On April 30, 2014, the U.S. Senate tried to bring a bill that would raise the federal minimum wage to $10.10 per hour. Republican Senators filibustered the bill. 54 Senators voted to proceed with final consideration and 42 Senators opposed going to final consideration so the filibuster was successful and the bill was not voted on in its final form. The vote proceeded on party lines with the only Democrat not voting being Mark Pryor and the only Democratic Senator voting against moving the bill forward was Harry Reid, which was done with procedural reasons. Republicans and other conservatives have largely been upset about efforts to raise the minimum wage instead, relying mainly on the claims of fast food workers and labor organizations to attempt to raise the minimum wage to $15 hour as opposed to efforts to raise the minimum wage that are politically viable. The raise to the minimum wage to at least $10 per hour is inevitable but the raise to $15 per hour is not politically viable at this point.
Fast food organizers and various labor organizations have been calling for a significant increase to the minimum wage to $15 per hour. The criticism against raising it is frequently subpar and if taken to their logical conclusion would have disastrous results. I don’t really want to spend too much time taking apart the criticism because I don’t believe that the raise to $15 per hour minimum wage is something that could be implemented at the federal level for several years. It seems pretty clear that the argument to raising the wage to $15 per hour is a negotiating tactic intended to highlight the wage disparity that is currently happening and to instigate action to raise the minimum wage. Once the wage is raised to $10 per hour both sides can claim a partial victory which is what both sides want. I really want to focus on why the minimum wage hike is a political inevitablity, why it is probably a good thing, and why most of the arguments against it are bananas. I may generalize the arguments that I have read or seen from other people but I am hoping not to strawman any of the arguments.
The Congressional Budget Office (CBO) produced an analysis of the effect of implementing a $10.10 per hour minimum wage. According to the CBO, low wage workers would see a total increased income of $31 billion. 19% of that $31 billion would go to families at or below the poverty level with 29% going to families earning up to three times the poverty threshold. There would be decreases in income for those who lost their jobs due to the raise in the minimum wage, business owners, and consumers facing higher inflation prices. The CBO estimates that after accounting for all of this, overall income would increase by $2 billion. More importantly, real income would increase by $5 billion among families at or below the poverty level. This would move 900,000 people out of poverty. Families whose income would be between one and three times the poverty level would receive $12 billion in additional real income. Families between three and six times the poverty level would receive an additional $2 billion in additional real income. Business owners and those making over six times the poverty level will see their incomes decrease only as much as their profits decrease.
A brief history of the minimum wage
Some arguments about the minimum wage tend to focus on the idea that the minimum wage was never intended to be a living wage. It was always intended to be a wage that was for those looking to supplement their income. Of course, this is incorrect.
The minimum wage was established by the Fair Labor Standards Act (FLSA) at $0.25/hour. This bill was signed by President Franklin Delano Roosevelt. The bill created overtime pay, a minimum wage, banning most child labor and established a 44 hour work week. President Roosevelt, speaking to Congress prior to the bill being created said, “a self-supporting and self-respecting democracy can plead no justification for the existence of child labor, no economic reason for chiseling worker’s wages or stretching workers’ hours.” President Roosevelt tried to convince Congress that the bill was a pro-business bill. Labor historian Erik Loomis notes in his “This Day in Labor History” post linked above, that the “Commissioner of Labor Statistic Isador Lubin told Congress that the businesses surviving the Depression were not the most efficient, but the ones who most ruthlessly exploited labor into longer hours and lower wages.” The establishment of these standards would attempt to halt these practices and allow businesses to compete on a somewhat more even playing field.
The minimum wage was supported by some leaders in the labor movement. Others “supported it only for the lowest wage workers, fearing a minimum wage would become a maximum wage for better paid labor.” This fear has been somewhat realized as commentators and business leaders often compare the wages of workers to the minimum wage when negotiating wages. The fear of resorting to the minimum wage for their labor has hindered some employees from exploring new jobs and limited their bargaining power with their employers. That’s a subject for a different time, though.
