The Daily Item, Sunbury, PA

Business

March 5, 2014

The argument for increasing minimum wage

Hi everybody, America’s most-beloved workplace advice columnist here. As promised last week, this column will focus on the argument in favor of raising the federal minimum wage. Next week’s column will focus on the opposing argument. So please don’t send mean emails saying I’m a dirtbag for only telling one side of the story. My feelings are easily hurt.

Perhaps the most common word you’ll hear from people who support boosting the minimum wage is “fairness.“ The minimum wage, after all, stemmed from the Fair Labor Standards Act of 1938.

“If we believe we should have a fair society, that in some sense the benefits of economic growth and technological progress should improve not just the living standards of business owners but of workers as well, then the minimum wage really should have grown more over time,“ said David Cooper, an economic analyst at the Economic Policy Institute. “We’ve chosen to let workers at the bottom fall farther and farther away from people in the middle.“

The federal minimum wage is currently $7.25 per hour and hasn’t been raised since 2009. The proposed increase would bring it to $10.10 per hour.

Because the minimum wage has never been tied to inflation, its value has eroded significantly, and many economists say that has contributed mightily to the growth in income inequality.

Cooper said the minimum wage in 1968 was about $9.40 in today’s dollars: “So that means that today, America’s lowest paid workers are being paid about 23 percent less than they were 45 years ago.“

Proponents of an increase argue that the fair thing to do for American workers is to increase the minimum wage and, ideally, tie it to inflation, thus removing future increases from the realm of politics.

The recent Congressional Budget Office report on the minimum wage estimates that an increase to $10.10 per hour would boost the weekly earnings of 16.5 million low-wage workers and bring 900,000 people above the poverty line.

Clearly, that would be a good thing.

Economist Michael Reich, director of the Institute for Research on Labor and Employment at the University of California at Berkeley, said the two goals of a minimum wage increase are to help people pay their bills and to create a more fair working environment.

“The question is: Do those two goals create any economic harm?“ he said.

Opponents say raising the minimum wage will force employers to hire fewer people or pass the new costs on to consumers by raising prices on goods and services. Either way, they say, the positive impact of the increased wages will be either muted or negated.

Reich’s research - and research by many other economists - provides evidence to the contrary.

Reich says the arguments of many opposed to a minimum wage increase are based on a “basic Econ 101 model“ that doesn’t accurately represent the nuanced realities of industries that employ minimum wage workers.

He - along with fellow researchers Arindrajit Dube and T. William Lester - examined the effects of minimum wage increases across state borders, where one state has had a wage increase and the other had not. Their work was published in 2010 in the journal Review of Economics and Statistics and found that, in the restaurant and retail industries, boosting the minimum wage by 10 percent had effectively no impact on employment levels.

In fact, the increase provided businesses with greater staffing stability, which saves money.

These results mirrored those of another study from the early 1990s that looked at fast-food restaurant employment in Pennsylvania, where the minimum wage remained fixed, and New Jersey, where wages increased. Again, the wage increase resulted in no negative change in employment levels.

But what about passing the increased labor costs on to consumers?

Reich and Cooper both said research has shown such increases have small overall effects on employers’ operating costs.

For example, Reich said labor makes up about one-third of a restaurant’s operating costs. And one-third of restaurant workers are paid at or close to the minimum wage.

A 10 percent minimum wage increase paid to one-third of the company’s workers translates to a 3 percent overall increase in the cost of labor. Since labor makes up a third of the companies’ costs, the overall cost increase would be only about 1 percent.

“It’s a lot lower than people think,“ Reich said.

And in retail, he said, labor is only 10 percent of the costs, so the impact is even lower.

Cooper said: “I think a lot of these arguments are straw men arguments, and they’re set up to basically say we shouldn’t enact this policy, that by all reasonable measures would improve the living standards of millions of people, based on the theoretical possibility that it might make things harder for a relatively small number of people.“

Reich and Cooper are not alone in their opinions.

Last year, the University of Chicago’s Booth School of Business asked more than three dozen top economists whether raising the federal minimum wage to $9 per hour and indexing it to inflation would be a “desirable policy.“

The result: 47 percent said it would, 11 percent said it wouldn’t and 35 percent were either uncertain or had no opinion.

Only 34 percent thought an increase would make it “noticeably harder for low-skilled workers to find employment.“

That’s all I have room for. Next week we’ll examine the views of those who think a minimum wage hike is a bad idea.

Rex Huppke writes for the Chicago Tribune. Send him questions by email at rhuppketribune.com or on Twitter RexWorksHere.

 

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