Tuesday, September 08, 2015

Labor Day Thoughts About the Minimum Wage

by Neil H. Buchanan

As the summer ends, and the annual Labor Day weekend fades into memory, this seems like a good time to revisit the debate over the minimum wage.  This year, for the first time in many years, the momentum is in favor of meaningful increases in the minimum wage across the country.  There were a few states in which voters passed state-level minimum wage increases in the 2014 midterms, even in a year in which Democrats lost badly.  (Even my blue state of Maryland elected a Republican governor.)

What is especially amazing about the current debate on the minimum wage, however, is how suddenly the "Fight for 15" movement has taken hold across the country.  Just a few months ago, it was still safe for Democrats to say that they were in favor of smaller increases in the minimum wage.  Senator Patty Murray's proposal to increase the federal minimum to $12 was considered essentially the furthest that a "practical" politician dared go, and Hillary Clinton predictably staked out that territory.

How quickly things can change!  At this point, even the editorial page of The New York Times has endorsed the $15 federal minimum.  (I say "even" in that context because, notwithstanding the generally liberal views of the the editors of The Times, they are not exactly known for being on the leading edge of such things.)  It is now a matter of waiting to see whether Hillary will catch up, and then to see how much pressure Republicans start to feel, especially Republican incumbents who are up for reelection in competitive U.S. Senate races next year.

Although I have occasionally expressed my support of increasing the minimum wage, it has been some time since I have discussed the issue in any depth.  And given the sudden surge in interest in meaningfully large increases, now is a good time to revisit these issues.  A couple of weeks ago, I did make a passing comment about the minimum wage, but that post's main topic was something else entirely.  In addition, a reader pointed out to me off-list that I had really only said in that post that assuming that minimum wages per se are bad is silly.  That, he correctly pointed out, is not the same thing as arguing that raising the minimum wage is actually a good idea.

So, to be very clear, I am in favor of an increase in the minimum wage, and I think that the $15 target is a good line in the sand.  This endorsement, in turn, calls for a few comments and clarifications:

(1) Note that the $15 target, in the legislation that has been proposed, would be phased in through the year 2020.  That is five years, which means that the new minimum will have been eroded by several years of inflation.  True, inflation is quite low, recently not even reaching the Federal Reserve's target rate of 2% per year.  But if we assume that inflation does average 2% over the next five years (with annual compounding), that $15 would be worth $13.59 in today's dollars.

How far does $13.59 go?  If -- and this is a huge if -- a person is able to find a minimum wage job that is full time and stable enough to provide year-round employment, that adds up to an annual wage of a bit more than $27,000.  From that, the worker pays Social Security and Medicare taxes, before starting to pay for health care costs, and so on.  That, at long last, would mean that a worker could support a family of four and stay above -- but barely above -- the poverty line.  This is not luxury living in a deluxe apartment in the sky.

(2) There are still plenty of people who either never took anything beyond Econ 101, or who conveniently ignore the state of economic knowledge, who will confidently announce to the world that "increasing the minimum wage might raise some people out of poverty, but it will put other people into poverty when their employers lay them off," or words to that effect.  The problem is that empirical studies fail to support the supposed theoretical certainty that wage increases cause layoffs, as I discussed at some length in a post early in 2013.

Right now, the most that one can say is that $15 is "out of sample," which means that we have little or no data based on minimum wages in that higher range, which in turn means that we are extrapolating into unknown territory.  True enough, but the new territory is, shall we say, sample-adjacent, meaning that it is not a stretch to draw some comfort from the empirical evidence.  We also know that the anti-minimum wage people have confidently told us for years that every minimum wage increase would kill jobs, and they were wrong.  At best, they are now saying, "Well, we might be right this time."

Again, we are not talking about raising the minimum wage by orders of magnitude, but simply by enough to make a real difference in people's lives.  I have no doubt that some pizza chains would loudly announce that they were about to lay off workers in response to the higher minimum wage.  (As I asked after the 2012 elections, what is it about pizza chain owners that makes them especially crazy?)  But phasing in the new minimum over a five-year period seems like a reasonable way to handle the potential concerns raised by people who are still trapped in the neoliberal ("It's all about supply and demand!") mindset.  In particular, the evidence is now overwhelming that the "laws" of demand and supply for widgets are different from the realities of demand and supply for people's efforts, and paying people living wages ends up being win-win.  That only a few individual firms are willing to pay more on their own is a classic group action problem.