Predictably, executives and business owners were livid about the minimum wage. They predicted that they would not be able to afford employees, which coming at the heels of the Great Depression was fairly scary and reminiscent of what many critics of raising the minimum wage, now. Roosevelt addressed these concerns in a fireside chat, saying “do not let any calamity-howling executive with an income of $1,000 a day…tell you…that a wage of $11 a week is going to have a disastrous effect on all American industry.” As Loomis points out the FLSA has greatly expanded over the years. He points out that Harry Truman expanded the FLSA to cannery and airline workers and John F. Kennedy expanded the protections to retail and service employees. The 1963 Equal Pay Act, as Loomis, notes expanded the FLSA to “require equal pay for equal work for women and men.”
The effects of raising the minimum wage on employment
The conventional analysis of raising the minimum wage, to put it simply, (I am not an economist) states that there are two long-term effects on employment from raising the minimum wage. The first is known as the scale effect. The scale effect is the one oft cited by critics of minimum wage hikes, albeit, they do not call it that. Essentially, higher wages raise the costs to businesses and the businesses pass this higher cost to consumers. Due to the higher prices, consumers will buy less from the business and so there is less of a need to hire more workers. This has the effect of both raising consumer prices and decreasing employment among both low and high income workers.
The other long-term effect is known as the substitution effect. The substitution effect is where the cost of low-wage workers are increased compared to machines, technology, and more productive higher-wage workers. To offset the costs, the business will shift to more machines, more technology, and try to increase productivity of higher-wage workers. With this effect, you would not see a dramatic increase in price but you would see lower employment of low-wage workers but an increase of higher-wage workers.
As the CBO points out, though, conventional analysis might not be correct in all circumstances. After an increase in the minimum wage, employers need to increase the pay to retain their original workers regardless of if new employees are hired. Since the cost of hiring new employees as decreased there are some economists that argue that this will lead to increased employment. In addition to that, an increase in the minimum wage could increase employment by raising the demand for goods and services. A higher minimum wage tends to shift income from higher-wage employees and business owners to low-wage workers. Low-wage workers are more likely to spend a larger portion of their income on goods and services which would increase employment for low-wage workers and higher-wage workers alike. As the CBO notes, “[this] effect is larger when the economy is weaker, and it is larger in regions of the country where the economy is weaker.”
A raise in the minimum wage would not only affect those wage-earners who earn the minimum wage but also though who earn slightly more than the minimum wage. This should be a self-evident point but it’s often forgotten. Employers may also increase pay to keep pay differentials between positions consistent. Some positions that are collectively bargained are tied to the federal minimum wage and those positions may see a pay increase, as well.
Employers whose businesses are more sensitive to price increases are more likely to see a higher decrease in employment than businesses that do not face this challenge. Employers who cannot follow the substitution effect by replacing low wage workers with technology, machines, or more productive higher-wage earners are also more likely to decrease their employment in greater numbers. Finally, businesses that rely heavily on low-income wage earners may see a decrease in their employment numbers. Of course, they might not, if there are fewer jobs available for low-income wage earners, they may increase their productivity and that reaction combined with the lower cost of hiring new applicants, there might be a slight increase in employment or at least a net zero gain in employment. Finally, employers that do not employ very many low-wage employees that compete against employers that do employ many low-wage employees will see demand rise as the costs rise at the employers with many low-wage employees. These employers tend to hire more low-wage workers, boosting employment. This last example portends well for Costco compared to Wal-Mart. We may yet have a law school at Costco.
For higher-wage workers, there is some good news for employment prospects according to the CBO. Once the minimum wage stabilizes, higher-wage employees are slightly less expensive to hire. Employers noticing that they can hire higher-wage employees to replace less productive low-wage employees for just a little bit more will hire more higher-wage workers. This combined with the increased demand will increase employment for higher-wage workers.
