Minimum Wage

The history of the academic debate over the minimum wage is a progressive success story. The short version goes something like this: until the early '90s, conventional wisdom had it that a higher minimum wage caused job loss and unemployment in the low-wage sector. Then a landmark study of the New Jersey fast food industry showed it had no impact on employment, and subsequent empirical studies have backed it up. And in 2006, over 650 economists signed a letter of support for an increase in the minimum wage.

Now a new paper adds another left-leaning wrinkle. It finds that under certain circumstances a higher minimum wage stimulated the creation of new jobs. Most likely, by putting more money in people's pockets, it increased demand for consumer goods, and employers responded by hiring more people. Other studies presumed that businesses would mostly pay for increased labor costs by charging higher prices, and consequently demand would decrease slightly. But if demand is increasing and employers are adding jobs, prices aren't going up. Rather, firms are trimming costs somehow.

This is only one study, and the authors caution the evidence only suggests that consumer demand increased. Even so, the upshot is that what's good for low-wage workers can also be what's good for business and consumers. We're all in this together.

Adam Cohen in yesterday's NYT on the 75th anniversary of the National Industrial Recovery Act and the minimum wage:

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This week marks the 75th anniversary of the National Industrial Recovery Act — which Roosevelt signed June 16, 1933, at the end of his famous first 100 days — and of the federal minimum wage. It was a grudging, almost accidental win, and the road since then has been rocky. Advocates for low-income workers have had a hard time keeping the minimum wage at a reasonable level and passing other laws necessary to fulfill the original goal: ensuring that people who work hard can achieve a reasonable standard of living.

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The Supreme Court declared the NIRA unconstitutional, but the idea of a federal minimum wage had taken hold. In 1938, Congress passed the Fair Labor Standards Act — which a more progressive Supreme Court upheld — creating a mandatory federal minimum wage.

The new law was enormously effective: within a year, it brought millions of low-paid workers up to a wage of 30 cents an hour. It also had major weaknesses, notably that it was not indexed to inflation. Congress has to raise it, which leaves low-income workers at the mercy of politics.

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The minimum wage can play a vital role in lifting hard-working families above the poverty line. But as Roosevelt understood, it is also about something larger: what kind of country America wants to be. “A self-supporting and self-respecting democracy,” he said in the Congressional message that accompanied the Fair Labor Standards Act, can plead “no economic reason for chiseling workers’ wages.”

One way to think about the debate over the Wal-Mart economy is in narrow cost-benefit terms: do the benefits of the low prices provided by America's largest private employer exceed the costs of low wages and benefits? But I think the better way to think about it is in Rooseveltian terms: do we want to be a country of low retail prices, low wages, and Gilded Age inequality?

Via Economist's View, an interesting 2006 paper on the minimum wage and firm profitability. According to EV, the paper:

finds evidence that the minimum wage transfers income from owners to workers, i.e. that it reduces profit and increases wages, but it does not change the probability of a firm going out of business, and it does not reduce employment. Thus, this paper raises the possibility that an increase in the minimum wage reduces inequality without having much of an impact on aggregate activity or employment.

In his Janesville speech, Obama calls for tripling the Earned Income Tax Credit and indexing the minimum wage to inflation:

... Since the Earned Income Tax Credit lifts nearly 5 million Americans out of poverty each year, I’ll double the number of workers who receive it and triple the benefit for minimum wage workers. And I won’t wait another ten years to raise the minimum wage – I’ll guarantee that it keeps pace with inflation every single year so that it’s not just a minimum wage, but a living wage. Because that’s the change that working Americans need.

Here's Hillary's position on the same topics:

Make Work Pay by Raising the Minimum Wage to $9.50 by 2011 and Aggressively Expanding the EITC. Hillary believes that no one who works hard to support their family should have to live in poverty. She was proud to introduce the first ever bill to raise the minimum wage to $9.50 by 2011, and index it to Congressional salaries after that. She has also called for tripling the EITC benefit for single workers, providing more than 4 million people a pro-work tax cut averaging $750.

Tying the minimum wage to Congressional salaries is clever messaging, but an inflation (and maybe productivity) adjustment probably makes more sense. That said, $9.50 in 2011 is a real boost, and it's good to see Clinton endorse that number.

