Standards Act of 1938 at 25 cents an hour. The current rate of 7.25 was set in 2009. Its highest purchasing power was back in 1968 when the minimum wage of $1.60 would be the equivalent of $11.60 today. The minimum wage has several exemptions: full-time students; workers under 20 receive only $4,25 the first 50 days; food service workers whose wages are supplemented by tips can receive only $2.13 an hour. Special treatment exists for workers in agriculture, seasonal businesses, elder and child care and other fields.
Currently we have 29 states which have implemented minimum wages higher than the federal level with several planning to increase to $15 an hour over time.
Why no raise?
Why not simply increase the wage employers must pay their workers? We learn in introductory economics that any time a government sets a minimum wage above what employers are willing to pay employees, the society loses jobs. Private firms are not willing to pay more than what an employee is worth to them. The lesson is that when a minimum wage is higher than what the market deems a worker is worth, that person will not be hired. People most hurt are those with weak skills.
While this conceptual approach makes sense, the issue in practice is how many low-paying jobs are actually lost when the minimum wage is raised and how much of an increase would result in a meaningful loss of employment.
Welcome to the world of dueling studies.
Playing to assumptions
Economists are good at finding what they assume to be true. Those who support the minimum wage and its increase have found several positive results. When the wage is increased, people and their families are pulled out of poverty. The higher cost of labor has encouraged their employers to help them be more valuable by providing additional education and training. The more valuable employees are then further rewarded to keep them from moving to competitors.
The higher wages stimulate economic growth as their recipients display what we economists call a high propensity to spend. The new income is spent immediately, creating new demand for local businesses. The higher incomes help to stabilize struggling families, especially with their housing. Children learn that hard work is properly rewarded and therefore it becomes more the norm. Also, people who had not believed they could prosper in the legal economy are encouraged to return to the labor force and reduce their extra legal activities.
Opponents of the minimum wage have found opposite results. People who lose jobs or job opportunities move into either welfare or the informal economy (or both). Government collects less revenue as people lose jobs and pay more in welfare support. The costs of doing business increase which in turn cause consumer prices to grow and many businesses to fail. Increasing wages leads to a reduction of employment as employers substitute machines for labor.
While a more thorough analysis of these differences can be found at ProCon.org, it seems reasonable to conclude that the negative impacts of an increase in the minimum wage have been minor if at all significant when the wage increases have been gradual.
As recently written in The Economist, “A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs…Some studies find no harm to employment from federal or state minimum wages, others see a small one, but none finds any serious damage…High minimum wages, however, particularly in rigid labour markets, do appear to hit employment. France has the rich world’s highest wage floor, at more than 60 percent of the median for adults and a far bigger fraction of the typical wage for the young. This helps explain why France also has shockingly high rates of youth unemployment: 26 percent for 15- to 24-year-olds.”
Is there another way?
Benefits could be realized in the long run if the minimum wage would be indexed to a measurement of price increases as are Social Security payments. Unfortunately, we are in a different situation as partisan politics have not allowed the minimum wage to be increased in eight years.
A further complication is the wide disparity in living costs and wages across the country. Employers could not hire anyone in New York or California at the federal minimum wage as prevailing market conditions demand $10 to $12 minimum for low-skilled workers. This reality and the paralysis in Washington, D.C., have led to the creation of 29 state minimum wages above the federal level.
Maybe this is the best we can expect today. In the past, states have been forced to compete against each other to attract new businesses with reduced taxes or regulations in what critics called a race to the bottom. It is interesting that some states now seem to be competing on raising wages.
Kenneth Zapp, professor emeritus at Metropolitan State University and Mentor, SCORE Savannah.