The CBO’s central estimate found that raising the minimum wage would reduce employment by 500,000 workers. The CBO points out that is “the net result of two effects: a slightly larger decrease in jobs for low-wage workers (because of their higher cost) and an increase of a few tens of thousands of jobs for other workers (because of greater demand for goods and services).” Those who would lose their jobs would center on those making less than $10.10 per hour currently. Workers earning between $10.10 and $11.50 per hour may see a pay raise which could reduce their employment but employers may hire more of those employees to make up for those workers who were scheduled to make less than $10.10 per hour. The CBO believes that the “number of such workers who were employed would probably not change significantly.” The analysis by the CBO found that there is a two-thirds chance that the employment would be reduced between a slight reduction and a decrease of 1.0 million workers.
Who would be affected by raising the minimum wage?
Often critics of raising the minimum wage will couch their criticism behind the idea that minimum wage earners are high schoolers or senior citizens and the wages are used to supplement their income. The Bureau of Labor Statistics found that this is more or less accurate. Minimum wage jobs are mostly for young people. In their study for workers who work for $7.25/hour or less, they found that 50.6% of them are ages 16-24. 30.9% of those who are working at exactly minimum wage are age 16-19 years old. Of course, this study is only looking at workers earning the federal minimum wage or less but is not looking at workers who are working for slightly more thanks to their state or local municipality raising the minimum wage or for workers who would be directly affected by a raise in the minimum wage.
A liberal think tank, the Economic Policy Institute, tried to look at who would be directly affected by a raise in the minimum wage to $10.10 per hour. In doing so, they looked at everyone who earned less than $11.10 per hour. The assumption is that those making a little more than $10.10 would also receive a slight boost (as we discussed above). According to them, 12.5% of workers directly affected are less than 20 years old. Beyond that, they found that 13.7% of workers are 55 or older. 36.5% of those who would be directly affected are 20-29 years old. Nearly three-quarters (73.7%) of those affected by a raise of the minimum wage are between the ages of 20-54. The average age for those making less than $11.10 per hour is 35 years old. The report’s author told PolitiFact that when he changed the numbers to those earning within 3% of the state’s minimum wage that the average was 31. The CBO looked at workers who would earn less than $11.50 per hour under current law in 2016 and found that 88% of them would be 20 or older with only 12% being 16-19.
The assumption that these jobs are used primarily for supplemental income are created to make sure that people don’t feel bad when they state that they don’t want to raise the minimum wage. If you can convince people that they don’t really need the money then you can paint those arguing for a minimum wage hike as selfish. The Economic Policy Institute found that only 14.2% of workers who would be affected by the minimum wage hike work fewer than 20 hours per week. About 54 percent work full time, as defined as 35 or more hours per week and 32 percent work 20-34 hours per week. This is also consistent with what the CBO found. They found that 53% of low-wage (earning less than $11.50) would be working 35 or more hours per week. Those workers affected by the raising of the minimum wage earn on average 50% of their family’s income. Not surprisingly, the vast majority of those affected by this raise (68.9%) have total family incomes of less than $60,000 per year. About a quarter (23.1%) of those affected have family incomes below $20,000 per year. Only 4.5% of those affected have a total family income of over $150,000. $144,000 is six times the poverty level for a family of four which is where we start to see real income decline because of the wage increase. Over a quarter (26.1%) of those who would see their wages rise from a minimum wage raise are parents. Some critics of raising the minimum wage state that those earning minimum wage or just a little more should know that their incomes are not enough to raise a family. Nearly three-quarters of them are not parents showing self-restraint and practicing safe sex even while these same critics advocate for cutting spending on family planning services such as Planned Parenthood, favoring abstinence only sex education (which has proven to be ineffective), praising the decision in the Hobby Lobby case that stopped some coverage of health insurance and contraception, and criticizing health insurance plans that provide free contraception. That’s probably not relevant, though.
The education of workers
A frequent argument against raising the minimum wage is that those working minimum wage jobs are for those with less education. If these workers were willing to educate themselves, they would find better jobs. The CBO projects that 58% of all workers without a high school diploma will be low-wage workers (earning less than $11.50/hour in 2016), 30% of all workers with a high school diploma/some college will be low-wage workers, and 7% of workers who earned a bachelor’s degree will be low-wage workers. Perhaps they have a point. That is, if you forget that 87% of workers aged 16 to 19 will be low-wage workers and that 12% of low wage workers are under 20. You know most of those years are spent GOING TO HIGH SCHOOL. You can’t have it both ways; you can’t claim that the vast majority of low-wage workers are young and then say they are also uneducated.