On the EITC, I think the Obama and Clinton proposals are probably very similar. I can't imagine that Obama is actually proposing to triple the EITC for families with children; he probably means single workers.

What opponents of Arizona's minimum wage increase said would happen: "... Arizona's proposed minimum-wage law would cost businesses tens of millions, and thousands of workers - especially the ones who needed their jobs the most - would be laid off."

What happened:

... a year after voters overwhelmingly approved boosting pay for the state's least-expensive workers from $5.15 an hour to $6.75, the immediate effect has seemed, well, minimal.

Estimates by the U.S. Bureau of Labor Statistics show the state's leisure and hospitality industry, which figured to be hardest hit, added 12,000 jobs statewide in the first nine months of the year. That is in line with annual job growth for those businesses in recent years, the numbers show.

In a new analysis, the Bureau of Business and Economic Research at the University of New Mexico finds little evidence of job loss as a result of Santa Fe's $9.50 minimum wage requirement:

In terms of the statistical analysis, there is little in the overall results that suggest any impact of the $9.50 living wage. Comparisons of large Santa Fe City businesses with large businesses in Santa Fe County and in Albuquerque yield no significant difference overall or by industry. Comparing large to small businesses, significant differences are only found in Santa Fe County and Albuquerque, our two control regions where the living wage does not play a direct role. All of this further supports conclusions arrived at in the original analysis of the $8.50 living wage that any employment changes are symptomatic of other factors, but that the living wage is not a significant factor in determining whether a company hires or fires employees.

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In response to the concern that the living wage means reduced employment opportunities for young people, BBER staff analyzed data from the US Census Bureau on younger workers in the City of Santa Fe. A review of the data quarter-by-quarter since the wage was implemented indicates that youth employment has continued to increase in all age cohorts – those 14-18, those 19-21 and those 22-24.

Over at TAP Online, J. Goodrich details the extent of conservative opposition to the recent minimum wage hike and suggests its mere passage was "just short of magical."

I don't know. The hike deserves applause, but probably not a standing ovation. Democrats, after all, do control both Houses of Congress. And despite opposition to the minimum wage among conservative elites—and, it must be said, some not-so-conservative elites, which is one reason why it took so long in the Cllinton Administration to get the last increase, which happened in 1996 when R's controlled both Houses of Congress—it's a no-brainer in the real world. As the votes on the increase—315-116 in the House and 94-3 in the Senate—show, the increase wasn't something that Democrats got through by the hair of their chinny chin chins.

Minimum wage increases are something that should just happen on a regular basis without much fuss. A growing number of states do just that, and it would have been nice to see such an option put forward as a starting point this year in Congress.

Goodrich concludes that:

On a purely political level, the Democrats have delivered on one of their concrete policy proposals; a proposal which garners wide public support and even that of many business people.

She's right—but I'm skeptical that the public will give them much credit for it, or view it as much of an achievement. My guess is that most of the public thinks that the minimum wage is, like I said, something that should be increased on a regular basis without much fuss, like Social Security benefits, or their own paychecks if they're already paid more than the minimum. If this is the case, failures to increase the minimum may be met with public ire that is greater in quantity and quality than the enthusiasm resulting from an increase.

By contrast, delivering, or even just fighting for, a new labor standard—like a minimum standard for paid sick and vacations days—that would directly affect a much broader swath of workers would likely make a much bigger impression with the public. As CEPR's Rebecca Ray and John Schmitt have shown, 1 in 4 U.S. workers don't receive any—as in zilch, nada, zero—holidays or vacation days. Many of these workers benefit from the minimum wage increase, but a establishing a minimum standard for paid time off would given them something they don't have at all right now.

The federal minimum wage goes from $5.15 to $5.85 today, ending the longest period without a increase in the minimum since it was enacted in 1938.

This is a good thing, and worth celebrating.

But it's also needs to be put into perspective. If I've got my numbers right, an hours work at yesterday's minimum would have bought you a regular sized QuarterPounder w/Cheese value meal at McDonalds. Today, that same hour of labor makes it possible to supersize and still have a few cents left over.

