LEL Flash | Issue: June/July 2014

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Issue: June/July 2014


The Minimum Wage: An Ongoing Debate

The debate over whether to raise the minimum wage has garnered national attention for more than a year now. Fast food workers around the country have gone on strike, federal and state legislators have considered a variety of bills, and President Obama has mentioned the issue in his last two State of the Union addresses.

Yet despite all this attention, the federal minimum wage has remained stagnant since 2009. How to explain this deadlock? One might chalk it up to simple divisions in the electorate. But that's apparently not it. At last count, roughly three-quarters of Americans now favor raising the wage to $10.10 an hour.1

What, then, is going on? The answer is simple: It's complicated. Sure, we all know the basics. Employers and their lobbyists say that any increase in the minimum wage will disrupt an already fragile economy; while low wage workers and their allies ask how anyone can live on a full-time minimum wage job.

Do both sides have a point? Let's look in a bit more detail. But first, some background.

Just the Facts

Approximately 3.3 million American workers earn wages at or below the minimum, according to the U.S. Department of Labor.2 (Of those, 1.5 million are at and 1.8 million are below.) That's 1% of the population, 1.6% of the labor force, 2.5% of all workers, and 4.3% of hourly workers. Not surprisingly, minimum wage workers skew young, with half under age 25. They also, however, skew disproportionately female and minority.

When it was first enacted in 1938 as part of the Fair Labor Standards Act, the federal minimum wage was 25 cents--or $4.05 in today's dollars (according to one internet inflation calculator).3 The minimum wage reached the height of its buying power in 1968, when it was worth $10.86 in today's dollars. The wage is now $7.25. At 40 hours a week for 52 weeks a year, the current minimum produces an annual gross income of $14,500.

Many people think that is too low, and Democrats in Washington in particular have been working hard to increase it. A Senate bill this past spring proposed raising the minimum wage to $10.10. It won the support of every Democratic senator. But only one Republican, Bob Corker of Tennessee, voted to allow debate to proceed, and the bill failed even to get to the House, where it stood virtually no chance of becoming law anyway.

Recognizing that congressional action is fanciful at best, President Obama is doing what he can to raise the income of the lowest wage workers on his own. In February, he signed an executive order mandating that, starting in 2015, new federal contracts will require contractors to pay their employees at least $10.10 an hour.

Meanwhile, many states and municipalities are also acting to guarantee what proponents call a "living wage." At present, 22 states and the District of Columbia have minimum wages above the federal floor, with Washington State the highest at $9.32.4 So far in 2014, eight states plus D.C. have enacted increases, and 38 states have considered minimum wage bills during their 2014 legislative sessions.

Now that we have a sense of the field of play, let's look in more depth at the teams' positions.

The Employer Perspective

Most employers seem to disfavor raising the minimum wage. They say it will increase the cost of doing business, precipitate widespread layoffs among low-wage workers, and have only a marginal impact on poverty. The employer's favored economists contend that increases in the minimum wage lead to decreases in low-wage employment.5 (The non-partisan Congressional Budget Office estimates that roughly 500,000 low-wage workers would lose their jobs, though the other 16.5 million would, of course, get a raise.6) These economists also argue that most low-wage workers don't actually live in poor households, so raising the minimum wage is a poor vehicle to combat inequality.7 And far from changing the realities for lower-income adults supporting families, it is young, part-time workers--exactly the sort of workers for whom the minimum wage provides a foothold--who would lose their jobs in the greatest numbers.8 Above all, employers say, raising the minimum wage will force businesses to raise their prices, which hardly helps anyone. If government really wants to help the working poor, they argue, it should increase the Earned Income Tax Credit (EITC), which would offer more targeted results and create a more diffuse burden.