Projecting out to 2016 with the CBO, 70% of low-wage workers have a high school diploma and/or some college and 10% of low-wage workers have a Bachelor’s degree. That leaves about 20% of low-wage workers who have not graduated high school. That doesn’t leave many uneducated people out there working low-wage (less than $11.50/hour) jobs who are not younger than 20. Knowing that, is it possible that raising the minimum wage could help educate these workers?
This is a crazy thought but college is significantly expensive and can be out of reach for those workers who are earning minimum wage. College is significantly more expensive than in any time in history. The National Center for Education Statistics (NCES) houses education statistics since 1969 including the price of tuition until the 2011-2012 school year. For a public four-year institution, the tuition was an average of $7,701. For someone making the exact federal minimum wage ($7.25/hour) and working 40 hours per week, this tuition would be over 50% of their total income (even if you don’t include any taxes). Since low-wage workers on average earn half of their family’s income, that’s unfeasible, without taking significant student loans. Even at California’s current minimum wage ($9/hour), a four year public university would take up 41% of the worker’s income which is still a significant amount of income. If the worker wants to go to a trade school or a two year college, a public two-year college costs on average $2.647. How can we compare this against the number of years? The next table compares how many hours one would have to work at the minimum wage to cover a year of tuition at a four year public university using in-state tuition. The first column is the year followed by the wage, the tuition in its non-inflation adjusted dollars and finally the number of hours it would take at this wage to pay for the tuition.
From that table, we can see that it now takes about 1000 hours of minimum wage work to be able to afford one year of tuition at a public four year institution. To kind of tease out the variable of college tuition, the next table shows how many hours it would take if the minimum wage remained at $7.25 in 2012 dollars for each of those years. The first column is the year, the wage column is what the wage was in comparable dollars to $7.25 in 2012. So, for instance, $7.25 in 2012 adjusted for inflation was $1.16 in 1969. The final column is the difference in total number of hours that would have needed to be worked with the real wages compared to the wages with the 2012 minimum wage in inflation adjusted dollars. The final column is the total number of hours needed to work at the year’s minimum wage compared to the total number of hours needed to work for the 2012 inflation adjusted wage.
|Year||Wage||Tuition||Hours||Difference in hours|
This table produces more of a need to cut the costs of colleges more than an increase in the minimum wage. But there are a number of years where the employee would need to work about 2 more weeks of minimum wage to be able to afford a year of tuition with the wage that was constructed compared to the current wage (minimum wage was really stagnant in the 1990s, though). Although, again, many critics of raising the minimum wage are trying to make it harder for those making minimum wage to be able to afford school by cutting state budgets to schooling, cutting aid programs (such as SNAP, TANF, etc.) or want to make it harder to be able to get those programs. Finally, many are trying to block Medicaid expansion which would allow these workers to get health insurance and having a greater chance of attending school.
Food service, income inequality, and the minimum wage
Restaurants and food services employ nearly half of all American workers who earn the federal minimum wage or less while restaurants employ nearly 10% of all American workers. The National Restaurant Association found that there will be nearly $683.4 billion in sales in 2014. It’s not surprising that thanks to these sales restaurant CEOs are very well compensated. The average top restaurant CEO was paid $10,872,390 in 2013. This was more than 721 times what a worker earning minimum wage would make in a year. To put it into more context, within the first half-day of working, a CEO will have earned as much as a minimum wage worker will earn in a whole year (provided that they work full-time).
The National Restaurant Association has frequently opposed a raise in the minimum wage. They state that restaurants would “limit hiring, increase prices, cut employee hours or implement a combination of all three to pay for the wage increase.” Congress last voted to increase the minimum wage in 2007. In 2006, the top CEO’s made 609 times what a minimum wage worker made. While denying a raise in the minimum wage to millions of workers, CEO’s were able to line their own pockets with cash.