It's never to early to start thinking about the next steps on the minmum wage. As I noted awhile back, Robert Pollin has the right idea.

Via OMB Watch's Budget Blog, here's a great journal article by economist Robert Pollin making a persuasive case for increasing the new $7.25/hr minimum wage (in 2009) to $9/hr in 2011 and $10 in 2013. Pollin's basic argument is that the minimum wage should rise "in line with average productivity and inflation, after taking account of employment effects" in order to "move the country closer to waht voters have demonstrated they support, what the economy can readily absorb, and what low-wage workers deserve."

Christine Vestal of Stateline.org has a good story on how states have been the real leaders on boosting the minimum wage:

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a majority of state legislatures have made wage hikes a top priority. In the past two and a half years, more states raised their minimum wage rates than in the 68-year history of the federal minimum wage law, according to the National Conference of State Legislatures.

The watershed was the 2004 election, when voters in Florida and Nevada overwhelmingly approved wage hikes while also voting for Republican President George W. Bush. Politicians realized the issue was a “winner,” said Bernie Horn of the Center for Policy Alternatives, a progressive advocacy group focusing on state policy.

In 2006, 11 states -- Arkansas, California, Delaware, Maine, Maryland, Massachusetts, Michigan, North Carolina, Pennsylvania, Rhode Island and West Virginia – enacted increases in the minimum wage; six of those states were exceeding the federal rate for the first time.

On Election Day, voters overwhelmingly approved wage hikes in another six states - Arizona, Colorado, Missouri, Montana, Nevada and Ohio. In all six states, minimum wages will be adjusted by inflation annually, and in Nevada, the minimum must also remain at least $1 above the federal rate.

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Congress should follow the lead of states that provide automatic annual adjustments in the minimum wage. At a minimum it would be nice to see Congressional leadership introduce legislation that makes that change, and Presidential candidates start talking about it.

Monday's Supreme Court decision upholding a Labor Department regulation that denies minimum wage and overtime protection to home care aides doesn't look particularly surprising from a narrow legal perspective. Basically the Court ruled uniamimously that DoL acted within the scope of its delegated rulemaking authority. There's a good argument for a different conclusion, but since it's not one that even Justices Ginsburg and Stevens agreed with, it's hard to disagree too much with the Court on the legal merits. This is now an issue that Congress can and should fix by clarifying that the Fair Labor Standards Act applies to home aides.

I noticed something in the NYT article on the case that adds to my skepticism about Mayor Bloomberg's poverty reduction effort:

The Bloomberg administration filed an amicus brief in the case, arguing that a victory for Ms. Coke could force the city, state and federal governments, which finance home care through Medicaid, to pay $250 million more a year to the 60,000 home care attendants in the city.

Home care aide work is low-wage work. The median wage for a home care aide is $8.34 an hour. Home care aide work is also one of the largest low-wage occupations in the United States employing more than 560,000 workers, more individuals than are employed as child care workers. If you're serious about improving the living standards or families at the bottom of the income scale, a good way to start would be by ensuring that home care workers have the same basic wage and overtime protections as other workers.

Liana Fox of EPI has developed a very helpful 50-state table showing the interaction between the increase in the federal minimum wage and state minimum wages. Thirty-three states have already passed laws increasing their minimum wages above the current $5.15 federal minimum.

In our recent report on low-wage work, we argue that low-wage work should be defined using what we call a social-inclusion approach—under this approach, a low-wage job is one that pays significantly less than the median wage for male workers. In an excellent new report on the adequacy of New Jersey's minimum wage, the nonprofit group New Jersey Policy Perspective argues for a similarly inclusive form of indexing the state's minimum wage. Instead of immediately indexing the wage to the Consumer Price Index, NJPP recommends indexing the state's minimum wage to 50 percent of the average wage.

While indexing the minimum wage has the potential to safeguard workers' economic well--being better than the current system in states that do not index, there is an important reason why New Jersey should not immediately index its minimum wage to the CPI: the wage as it now stands is too low. Increasing the state minimum wage at the pace of the cost of living without first raising the minimum wage to a meaningful level would leave minimum wage workers and their families perpetually behind.

