03/17/2021
Happy Blue & Gold Wednesday everyone!
Attached is an article written by Department of Management & Economics faculty, Dr. Steven Schwiff, in regard to the upcoming minimum wage increase, from an economics perspective. This is a great read you won't want to miss out on!
The Federal Minimum Wage: Helps or Hurts?
The federal minimum age was created under the Fair Labor Standards Act (FLSA) in 1938. President Roosevelt intended the wage to be “more than a bare subsistence level.” The act only applies to firms that have annual gross sales of at least $500,000. The current level is $7.25 nationwide though it varies from state to state and city to city. To get a sense of the variation Texas and New Hampshire pay $7.25; Washington State pays $13.39; Massachusetts pays $13.50 and Georgia and Wyoming pay $5.15. Seattle and San Francisco now pay a minimum wage of $15.00.
According to the Bureau of Labor Statistics (BLS) 1.6 million workers or 1.9% of all hourly paid, non-self-employed workers earned wages at or below the federal minimum in 2019. For comparison sake, 82.3 million people were classified as being paid hourly rates or 58.1% of all wage and salary workers. In South Carolina, 5.4% of hourly workers or 64,000 people earn at or below the federal minimum. In California, Minnesota, Montana, Oregon, and Washington state less than 1% do.
When one looks at educational attainment, 3.1% of workers with less than a high school diploma, 2% of high school graduates, and 1.2% of those with a BA degree or more earn at or below the minimum wage. When we filter by occupation type, 12.1% of food preparation and service workers; 3.2% of personal care and service workers; 1.7% of building and grounds maintenance workers and sales & related workers earn at or below minimum wages. Not surprisingly only .5% of professional and related workers earn at or below the minimum wage.
The Congressional Budget Office estimates that raising the minimum wage to $15.00 would increase the wages of 17 million workers by 2025 but that 1.3 million could become jobless.
To better understand the minimum wage debate let’s look at two major issues: (1) what do economists and economic theory say and (2) what is the consensus from empirical research.
The economic theory argument is fairly straight forward and relies the market for labor. The labor market is where firms looking to hire employees (demand for labor) and workers looking for work (supply of labor) meet. The “deal” they end up making is over the offered wage rate. Firms would ideally be willing to pay workers a wage rate related to how much more productive that worker would make the firm.
The minimum wage “short circuits” this deal. If firms must pay a wage higher than would have been made through the “deal”, then the wage rate is higher than the additional productivity the new worker brings and firms reduce the quantity of labor they will hire. Further, more workers would be willing to work at this new higher wage and a surplus of labor also results. This in essence of the economic argument. As recently as 1992 a survey of economists showed 79% agreed with this result.
Much has changed since 1992. The variations in how minimum wages have been implemented have opened up opportunities for new empirical research. Attitudes have changed nationwide with 40% of Republican voters now favoring a hike to $15.00.
Let’s look at the new empirical research that has been done. In the early 1990’s David Card and Alan Krueger looked at employment in the fast-food industry. They found no evidence that higher minimum wages lead to unemployment but in fact just the opposite. Further, higher minimum wages did not deter the opening of new fast-food restaurants. In 1995 they published a book, “Myth and Measurement” detailing their findings. By 2000 only 46% of economists believed higher minimum wages lead to unemployment. Other studies were conducted in England, Germany and Israel looking at the relationship between higher minimum wage and unemployment. The results of these studies have shown that the labor market is more nuanced than the making of a simple deal over the wage rate. Often firms have no idea how much additional productivity a new worker will bring. Suggesting that workers and firms can negotiate on an equal basis with each other over wage offers does not reflect reality. If firms pay entry level workers a higher minimum wage will they also have to raise the wages of co-workers and supervisors? How does minimum wage impact low productivity firms versus those that are more productive? Does how high and fast you raise the minimum play a role?
So, with all this said where do we stand with minimum wage? Most economists and empirical studies hold that higher minimum wages are not always bad. But, caution, that also does not mean they are good. The new consensus suggests that in the short-term higher minimum wages would have an overall small negative impact on employment but a disproportionally higher impact on low skilled workers. In the longer term, if firms see continually higher minimum wages as a permanent fixture and that they will not be eroded by inflation, this could encourage them to replace workers with capital thus causing unemployment to rise.
As with most public policy issues, there is no short, simple answer to the question: “Does raising the minimum wage help or hurt?”
