What’s the Right Minimum Wage?
Author: David Howell
Date of source:
The American Prospect
Just a few years ago, small groups of fast food workers went into the street to demand a $15 wage. With some important help from their friends—most notably from progressive trade unions like the Service Employees International Union (SEIU) and advocacy groups like the National Employment Law Project—the movement not only stayed alive, but has been transformative. Who could have imagined that one of the biggest news stories this week would be New York state’s Andrew Cuomo and California’s Jerry Brown’s competition over which would be the first to enact a statewide $15 statutory wage floor?
But like Donald Trump’s success with large parts of blue-collar America—a population that used to be heavily unionized and vote with the Democratic Party—this should have come as no surprise. My research for the Washington Center for Equitable Growth shows a spectacularly large decline in the quality of jobs since the neoliberal transformation of public policy in the late 1970s and early 1980s, especially for young workers in their prime child-rearing years (18-34) with less than a college degree.
Here’s just one statistic: For these young, male workers, over 60 percent had a decent job back in 1980 (one that paid the equivalent of at least $16 in 2014). This decent job share fell to 47 percent in 1989, 37 percent in 1999, and in 2014 hit just 27 percent. The collapse was similar for young female workers without a college degree. In 1980, 32 percent had a decent job, but only 15 percent did in 2014. These figures mean that almost three-quarters of these 18-34 year-old male workers and more than four-fifths of young female workers are working for pay that is less than $16 an hour—and many earned far less.
The labor market is not working for these workers, so a $15 minimum wage would be a big deal, with over one-third of all workers in California and New York state expected to see wage increases. Even “red” states like Alaska and Nebraska are acting where Congress won’t, by legislating much higher wage floors than the current federal level of $7.25.
The popular case for the $15 wage relies on the same moral imperative that motivated the 1938 Fair Labor Standard Act (FLSA), defined as a wage sufficient to provide the “minimum standard of living necessary for health, efficiency, and general well-being of workers.” Eleanor Roosevelt put the case in characteristically strong terms: “Everyone of us will agree that a business has no right to exist which cannot pay every employee a living wage.”
Considerable resistance remains, as illustrated by the negotiations between the two governors and their legislatures over the last few weeks. Libertarians and states-rights advocates oppose any federal social policy in principle, especially those that interfere with the the operation of markets, and there are strong business lobbies opposed on the grounds that a meaningful wage floor threatens their economic interests.
But in the policy debate, it is the job loss argument that overwhelmingly dominates. On this score, minimum wage advocates have been helped by the facts—the best research now shows that large hikes in the local statutory wage floor has no discernible effect on employment.
Despite this lack of evidence, the case against the $15 wage has been framed—as usual—by what can be called the “No Job Loss” (NJL) criterion: The highest wage that previous research has established will produce little or no job loss.
For example, presidential candidate Hillary Clinton has resisted calls to support a federal minimum wage above $12 by invoking the NJL rule, citing the concerns of Professor Alan Krueger, a leading progressive economist and expert on the minimum wage, who has argued that increasing the national wage floor above $12 means navigating in “uncharted waters,” a venture that in his view is “not worth the risk.” As Krueger put it in his New York Times op-ed, “Although some high-wage cities and states could probably absorb a $15-an-hour minimum wage with little or no job loss, it is far from clear that the same could be said for every state, city and town in the United States” (italics added).
Should it be standard practice in public policy to require that new regulations pass such an extreme, evidence-based No Job Loss test? It would be a remarkable hurdle if applied to other areas of social policy. For instance, not only would the 1938 FLSA’s minimum wage have certainly failed the test, even though it was reduced from 40 to 25 cents and covered only one-fifth of the workforce, but so would the FLSA’s banning of child labor—which was explicitly designed to reduce employment (of children). And by putting upward pressure on adult wages, this ban would also have been expected to reduce adult employment as well. Nor would most workplace health and safety rules, environmental regulations, or for that matter, foreign trade agreements (or foreign trade itself) pass such a strict NJL test.
Why is it that only the minimum wage gets this special treatment? Is it really jobs, or is it high profit margins and low consumer prices that we want to protect?
When in uncharted waters and fearing any risk of job loss, some anecdotal evidence may provide some guidance. On January 25, 1950, the wage floor was increased by 87.5 percent, from 40 cents to 75 cents. This represented a sudden increase in the ratio of the minimum wage to the average hourly earnings of non-farm private sector workers from 31.4 percent in 1949 to 56.2 percent in 1950.
What was the impact on jobs? Teenage (16-19) unemployment rates fell,from 15.8 percent in October 1949 (three months earlier) to 15.2 percent in February 1950 (one month later), and then fell further to just 12 percent in April (three months later). A year later, in April 1951, the teenage unemployment rate was down to 7.9 percent. Over the same period the overall unemployment rate fell from 6.1 percent to 3.2 percent.
Much the same story can be told for the 33.3 percent increase in the minimum wage that took place on March 1, 1956. And as the New York State Department of Labor has put it, “New York increased its minimum wage eight times from 1991 through 2015 and six of those times, the data show an employment uptick following an increase in the state’s minimum wage.” The lesson of these examples is that any tendency for negative employment effects can be swamped by other factors—most importantly by the strength of the macroeconomy.