There is a way to meet these concerns, based on the concept that minimum wages are often set with the wage levels of other workers in mind. This approach reflects the principle that minimum--wage workers should share in economic gains and should not fall too far behind other workers. During the 1950's and 1960's the minimum wage was at least half of the hourly earnings for non--supervisory and production workers in the non--farm private sector. If it were back to the historical level of half the average wage today, New Jersey's minimum wage would be $8.50 an hour. Instead, the eroded $7.15 minimum wage stands at just over 40% of the average wage.

A two-step approach to this problem makes sense:

1. Bring New Jersey's minimum wage to half of average wages. This year, that would mean a minimum wage of $8.50 an hour. If the increase comes later or is phased in over more than one year, the minimum wage would be more than $8.50.

2. Annually adjust the state minimum wage so that it is half the average wage, ensuring that the value of the minimum wage is not eroded as the cost of living increases.

Together, these two steps would stem the decline in purchasing power New Jersey minimum wage workers have endured in the past, and at the same time avoid the sudden increases that trouble employers.

PS: Thanks to CEPR's Liz Chimienti for bringing this report to my attention.

It's official—Maryland is now the first state (joining many other cities) with with a living wage law:

Gov. Martin O'Malley signed a first-in-the-nation "living wage" law yesterday, setting a higher minimum wage for those employed by state contractors and putting Maryland in the forefront of a national debate over government's role in fighting poverty.

"What this bill simply says is, 'If you're working on a contract funded by the people of Maryland, we are going to treat you in a fair and just way so you can put food on the table for your family after a day's work,'" O'Malley said.

Advocates have framed it not simply as an anti-poverty measure, but affirmatively as a way to "expand the middle class":

Many states, Maryland included, have pursued general increases in the minimum wage, but supporters of living wage laws say governments have a duty to ensure that they expand the middle class rather than widen the ranks of the poor.

In the NYT article on the new law, ACORN's Jen Kern says:

“A lot of organizations have been focused on increasing state minimum wages over the past couple of years, but now with this becoming law in Maryland, some people are asking, ‘Why isn’t this on our state legislative agenda?’”

Today's NYT on the minimum wage-tax cut deal:

Congressional negotiators have finally reached an agreement on a bill to raise the federal minimum wage. But in getting to that important point, some Democratic lawmakers have shown the same disturbing tendency as their Republican kin to turn pressing issues into pretexts for more tax cuts.

The bill would raise the minimum wage to $7.25 an hour by 2009 from $5.15 — the level it has been stalled at for a decade. It also contains tax cuts that would be worth $8 billion over the next five years. About a third of those cuts are aimed at businesses that are apt to employ minimum wage workers. They include a nearly four-year extension of a tax credit for hiring people from such underemployed groups as high-risk youth. Another big chunk would allow small businesses to take bigger write-offs when they bought new equipment. That’s not specifically intended to help low-wage employers, but would probably help some.

But about $600 million of the bill’s tax breaks have no reasonable connection to the minimum wage. Senate Democrats were among the main drivers behind $366 million in tax cuts on behalf of a narrowly targeted group of corporate constituents, including more generous tax treatment of some companies’ investment income. House lawmakers — more attuned to urgent needs — added an additional $246 million in tax breaks for hurricane-ravaged areas on the Gulf Coast. The corporate tax breaks, however, would be permanent, and would balloon to a cost of nearly $900 million over 10 years while the Gulf Coast tax breaks would be temporary.

Tax cuts that measure in the hundreds of millions of dollars are chicken feed compared with the hundreds of billions in tax cuts championed by the Bush administration and pushed through Congress in the last six years. And to the Democrats’ credit, all of the tax cuts in the minimum wage bill are paid for in the long run, generally by closing overly generous tax breaks elsewhere in the code. But closing loopholes to pay for tax cuts for corporate constituents means that money is not available to pay for programs for needier Americans.

Congress is to be commended for making the minimum wage bill a priority and should look for every opportunity to send it to Mr. Bush. But to really move the nation in a new direction, lawmakers will have to temper their enthusiasm for never-ending tax cuts.

Yes, it's a good thing pay-go rules helped keep the tax cut number down, but until Dems stop throwing away money that could be used for real investments in public structures, we won't make much progress.