In 1965, a CEO made 20 times more than a typical worker in 1965, growing to 29.1 in 1978, 58.7 by 1989 and reached a peak of 383.4 by the end of the 1990s. Right now, the average CEO makes 295.9 times more than the typical worker. All these statistics are courtesy of the Economic Policy Institute.
It’s a good thing that the CEO’s and others at such corporations, like McDonald’s, produced a handy budget to help those who are unfortunate enough to be stuck working a minimum wage job. Of course, it assumes that you are working two jobs. One job is at McDonald’s at minimum wage which gives you $1105 per month and the second job is basically a full time job (over 30 hours a week) if you are working at the minimum wage. Good luck working those two jobs with your McDonald’s schedule that probably is not very consistent. The annual compensation for the CEO of McDonald’s, Donald Thompson is $9.5 million. McDonald’s Corporation spent over $2 million lobbying in 2013.
The budget that McDonald’s posted was taken down after criticism from many organizations.
Because of the number of teenagers and high school aged teenagers who are working at restaurants and in the food service industry, many people cite that as the fact that these jobs are only supposed to be for them. Unfortunately, the hours of operation of these restaurants significantly disproves this. For some reason they are open late at night and during the day when children are at school.
Obviously, not all restaurants are comparable to large corporations to McDonald’s or other franchises. There are many mom and pop restaurants and other small businesses that could be hurt by raising the minimum wage. Of course, they should look at other factors including whether or not additional buying power by their consumers can help alleviate some of the damage.
The political inevitability
Raising the minimum wage to $10.10 per hour (or close to that amount) is inevitable. The question is just a matter of when. In a poll released in March of 2014 by ABC News/Washington Post, 50% of Americans stated that they would be more likely to vote for a candidate who supported raising the minimum wage. Nearly every poll conducted on the issue shows overwhelming support for raising the minimum wage. Just a quick rundown on some nationwide polls: Bloomberg found that 69% of Americans favored raising the minimum wage to $10.10 over the next three years. In June, CNN found that 71% of Americans favored an increase in the federal minimum wage and the New York Times found in September of 2014 that 70% of Americans supported raising the minimum wage to $10.10 per hour.
Support for raising the minimum wage hovers around 70%. The only poll asking respondents what the minimum wage should be raised to, the CNN poll, found that 52% of Americans supported raising the minimum wage to $10.10 per hour or higher. 19% favored raising the minimum wage but to less than $10.10 per hour.
The polls also indicate what talking points will be used to lower this support. The Bloomberg poll misrepresented the CBO report and stated that only 16.5 million Americans will see their incomes increase while 500,000 jobs would be eliminated. Both of these are misrepresentations as we will discuss later. 57% of Americans found this tradeoff to be unacceptable. This is not surprising since both of the statements are incorrect. As long as you focus on the total number of jobs lost and lie about who will see their incomes increase, people will not support raising the minimum wage.
We see that the vast majority of Americans support raising the minimum wage, who does not support raising the minimum wage? To answer this question, I looked at cross-tabs for 10 statewide polls from Public Policy Polling (PPP). The nine states that I looked at were Connecticut, Louisiana, Kansas, Florida, North Carolina, Michigan, Kentucky, Mississippi, and Minnesota. PPP asked if voters would support or oppose a raise in the minimum wage to $10/hour. I looked at the percentage that stated they opposed the minimum wage. Then I looked at the percentage of each of the cross tabs that opposed the minimum wage hike. I subtracted those in the cross tab from the overall percentage who opposed the minimum wage hike.
If there is a negative in the column it means that there are less people in that cross tab who oppose the minimum wage hike.
So on average, women were less likely to oppose a minimum wage hike and men were more likely to oppose the minimum wage hike. Women are more likely to be making minimum wage (or close to minimum wage) than men. Next table is by political party.
Note: Independent also means other in this table
Not even close to surprising is that Republicans are much more likely to oppose a minimum wage hike. It also gives the appearance that the minimum wage hike is largely a partisan issue.
