POTUS Proposes an Increase in the Minimum Wage!

February 12th, 2013 at 11:44 pm

It’s a great idea, one I’ve espoused on these very pages.  The President suggested raising the federal minimum from its current level of $7.25 up to $9 by 2015 and then index it to inflation.  An increase of that magnitude would directly lift the wages of 15 million low-wage workers, according to the WH.

Clearly, in an economy where for decades growth has failed to reach our lowest wage workers, it’s time to raise the wage floor to ensure that low-wage workers have a decent shot at a fair wage.

From the WH fact sheet:

Raising the minimum wage mostly benefits adults, and especially working women: Around 60 percent of workers benefiting from a higher minimum wage are women, and few are teenagers – less than 20 percent.

Raising the minimum wage helps parents: The average worker who would benefit from a rise in the minimum wage to $9 an hour brought home 46 percent of his or her household’s total wage and salary income in 2011, according to the Current Population Survey.

For a working family earning $20,000 – $30,000, the extra $3,500 per year from raising the minimum wage would cover:

o The family’s spending on groceries for a year; or

o The family’s spending on utilities for a year; or

o The family’s spending on gasoline and clothing for a year; or

o Six months of housing.

Raising the minimum wage will boost wages without jeopardizing jobs while improving turnover and productivity: A range of economic studies show that modestly raising the minimum wage increases earnings and reduces poverty without measurably reducing employment, and that in fact employers may see a more stable workforce due to reduced turnover and increased productivity:

o Numerous careful economic studies have shown that increasing the minimum wage has no negative effect on employment. Recent comprehensive studies have built on earlier research and confirmed that higher wages do not reduce employment, potentially because they increase employers’ ability to attract, retain, and motivate workers. And they benefit workers by increasing the reward to work. For example, one recent study found that when states like New York, Rhode Island, California, and Vermont raised their minimum wage, their workers benefited relative to workers in neighboring states that did not raise their minimum wage. This study concluded: “These estimates suggest no detectable employment losses from the kind of minimum wage increases we have seen in the United States.” [Arindrajit Dube, T. William Lester, and Michael Reich, 2010, “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties,” Review of Economics and Statistics.]

o In 2006, the Congressional Budget Office analyzed a $2 increase in the minimum wage and found that “the potential employment and unemployment impacts of raising the federal minimum wage rate….are difficult to predict, but are likely to be small.”

Source: NYT

 

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17 comments in reply to "POTUS Proposes an Increase in the Minimum Wage!"

  1. Guest says:

    Indexing it to inflation could be a problem if it dissuades the Fed from inducing more inflation to help stimulate the economy


  2. Ryan Johnson says:

    Hi Jared,

    Thanks for your great great blog. Happy to hear the minimum wage increase proposal.

    Two questions:

    How much would you need to raise the minimum wage to pull the minimum wage worker out of the range where they qualify for government support (EITC, SNAP etc)

    Could you graph how much the savings would be in government spending on those programs as you raised the minimum wage? Would be interesting to see.

    Best,
    Ryan Johnson


    • Kevin Rica says:

      Ryan,

      See my post below.

      In order to reduce the deficit, the minimum wage must be combined with tighter immigration restrictions — not a higher level of immigration.

      See Paul Krugman’s “The Curious Politics of Immigration”
      http://krugman.blogs.nytimes.com/2010/04/26/the-curious-politics-of-immigration/

      If you increase the minimum wage and low-skilled immigration, you just get more unemployment and dependency on the social safety net.

      The last night’s SOTU address was the final death knell of the New Deal.


  3. Kevin Rica says:

    But the labor market conditions that would allow a higher minimum wage without a significant job losses (i.e. low labor market elasticities) are the very ones that would cause a large drop in wages as a result of increased low-wage immigration (which the President is also proposing).

    If you combine the two, inconsistent policies, the increased minimum wage would limit employment while the immigration would increase the low-wage labor force. Eh voila! A one-for-one increase in the number of unemployed for every immigrant. (Although the burden of unemployment would be shared by both the new immigrants and the previous labor force).

    On the other hand, if labor market elasticities had been high (the ones estimated by the economists hired by the Chamber of Commerce and immigration advocates), the unemployment rate would have gone up more!

    If the President believes that more on-the-job training is the answer, he should offer the cabinet a freshman econ course so that they could learn supply and demand.


  4. Eric L says:

    It should be indexed to GDP per-capita. I think it’s past time to dispense with the notion that we can have healthy growth over the long term while people at the bottom become an arbitrarily small fraction of the economy.


    • D. C. Sessions says:

      ^^^^^^^
      This.

      Index wages to per-capita GDP, index taxes to median wage. Not a short-term solution, but over time it will make a real dent in inequality.


  5. rjs says:

    also important, it works to close the deficit; those making more are more likely to be taxpayers rather than needing assistance…


  6. save_the_rustbelt says:

    Many small businesses are in the fifth year of a recession, and this is not what they need (I know economists consider the “average business” but some of us work in the real world).

    In my world the good news is I am getting fewer calls for the names of bankruptcy attorneys and fewer “how do I shut down my business” calls.

