The Minimum Wage Riddle

Would a $15 federal minimum wage increase the well-being of low income Americans or put them out of work?

Five Figures to Consider

12% loss of purchasing power in the federal minimum wage since its last increase in 2009
29 states have minimum wages above the federal minimum
46% of African Americans and 52% of Hispanics are at high risk of material hardship
7 million jobs eliminated with a $15 federal minimum wage
7% expected job loss to automation by 2030 for workers with a high school education

How many workers does it take to wash a car in Queens, NY? Twenty-five before unionization raised the wage to $15 an hour. Then just two workers after the wage increase incentivized the owner to install automatic car washing equipment. Twenty-three employees lost their jobs following the wage hike at a single car wash, according to a Reason report. Similar scenarios are taking place across New York City as employers adapt to the City’s new $15 minimum wage for businesses with 11 or more employees. Amy Scherber, founder of Amy’s Bread, told The Wall Street Journal last week that she raised wages for her entire staff of 210 in response to the minimum wage increase. Good news for workers! Not so fast. Scherber is now looking to cut costs elsewhere including closing a Manhattan location and leasing new bread-making equipment to do the work humans might otherwise do.

In Washington, D.C., Congressional Democrats have revived their fight to increase the federal minimum wage. The Raise the Wage Act, introduced by Bobby Scott (D-VA) in the House and Bernie Sanders (I-VT) in the Senate, would lift the minimum hourly wage from its current $7.25 to $15 by 2024 and index future increases to median wage growth. The House version has 181 co-sponsors. The Senate version has 31. That’s far from enough to pass the Senate, but as the #RaiseTheWage rally gets going again, it’s a good time to consider whether a 200% increase in the minimum wage would, on balance, help or hurt low skill workers.

Supporters of the wage hike want to reverse increasing wage stagnation and economic inequality in the U.S. Since its last increase in 2009, the federal minimum wage has lost 12% of its purchasing power. Over the longer term, middle and low-wage workers are getting a smaller piece of the economic pie. Since 1979, the share of personal income going to the bottom 90% of workers has dropped from 59% to 47%. Low skill workers, a group made up disproportionately of minorities, have been hardest hit. According to a 2017 Federal Reserve report on the economic well-being of Americans, 46% of African Americans and 52% of Hispanics are at high risk of material hardship. This is true for just 25% of Whites. The Economic Policy Institute (EPI), a proponent of the wage hike, figures that a $15 wage by 2024 would lift the pay of 30% of the U.S. workforce, including an outsized share of workers of color and women.

Not so fast, say the bill’s detractors. Think of it from the employer’s perspective. A higher minimum wage means employers will hire fewer people, and what goes in New York isn’t necessarily good for Tennessee. You pay 89¢ in Tennessee for what costs $1.34 in New York. Such cost of living differences are one reason New York and 28 other states have already raised their minimum wage above the current federal minimum. Meanwhile 21 states, including Tennessee, stick to the federal rate. Employers in those 21 states would face the biggest wage hikes if the Act passes and would likely look to reduce worker hours, forgo new hires and install automation to replace workers. The conservative Heritage Foundation figures that a $15 federal minimum wage would cost the economy 7 million jobs. Teenage employment in particular would suffer. According to the Center on Budget and Policy Priorities, about half of the 1.8 million minimum wage workers are under age 25.

Are there ways the federal government could address wage stagnation without threatening job growth? First, consider some of the likely causes of wage stagnation. One is the rising cost of employer-purchased health insurance, which might have limited employers’ ability or willingness to increase wages. Since 2001, employer paid benefit costs have climbed an inflation-adjusted 22.5% versus 5.3% for wage and salary costs. Another cause may be the declining influence of organized labor. The union membership rate has halved since 1983, and an increasing number of states are union unfriendly. Yet another cause is the decline in manufacturing and production sector jobs, which has driven a shift toward low-wage service jobs. Finally, those low wage service jobs are losing out to automation. Here is one place the federal government can most directly address wage stagnation. Help people help themselves by increasing funding and incentives for education and job training.

According to the McKinsey Global Institute, by 2030 automation, including robotics and artificial intelligence, will replace 7% of jobs available to workers with no more than a high school diploma. Low wage and medium wage jobs will continue to disappear as a proportion of overall employment. Moreover, up to 33% of the workforce may need to switch occupational areas. These automation-driven disruptions will put people out of work with no chance to earn any wage. In fact, increasing the minimum wage for low skill work might hurry that trend. Why not leave minimum wage regulation to the states and focus on ways to increase workforce skills? A $15 wage won’t save a high school dropout’s job as a drug store clerk. The do-it-yourself scanner costs less to run, doesn’t require health care benefits and never calls in sick. Send that dropout back to school, though, and she may be able to get a $25 an hour computer tech job servicing that scanner.

Sources

Board of Governors of the Federal Reserve System, Bureau of Labor Statistics, Center on Budget and Policy Priorities, Congress.gov, Economic Policy Institute, Heritage Foundation, McKinsey Global Institute, National Coalition of State Legislatures, New York State Department of Labor, Pew Research