When passed, the Raise the Wage Act currently in the House of Representatives (H.R. 15) and the Senate (S.1242) will increase the federal minimum wage to $15 per hour by 2024, and provide an overdue and needed stimulus to around 40 percent of Americans and their communities.Since its passing as a part of the Fair Labor Standards Act of 1938, the minimum wage has set an influential floor for basic work standards. Prior to the Raise the Wage Act, the most recent piece of federal minimum wage legislation, the Fair Minimum Wage Act, was passed in 2007, which raised the rate to $7.25 by 2009. However, due to a long erosion in the real minimum wage, the scale of the recently proposed increase is necessary for reinstating a minimum wage that is commensurate with wages, productivity, and the cost of living, and will go a long way towards establishing an adequate baseline of quality of living for all Americans.
The general stagnation of wages since the 1970s has occurred for many reasons, but has only been exacerbated by an inadequate wage floor. The productivity of American workers has roughly doubled since 1968 (the peak of the minimum wage in inflation-adjusted dollars), but workers making the minimum wage today make 25 percent less than they did in 1968, once adjusted to today’s dollars. Even though unemployment has dropped precipitously, sitting well below 5 percent for the last three years, it has not been until recently that wage increases for workers in lower-paying occupations have occurred. And much of that growth at the low end of the distribution has come from action on the minimum wage at not the federal level, but the state and local level.
Many state and local policymakers, and a growing number of employers, have come to understand that, for a number of social and economic reasons, pay needs to better reflect workers’ efforts. There has been some significant progress, spurred on not least by the Fight for 15 movement: since the movement began in 2012, an estimated 22 million workers have been affected by new minimum wage policies, including state and local statutes, administrative and executive action by local officials, and private employers’ own initiatives. Amazon and Costco, for example, increased their minimum wages to $15 and $14 per hour, respectively; Target plans to increase its minimum wage to $15 by 2020; and Walmart and CVS are scheduled to increase their minimum wage to $11 per hour in 2019.
Many state and local policymakers, and a growing number of employers, have come to understand that, for a number of social and economic reasons, pay needs to better reflect workers’ efforts.
In what follows, the recent evidence and rationale for supporting a $15 minimum wage will be discussed, from the perspective of businesses, workers, and communities. Consideration will be given to businesses’ profit motives as well as to the need to reduce poverty and income inequality.
Evidence Points to Negligible Job Loss
One concern among many critics with raising the minimum wage to $15—a concern that historically has tended to dominate conversations about the policy—regards whether such an increase would lead to a significant elimination in hiring and jobs as employers adjust to the increased labor costs. The critique goes that, in order to cut losses, employers could hire fewer workers, reduce workers’ hours, and/or shift toward automation, among other measures, causing workers to lose more than they’ve gained from the policy. Decades of economic research has debated this question. While historically the research has been divided, the recent consensus is that job losses due to increasing the minimum wage are in fact insignificant.
Many “natural” studies have been conducted, the most influential of which was David Card and Alan Krueger’s analysis of the New Jersey minimum wage increase in 1992, comparing employment outcomes in the New Jersey restaurant industry to neighboring Pennsylvania. Contrary to what some might have expected, New Jersey’s fast-food employment actually grew by thirteen percent relative to that of Pennsylvania.
There have been recent studies arguing the opposite to Card and Krueger’s conclusions, including well-known studies by economist David Neumark. For instance, in a 2017 paper, Neumark and his coauthor Grace Lordan used data from 1980 through 2015 to show that jurisdictions that raised minimum wages also saw a rise in job loss due to the automation of low-wage jobs.
Decades of research findings, when combined, show little to no negative employment effects in localities that have raised the minimum wage.
However, Arin Dube, Ben Zipperer, and their co-authors published a counter that same year. A meta-analysis that combined the results of hundreds of studies, it showed that job loss estimates cluster around zero. In other words, decades of research findings, when combined, show little to no negative employment effects in localities that have raised the minimum wage.
Similarly, a team of economists from UC Berkeley led by Sylvia Allegretto examined the most recent outcomes in six major cities that have significantly raised the minimum wage. By comparing these cities (among them Seattle, Chicago, and Washington, D.C.) with similarly sized areas that haven’t raised the minimum wage, they found no statistically significant employment effects after the policies were enacted.