The next table was going to be a table looking at racial demographics. Unfortunately, due to choosing less racially diverse states such as Louisiana, Kansas, Mississippi, and Minnesota PPP lumped racial categories together into an “other” category which makes crossracial comparisons not as accurate. Whites are more likely to oppose a minimum wage hike at 5.3, meaning that in the average state, whites opposed a minimum wage hike by 5 percentage points above how the state felt. Blacks opposed the minimum wage hike at about the rate as Democrats (meaning almost none at all).
The last table is an age comparison:
Younger voters are less likely to oppose a minimum wage hike. This is not surprising but gives us another opportunity to show how millenials are changing politics. If we take out the outlier in Mississippi, we see that senior citizens are less likely to oppose a minimum wage hike, as well, although it is only by 1.25 points. Although if you take out Minnesota, as well, it is essentially zero for senior citizens.
After looking at the data, those who oppose a minimum wage hike are primarily white, male, Republicans between the ages of 30-65. The strongest correlation between opposing a minimum wage hike, though, is political party (it would then be followed by race), then gender, then age.
Characteristics of minimum wage workers
I wrote a lot about the projections of the CBO for what the minimum wage workforce will look like in 2016. The BLS data on minimum wage workers is an extremely valuable resource for those who want to discuss the current minimum wage intelligently. Some of the highlights include that workers who make exactly the minimum wage ($7.25/hour) or less now represents less than 5% of the total workforce. The data is self-reported and is asked about their income. Of course, many states have a state minimum wage above $7.25, as do cities, counties, and municipalities. Because of that and my focus on workers who are earning below $11.50 for the most part, I did not include much of the data that was found in the report.
This section will just give some more information on those working at exactly the minimum wage or lower. All information can be found in the BLS data linked above. About half of those who earn the minimum wage or lower are under 25. 5% of all women who are paid hourly wages make the minimum wage or less compared to 3% of men. 5% of all hourly paid Black workers, 4% of White workers and Latino workers, and 3% of Asian workers earned the federal minimum wage or less. 10% of hourly paid workers without a high school diploma earn minimum wage or less, 4% who have a high school diploma, and about 2% of college graduates do the same.
What are we to do in the face of all this knowledge? One thing that we definitely will do is argue about raising the minimum wage while building strawmen because we like to do that. The minimum wage is almost certain to be raised to $10 per hour at some point in the near future. At some point in the future, we may see the minimum wage even be raised to $15/hour but that is more likely due to inflation and there are not bills on the horizon with this type of provision.
I remain unconvinced by arguments by critics of the law that it would hurt work ethic to raise the wage, just as pay raises at other jobs do not hurt work ethic, there is not sufficient proof that this will happen. I did not even address this in the post as I believe the very thought is laughable.
When discussing any policy, there are multiple things that you have to weigh, I do so with a utilitarian bent on most policy issues. The evidence suggests that there will be a minimal job loss, minimal-moderate increase on consumer price, and a minimal loss of income for those making more than 6 times the poverty level. For the last point, even if there was a substantial loss of income, I would still probably be ok with it as I believe in a larger redistributive society. I believe all of that pales into comparison to lifting hundreds of thousands of families out of poverty, increasing educational opportunities for more people, and increasing real income for millions of individuals. In my mind, I weigh it fairly favorably to raising the minimum wage.
Obviously, raising the minimum wage is not going to be a cure-all for poverty and I don’t believe that anyone is suggesting that. In my ideal world, we would have an increased Earned Income Tax Credit (EITC) and we would expand it to include more individuals. Additionally, we would spend more state funding on both two-year public universities and for four year public universities. As everyone suggests, the best way to avoid poverty is to increase educational opportunities. Unfortunately, many state budgets have been slashed much to the detriment of four-year and two-year public universities. I have written about the scourge of for-profit universities who have worked to take their place, in the past. I believe that the expansion of the EITC in both the amount that is paid out and who it goes to is critical, as well. If I had to bet on one or the other to happen, it would be on an increased and expanded EITC.