Many jobs that fail to pay a living wage reflect the collapse of worker bargaining power over the course of the last four decades. The evidence speaks loudly: Forced to pay higher wages, employers find ways to adjust, through productivity gains, lower worker turnover, lower wage increases for higher wage workers, price increases that have little effect on consumer demand, and even reduced profit margins. Above all, a necessary condition for stronger worker bargaining power in the absence of collective bargaining is a strong macroeconomy. With sufficient time to adjust, jobs that cannot pay a minimally decent wage should be driven out of the labor market. Eleanor Roosevelt was right.
But there is no evidence that a $15 wage floor phased in over the next five to six years will have a negative overall effect on job opportunities. A phased increase from $7.25 to $15 would in fact be an increase from at least $9 in 12 states (only 17 mostly small states have only the $7.25 federal wage floor), and the annual percentage increase for every state would be far less than those 1951 and 1956 increases. In terms of the absolute level of a $15 wage, it is instructive that Costco has just announced that starting pay for all its workers in all its U.S. stores is now at least $13, which is nearly the current value ($13.34) of a $15 wage in 2021, according to Congressional Budget Office inflation projections. The alternative business model is Walmart's, whose low-pay strategy has netted Walmart fantastic profits; the Walton family is said to be worth $150 billion, and four family members recently made Forbes’ top 10 list of richest Americans.
Why isn’t a $15 minimum wage in 2021 or 2022 worth the risk? How should we compare the costs of the very uncertain possibility of some loss in mostly very high turnover jobs, against the certainty of additional demand-driven increases in employment, the certainty of reduced pressure on public budgets to fund social assistance for working poor families, and above all the certain wage benefits, which in the case of New York state and California, would provide substantial income gains for over one-third of the workforce?
According to the Economic Policy Institute’s Family Budget Calculator, the basic-needs budget for a single person in Bakersfield, California, is $14.64. With a single child, it rises to $23.59. In Baltimore, it is $17 for a single person and $29.58 for a worker with a dependent child. The full-time wage necessary to pay fair market rent for a modest two-bedroom apartment in a non-metropolitan area is $14 in both Arizona and Montana, and $18 in California. This compares to the current value of a 2021 $15 wage of $13.34.
The closest thing we have to a reliable estimate of the net effects of a $15 wage is a recent comprehensive study by the UC Berkeley Institute for Research on Labor and Employment on the New York state proposal. Like the results calculated by the EPI’s David Cooper, this study estimates that increasing New York’s wage floor from $9 to $15 will increase earnings for about 3.2 million workers and increase average pay for those getting raises by 23 percent (about $5,000 a year). While the study’s model suggests there may be as many as 78,000 lost jobs, these are expected to be more than offset by the (more certain) gains from increased consumer demand, leading to a slight positive net effect (3,000 jobs).
The study concludes, “In the end, the costs of the minimum wage will be borne by turnover reductions, productivity increases and modest price increases.” This list fails to mention the possibility of lower wage increases for higher income employees and, most importantly, of lower but acceptable profit margins for business firms.
There is another benefit. Means-tested social spending is increasingly tied to work through such programs as the Earned Income Tax Credit, food stamps, and others. Much of America’s public assistance goes to working families with very low incomes, effectively subsidizing low wage employers. According to the Berkeley Labor Center, about $13.1 billion is spent on public assistance for working families in New York state; EPI’s David Cooper estimates this figure to be about $8.7 billion.
A $15 New York state minimum wage would dramatically reduce this taxpayer subsidy to employers. Let’s say this increase in worker pay led to a decline in means-tested public assistance to working families of 25 percent in New York State, and let’s also assume a worst case scenario in which 78,000 workers lost their jobs under a $15 wage with zero offsetting job gains from increased consumer demand. This would make available between $28,154 (Cooper) and $48,875 (Labor Center) for each displaced worker. And 3.1 million workers would still get wage increases. The net benefits of a $15 minimum wage for the living standards of working families and taxpayers that come from a “high-road” economy could be huge.
In short, raising the federal statutory minimum wage is easily worth the risk. The criterion for setting the appropriate level of the minimum wage is not a No Job Loss standard. It is a Minimum Living Wage (MLW) standard. And it is hard to imagine that the MLW could be less than $15 in 2016, even in low cost-of-living, non-metropolitan America.
The minimum wage debate is being reframed, and none too soon. Eleanor Roosevelt was right, as was her husband, who made his case for the federal minimum wage in the fight over the FLSA exclusively on Minimum Living Wage grounds: “Our nation so richly endowed with natural resources and with a capable and industrial population, should be able to devise ways and means of insuring to all our able-boded working men and women a fair day’s pay for a fair day’s work.” Poverty wages should be judged with the same moral standards as child labor and dangerous workplaces, and low-wage job loss should be a concern that is no more important than it is in any other domain of social policy.
David Howell is a professor of economics and public policy at The New School (New York City).