The City of Los Angeles made headlines last week by raising its minimum wage to $15 per hour. But perhaps it shouldn’t have come as a surprise: a powerful minimum wage movement has taken hold in America. And it’s gaining momentum—despite Congress’s best attempts to ignore it.
Behind the Headlines
Few economic policy issues provoke more public debate than the minimum wage. Unlike macro aggregates, like GDP, or abstract averages, like the unemployment rate, it’s tangible; unlike the tax code, it’s something we can actually understand. It’s hard to go an hour without encountering someone who earns it—from the guy pouring our morning coffee to the woman helping our elderly neighbor with household chores—and many of us have earned it at some point ourselves.
The minimum wage is economic policy with a human face. And it speaks to our deepest values: in a country that prides itself on individual self-determination, what is the least we deserve to work for? Because the minimum wage is not indexed for inflation—so that its real value is always eroding—this is a question we’re constantly forced to reassess.
In the current political environment, where areas of agreement between Democrats and Republicans consist almost entirely of “what color is the American flag?”, it’s hardly surprising the minimum wage has become a flashpoint of contention. Even as fast food workers take to the streets to demand livable pay, industry groups, including the National Restaurant Association and the National Retail Federation, push back and issue dire warnings of the massive job losses that such raises would provoke.
Given the intensity of the animosity, you’d be forgiven for thinking the minimum wage is a policy grey area, with pros and cons, and debatable implications. It’s not. Instead, there are four clear reasons why Congress ought to increase the minimum wage now—and permanently index it for changes in the cost of living.
The Minimum Wage Is a Poverty Wage
$7.25 per hour is not a lot. Working full-time, year-round (that’s forty hours a week, fifty-two weeks a year) at the minimum wage yields just $15,100—or about $800 below the poverty line for a family of two. In other words, in the richest country in the history of the world, you can work really hard and still, quite easily, be poor.
And the wage situation gets worse by the day. Our political system is designed to prevent drastic change, but the minimum wage is one area where inertia is hardly acceptable, thanks to inflation. Congress last raised the minimum wage, to $7.25, in 2009; today, because prices have increased, that $7.25 is worth $6.57 in 2009 terms. This means low-wage workers have taken a 9 percent pay cut over the last six years.
Not that congressional intransigence is an historical aberration. The minimum wage has increased just three times since 1982. In fact, had the minimum wage maintained its peak value, attained in 1968, it would be $10.88 today. That’s a 50 percent raise today’s low-wage workers are missing out on.
Nor do U.S. wage standards compare favorably to those of other countries. According to the OECD, among twenty-eight developed economies with statutory minimum wages, America ranks third to last when minimum wages are measured relative to median wages. What this means is that, comparatively speaking, it’s worse to be a low-wage worker in the U.S. than it is in most other advanced countries.
Americans Support Higher Minimum Wages
While Congress simmers with endless contention, the American public is a community of consensus. Poll after poll finds Americans support raising the minimum wage—and by wide margins. In a 2014 Pew survey, 73 percent of Americans favored raising the wage to $10.10, including 90 percent of Democrats, 71 percent of Independents, and more than half of Republicans. Similarly, a 2015 survey conducted for the National Employment Law Project found 75 percent of Americans in favor of a $12.50 minimum wage by 2020, and 63 percent supported raising it to $15. In addition, 82 percent favored indexing the minimum wage for inflation.
And when given the chance, Americans express their preferences in the voting booth. Five states considered minimum wage ballot measures in November 2014, and all five passed by wide margins. Further underscoring the minimum wage’s broad appeal, four of the states—Alaska, Arkansas, Nebraska, and South Dakota—had overwhelmingly voted against President Obama in 2012.
The Minimum Wage Is Good Policy
Textbook economic theory predicts higher wages mean less employment. But often, textbook economics is wrong. As it turns out, the real world is a good bit more complicated than supply and demand curves, and a large body of empirical studies finds that modest increases in the minimum wage have no adverse impact on employment levels.
The first major hint that the minimum wage may not carry the drawbacks traditionally assumed came with David Card and Alan Krueger’s influential 1994 study comparing fast food workers in eastern Pennsylvania and New Jersey, after the latter increased its minimum wage. Because the economies on either side of the two states’ shared border were otherwise similar, Card and Krueger were able to isolate the impact of the minimum wage increase. They found no evidence of diminished employment.
While several subsequent studies were critical of their work, by and large a consensus affirming their counterintuitive results has only grown stronger. Perhaps the most comprehensive study to date—a 2009 meta-analysis of sixty-four prior papers by Hristos Doucouliagos and T.D. Stanley—concluded there is “little or no evidence of a negative association between minimum wages and employment.” And even more recently, Arindrajit Dube and his colleagues scaled up Card and Krueger’s methods to the national level, again finding no negative employment impacts. In addition, when the University of Chicago polled the nation’s top economists in 2013, 47 percent characterized a minimum wage increase as a “desirable” policy, while only 11 percent disagreed.
So why are the employment effects of a higher minimum wage so small in practice? One explanation is that low-wage workers lack bargaining power; consequently, some large, low-wage employers can pay them at less than their fair value. A second reason is that job search takes time—and is a costly process for workers and employers alike. Because higher wages reduce worker turnover, it saves firms recruitment and training costs—and more experienced workers also tend to be more productive. Finally, a further boost in productivity comes from the so-called “efficiency wage” effect, which goes something like this: employers are only able to monitor worker effort imperfectly, so one way to motivate them to work harder is by increasing wages—and thereby raising the cost of getting caught shirking.
Taken together, these effects suggest that not only does a higher minimum wage benefit those who earn it, but that it can also increase firm profitability and economic performance.
The Minimum Wage Is Winning
Lost amid the partisan rancor in Washington is one key fact: for many Americans, a higher minimum wage is already here. As Congress remains paralyzed by the politics of pettiness, states, localities, and private employers have taken matters into their own hands.
Like Los Angeles, twenty-nine states and Washington, D.C. already have minimum wages above the federal standard, as do at least twenty-one other cities and counties, including Seattle, Chicago, San Francisco, and Louisville. In addition, some of them have already scheduled future increases, and others have smartly indexed theirs to automatically rise with the cost of living. In all, three in five Americans live in a place where the minimum wage exceeds $7.25; nationwide, the population-weighted average minimum is $8.04.
Private companies have taken notice, too. Walmart, the nation’s largest private employer and notoriously one of its worst paying, raised its minimum to $9.00 in April; other major low-wage employers, including McDonald’s, Target, Starbucks, Ikea, and Gap have also done so. The same is true even among popular, highly coveted employers, including Facebook and Costco. And, thanks to President Obama’s Executive Order, federal contractors are now guaranteed at least $10.10 per hour.
When you put it all together, it’s hard to think of a policy area where congressional inaction is so vastly at odds with the expressed preferences of the American people. A common-sense policy to raise the minimum wage to livable levels and automatically adjust it for living costs would save states and localities (to say nothing of policy analysts) a great deal of time, effort, and resources that could better be spent elsewhere.
But until they do so, we’ll be busy raising it ourselves.