Increasing Consumer Demand
Economists and political leaders, including President Trump, are worried that the resurged U.S. economy will soon lose steam. While these concerns have some justification, a powerful alleviation is well within reach: raising low-wage workers’ pay by increasing the minimum wage.
A report by the Federal Reserve Bank of Chicago shows that a $1 minimum wage increase boosts consumer spending for households with minimum wage workers by $2,080 per household. The Economic Policy Institute estimates that for a directly affected worker who works full-year, an increase to $15 dollars per hour translates into a $5,100 increase in annual wage income, which represents a non-trivial source of stimulus for families and their local communities.
The average annual expenditures of low-income families adds up to $33,300, indicating that the $5,100 increase in income represents a 15 percent jump in the typical household’s possible expenditures. This additional $5,100 could represent, for example, eighteen months’ worth of groceries, 40 percent of overall annual housing expenditures, more than half a year’s rent or mortgage payment, just over one year of the typical family’s expenditures on transportation, and two years of health insurance expenditures.
Further, the incremental increases in the minimum wage would strengthen the purchasing power of low-wage African American and Latinx workers, who currently have around $700 in median weekly earnings. According to the Selig Center at the University of Georgia, African Americans have a collective buying power of $1.2 trillion. Housing, education, and food expenditures constitute $166 billion, $71.0 billion, and $65.3 billion of that buying power, respectively. The buying power of Latinxs is similar, sitting at approximately $1.3 trillion. Simply supporting incremental increases in the federal minimum wage could lead to greater business earnings across the country in tandem with broader economic growth in communities of color.
Simply supporting incremental increases in the federal minimum wage could lead to greater business earnings across the country in tandem with broader economic growth in communities of color
Boosting Morale and Productivity while Reducing Turnover
Based on a variety of academic studies, a report issued by President Obama’s Council of Economic Advisors came to the conclusion that paying below-market wages is associated with higher turnover, lower morale, and higher training cost. Many studies show that higher pay increases worker productivity due to greater motivation, a perception of fairness, and improved health.
The work of The College of William and Mary’s Committee on Employment Opportunity further illustrates this point. The committee’s charge was to conduct a compensation study of the college’s lowest paid occupations. The analysis revealed several problems. Even though the college was one of the region’s largest employers, the school’s housekeeper and landscaping jobs paid well below market wages. Based on employee town hall conversations and a labor market analysis, the committee found that morale and effort was quite low and turnover was quite high. The college’s president, Timothy J. Sullivan, enthusiastically accepted the committee’s recommendations to raise wages. When implemented, productivity rose, turnover fell, and search and training costs fell. These adjustments represented a “win–win” for workers, employers, and the community at large.
Studies also offer evidence that higher minimum wages are good for employee retention. Low retention is very expensive for businesses, especially for those in low-wage industries like retail and hospitality, which both have notoriously high turnover rates. In those industries, businesses can lose up to 1.5 to 2 times the annual salary of a worker that left the company, due to search costs and lower productivity during training. Some very large low-wage employers are beginning to catch on: Walmart and others have cited improved recruitment and retention as part of their rationale behind raising pay.
Improving Food Security
The current federal minimum wage of $7.25 represents poverty level incomes for American families, which leaves their members at risk of health and nutritional deficiencies, and especially in the case of job loss. According to the U.S. Department of Agriculture, over 30 million households are either food insecure or have a low level of food security, representing deficits which have broad-ranging negative impacts on not only health and nutrition but also education and child development. The shocking truth is that lack of food has become an ongoing reality for many Americans, even among those who are working. Food pantries have gone from an emergency service used by a small portion of the population to a fixture of entire communities: in 2014, 54 percent of Americans using a food pantry were from working families.
According to research by The Century Foundation, bringing the nationwide hourly base wage to $15 by 2023 would free 1.2 million households from hunger. The households who would achieve food security—the ability to consistently meet basic nutritional needs—mirror the demographics of the low-wage workforce as a whole: about 44 percent, or half a million, would be black and Latinx households, and nearly 350,000 would be single-parent households who suffer disproportionately from hunger. Regionally, the greatest impact on hunger will be in southern states, where approximately 430,000 households will become food secure, representing 37 percent of households that would achieve food security.