The Employee Perspective

Employee advocates (of whom, I must disclose, I am one) dispute virtually all of this. Raising the minimum wage won't substantially increase costs, they/we say, because it will reduce employee turnover and boost productivity.9 Nor will it ultimately hurt businesses, since low-wage workers (who, after all, are also consumers) will have more money to spend on the businesses' goods and services.10 And while increasing the EITC isn't a bad idea, it would require the working poor to average the increase out over the course of the year, rather than receiving more money in each paycheck. Plus, some of its benefits flow to employers in the form of lower wages, rather than to employees, at least as a matter of theoretical microeconomics.

Beyond all this, though, the pro-hike camp says that raising the minimum wage is simply the right thing to do. Since the late 1970s, when the minimum wage was $2.90 (or $9.98 in today's money), productivity in the American economy has grown about 65%. Yet compensation for hourly workers--80% of the workforce--has grown just 8%. Meanwhile, compensation for the top 1% of earners has grown over 150%.11 And that level of inequality, they/we say, just isn't right.

* * *

Ultimately, as with so many policy issues today, the debate over the minimum wage seems to come down to a battle of the economists. Not that the economists really change much. After all, which economists you prefer to believe probably has a lot to do with which position you already support. In the end, though, perhaps understanding where each camp is coming from represents some progress in itself.

1Bruce Drake, "Polls show strong support for minimum wage hike," http://www.pewresearch.org/fact-tank/2014/03/04/polls-show-strong-support-for-minimum-wage-hike (Mar. 2014).

2U.S. Bureau of Labor Statistics, "Characteristics of Minimum Wage Workers, 2013," available at http://www.bls.gov/cps/minwage2013.pdf.

3U.S. Department of Labor, Wage and Hour Division, http://www.dol.gov/whd/minwage/chart.htm.

4National Conference of State Legislators, http://www.ncsl.org/research/labor-and-employment/state-minimum-wage-chart.aspx.

5David Neumark & William Wascher, "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research," National Bureau of Economic Research (Nov. 2006), available at http://www.nber.org/papers/w12663.

6"The Effects of a Minium-Wage Increase on Employment and Family Income," U.S. Congressional Budget Office (Feb. 2014), available at http://www.cbo.gov/sites/default/files/cbofiles/attachments/44995-MinimumWage.pdf.

7See, e.g., Joseph J. Sabia & Richard V. Burkhauser, "Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor?," Southern Economic Journal (2010), available at http://www.people.vcu.edu/~lrazzolini/GR2010.pdf.

8See, e.g., Michael J. Hicks, "Who Lost Jobs When the Minimum Wage Rose?," CBER Business Brief (Feb. 2010), available at http://cms.bsu.edu/-/media/WWW/DepartmentalContent/MillerCollegeofBusiness/BBR/Publications/MinWage.pdf.

9See, e.g., John Schmitt, "Why Does the Minimum Wage Have No Discernable Effect on Employment?," Center for Economic and Policy Research (Feb. 2013), available at http://www.cepr.net/documents/publications/min-wage-2013-02.pdf.

10See, e.g., Michael Reich et al., "Local Minimum Wage Laws: Impacts on Workers, Families and Businesses" (Mar. 2014), IRLE Working Paper, available at http://www.irle.berkeley.edu/workingpapers/104-14.pdf; Benjamin H. Harris & Melissa S. Kearney, "The 'Ripple Effect' of a Minimum Wage Increase on American Workers," Brookings Institution (Jan. 2014), http://www.brookings.edu/blogs/up-front/posts/2014/01/10-ripple-effect-of-increasing-the-minimum-wage-kearney-harris.

11Josh Bivens et al., "Raising America's Pay: Why It's Our Central Economic Policy Challenge," Economic Policy Institute (Jun. 2014), available at http://s2.epi.org/files/2014/Raising-America%27s-Pay-2014-Report.pdf.

Joshua R. Goodbaum, Garrison, Levin-Epstein, Richardson, Fitzgerald & Pirrotti, P.C., New Haven, Connecticut


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Flash Co-Chairs:
Jeremy J Glenn, Meckler Bulger et al | Monique R. Gougisha, Ogletree Deakins | Amy F. Shulman, Broach & Stulberg LLP | Jennifer R. Spector, National Labor Relations Board

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