(3) As some of the Republican presidential candidates now candidly admit, their arguments against increasing the minimum wage are actually arguments against having a minimum wage at all.  If one believes in the genius of the Invisible Hand, then why would one think that any agreement between worker and employer should be disallowed?  If there are people who are so desperate that they would agree to work for $2 per hour, then so be it, according to this logic.  If one is worried about fast-food chains laying off workers, then the intellectually consistent position is to say that any non-zero minimum wage will potentially put Burger King on a frenzy to lay off workers.  Those candidates who oppose increasing the minimum wage, but who are not honest enough to admit that they have no reason to prefer the current (pathetic) $7.25 over $12 or $15 are really saying that they want inflation to implicitly repeal the minimum wage.

In addition, those who oppose the minimum wage also oppose efforts to enforce labor laws that protect workers against wage theft, to enforce overtime rules, to protect workers from dangers in the workplace ("He agreed to work without a gas mask, so he assumed the risk"), and on an on.  In the real world, the people who are supposed to receive the minimum often do not receive it.

(4) There is, of course, a way to say that one is in favor of helping the working poor without increasing the minimum wage.  And remember, we are not talking about "welfare recipients," with all of the othering that comes with that formulation.  Wages, minimum or otherwise, are paid to people when they work (at least, when the employer does not steal the wages, as noted in (3) above).  Other than the minimum wage, the other major policy initiative designed to improve the living standards of the working poor is the Earned-Income Tax Credit (EITC), which is effectively a wage subsidy, increasing low-wage workers' after-tax incomes via a refundable credit.

The problem is that the current Republican party hates the EITC.  I say "current" because it was only in the last decade or so that the EITC has come under severe attack from the right. In 1986, Ronald Reagan signed a bill to increase the EITC and called it "the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress." Now, Republicans have done everything possible to attack the EITC. Because it is, by design, a tax credit that will be paid even when the worker has no other federal income tax liability (which is what it means for a tax credit to be refundable), they call it a "handout."  They have imposed all kinds of filing requirements that are so difficult to navigate that low-income tax clinics spend almost all of their time helping people fill out the needlessly complicated forms correctly.  And if there are any mistakes, it is called "fraud" and thus proof that the poor people are ripping us off.

Most progressive economists believe that the minimum wage and the EITC work well together, and that both should be increased to allow the working poor to have decent living standards.  Relying too much on one or the other really might push us out of sample to the point where some unintended consequences could become a real concern.  But saying, "Well, the minimum wage is bad, because it violates the law of supply and demand, and the EITC is bad, because it's a handout," is simply to assert that there is nothing that we can do about poverty and inequality.  The evidence clearly says otherwise, if only we can finally put all these hoary myths to rest.

3 comments:

Paul Scott said...

I have a basic question that applies to all related legislation. Two things I have never understood is why legislators ever, ever use dollar amounts. Why is the minimum wage $X. Why is the debt ceiling $Y, the EITC $Z, etc.

Everyone knows that:
1. there will be inflation, however small; and

2. Different places have different costs of living.

But let's forget #2, because while it is completely true and even reasonably easy to calculate, deciding how to do so is not as easy. So let's just pretend its not true for now.

Given 1, how can any legislation ever be passed with a flat dollar amount. It guarantees that new legislation will be needed in the future. If you think that $15.00/hour is adequate (probably is in most places, clearly not in at least LA, NYC and SF), then set it in 2015 dollars and adjust (or in this case, 2020 dollars).

It is not just minimum wage, it is everything. If there is one statute I would like passed it is one that automatically and retroactively changes all dollar amounts in all statutes to dollar amounts in Year A dollars, with Year A being the date the statute was enacted or rule put in force.

Joe said...

I have wondered why the minimum wage isn't indexed to inflation or whatever the proper terminology is. Isn't that how they do congressional pay raises and such?

Greg said...

The problem I see with a $15 minimum wage is that it will DRAMATICALLY change the landscape of what qualifies as a minimum-wage job. Lots of skilled professionals are making close to that. Medical technicians are making less than that in my area. Nurse starting salaries are around $20 an hour, not really that much more. Nurses in doctor's offices might be making less.

With that kind of change to where lots of technical-school or college-educated jobs are going to suddenly become minimum wage (or not much more) it could finally cause a sea change in attitudes about education. Alternatively, it could have the opposite effect, and drive people towards college who wouldn't have otherwise considered it, seeking one of the few jobs that hasn't been turned into minimum-wage.

I'm not trying to say that people making less that $15 aren't underpaid, but if real wages go up dramatically and quickly (5 years is fast for something like doubling the minimum wage) we are indeed in "uncharted territory."

If nothing else, in labor-dominant fields it seems predictable that prices will go up. Is it possible that this could be an inflation driver in itself, ultimately driving down real wages in fields not subject to the minimum, while perhaps not significantly changing real wages for those who receive the $15/hour?

To be clear, I'm not against raising the minimum wage, and $12 sounds not totally unreasonable in my area. $15 just feels too high.