Currently, a family of four with one full-time worker earning the $7.25 minimum wage has an annual income that is 17 percent below the poverty line, even after factoring in cash from tax credits, such as the earned income tax credit. Economist Arin Dube has found that for every 10 percent increase in the minimum wage, over the long run, the poverty rate is expected to decline by more than 5 percent, which would be 0.5 percentage points from the current 10 percent poverty rate for non-elderly adults. At the minimum wage’s peak value in 1968, it was able to keep a family of three above the poverty line, but not a family of four. If passed, the Raise the Wage Act will move a full-time minimum wage worker above the poverty line for a family of four for the first time in history, making it possible for these families to earn $31,200 a year versus the poverty threshold of roughly $25,000.
Currently, a family of four with one full-time worker earning the $7.25 minimum wage has an annual income that is 17 percent below the poverty line, even after factoring in cash from tax credits
Some opponents of raising the minimum wage contend that as a policy for reducing economic hardship, the minimum wage is ineffective because many poor people do not work. There is little support for this claim. As explained by the Economic Policy Institute, the majority of poor people aged eighteen to sixty-four who can work (i.e., they are not in school, retired, or disabled) do work, and over 40 percent work full time.
One thing that today’s record-long economic expansion has shown is that economic growth alone cannot reverse corrosive and pervasive inequality, but that a major increase in the minimum wage can. Kevin Rinz and John Voorheis for the U.S. Census Bureau have shown that raising the minimum wage decreases income inequality, increases earnings growth, and increases family incomes at the bottom of the distribution. Indeed, an increase in the minimum wage that was similar in size to the ones applied by Seattle in 2013 and 2016 would have restored a large portion of the losses suffered by low-income workers during the Recession.
Since a larger share of those impacted by the minimum wage are women and minorities, increases can play a major role in lessening gender and racial inequality. Based on the Economic Policy Institute’s estimates, women in 2013 comprised more than three of five minimum wage workers (2.06 million out of 3.3 million), and that raising the minimum wage to $15 would effect over 23 million women. With the erosion of the minimum wage, it is no wonder that, overall, the black–white racial pay gap has increased. The raise would directly or indirectly boost pay for 40 percent of black workers and over 33 percent of Latinx workers.
The Raise the Wage Act would boost the minimum wage of tipped workers from $2.13 to $12.20 per hour, two-thirds of whom are women. It’s no surprise that research finds that a minimum wage, alongside other benefits like the child tax credit, can reduce child poverty among female headed households. Moreover, it would increase the minimum wage for the population of 5.8 million disabled workers from $4.25 to $12.25.
Regional Minimum Wages are Insufficient
Some suggest that instead of having a uniform national minimum wage of $15 per hour, regions set their own minimum wage based on cost of living estimates. They argue for this approach because the cost of living differs by region of the country and are concerned that small towns can’t handle the same large increases as cities. A significant problem with this approach is that it weakens the federal government’s important role of setting minimum standards. The federal minimum wage provides a “floor” on wages nationwide, with the Fair Labor Standards Act of 1938 laying out a scaffolding below which workers should not fall. This national floor is important to preserve because many states, particularly those in the south, have labor practices that restrict wage growth, such as so-called “right-to-work” laws which weaken the power of unions. If southern states were permitted to set their own regional minimums, that could facilitate a mass migration of low-wage employers to those states. Therefore such a policy could exacerbate racial inequality, because blacks disproportionately reside in the south and southern states would most likely set lower minimum wages. The end result would very likely be an increase in African American poverty.
Additionally, the National Employment Law Project finds that by 2024, workers in all fifty states will need at least $15 per hour to afford the basic material needs for food, education, and shelter. More specifically, in both urban and rural areas, a single adult working full-time will need $15 per hour to make ends meet in 2024. This adds further support to a federal-level, nationwide approach over one based on regional self-determination.
The vital wage changes proposed in the Raise the Wage Act represent a win–win for workers, employers, and their communities, who will collectively experience four effects:
- Food and housing security will increase.
- Businesses will experience an increase in the production, distribution, and sale of “necessities.”
- Employee morale and productivity will increase, as a benefit to both workers and employers.
- Incomes will rise for millions, poverty will fall, and inequality will narrow.