    That is very weak good news.

    Even in the dark days of 1978 – 1982 small business owners were more positive about the future.


    • Just my opinion says:

      While I favor raising the minimum wage, I must make a couple of comments:

      If you increase the minimum wage and it has no negative impact on local employment (as the quoted study shows) then likely the real constraint was the market clearing wage (the equilibrium wage that an employer would offer and an employee would accept). In contrast, if you increase the minimum wage above the market clearing wage then I suspect it would have to negatively impact employment levels.

      Given the unemployment levels are highest in our lowest skilled segments of society, one would have to believe that either $9 per hour is below the market clearing wages in most areas or a rise in unemployment is an acceptable outcome for higher wages.

      Is there research that compares market clearing wage levels against the new proposed minimum wage?


  7. radmul says:

    $9 is too low. We are raising the minimum wage to $12 for larger employers in Eureka California by ballot initiative. You can read it here. http://eurekafairwageact.wordpress.com/text-of-the-eureka-fair-wage-act/


  8. Justin says:

    What about places like American Samoa, where the market-clearing wage is much less than the U.S. average, yet they still have to match U.S. minimum wage laws (on a gradual basis, their minimum wage is set to regularly rise 50 cents until it reaches the U.S. wage)? This clearly causes unemployment in American Samoa and other U.S. territories where poverty and standard of living is much lower than the U.S. that have to, yet Bernstein and other economists ignore this. Why? Shouldn’t Progressives be about helping those at the bottom?

    To argue that “profits are high” and therefore firms can afford to pay their minimum workers more ignores exactly which firms are seeing these record profits. How many minimum wage workers in the U.S. does Exxon employ? Not many. But small businesses in towns like Detroit and Cleveland that have been hit hardest by the latest recession are just barely getting by, and will now have to lay off or cut back the hours of some of their minimum wage workers, or simply increase the price of their products.

    Changing minimum wage is a blunt instrument that has different effects in different localities. It’s simply a way for politicians to look like they’re doing something, ignoring that they’re helping some while hurting others.


  9. Charles says:

    When I was 18 (I am 53 now) I was working at Johnny’s Pizza. Minimum wage was 2.90 and it was going to 3.35 (I think). We were all excited. The night before it went into effect, when we closed, we pulled down all the menu boards and raised prices to cover the increased cost. It hit me right then that all over the country a lot of businesses were doing the same thing. It is a feel good move at best. The way up in this country is not by government mandate, but by individual effort. IMHO of course.


  10. Dilip says:

    I found this comment in another blog very persuasive in arguing that raising the minimum wage will cause unemployment to go up:
    http://www.themoneyillusion.com/?p=19392#comment-227266


  11. LisaR says:

    Your previous $10 tab at McD’s becomes $12.50 if min. wage is $9/hr. instead of $7.25. This simplistic “fix” is akin to “tax the rich” fix. When the rich are taxed more, they (business owners) pass that on to the rest of us in higher prices and lower wages/benefits. If a worker supporting a child has to work for minimum wage…we are encouraging these types of poor decisions when gov’t tell employers what they must pay laborers. Teenagers and college-age kids will have a terrible time finding work. It may be too late for Rs to be believed…they’ve become too moderate and gone along way too much with bigger gov’t. When the Senate does their job, as required by our Constitution, we can begin to take our gov’t seriously. When politicians stop using “invest” when they mean “gov’t expenditure,” we can begin to see the light. Imagine if we, individuals, could spend w/o a budget… simply raise our credit card limit every year. Congress is the cause of our incredibly wasteful and bloated gov’t and allowing disaster for America.
    When bloated and wasteful gov’t takes tax money out of your pocket, you have less to spend in the free market…less to buy goods and services….LESS to spur the “real economy”….private enterprise. Gov’t taking and then wasting your money (deciding how much you “should keep” of your hard-earned money) is not freedom and certainly not a way to “grow the economy.” Big, over-powering gov’t is what made the English bravely leave their country. This brave experiment called America has lost its purpose, thanks in huge part to the false perception that watching TV news imparts knowledge.


    • Kevin Rica says:

      Lisa,

      Interesting. Assuming that all Micky D’s workers previously earned the $7.25 minimum and they get a $1.75 wage increase, they would have to work 1.42 hours to make one $10 meal cost another $2.50.

      Of course if that were the case, the labor costs alone would be $12.85 (1.42 hours at $9/hr) to make a $12.50 meal. Obviously — that makes no sense. Your analysis is economically naive or possibly innumerate.

      This is the same argument used by the Chamber of Commerce to defend illegal immigrants. “They don’t depress wages, but if we made them leave, you would have to pay American workers so much that we would pay $10 per apple.” (Notice the inconsistency?)

      FYI a good apple picker with few other skills beside climbing a ladder can pick nearly one “bin” (about 900-1000 lbs) in an hour. That’s about 2500 apples. The pay – depending on the availability of illegal immigrants is $15 to $30 per bin or about 1¢ per apple. To add $1 to the cost of an apple you would have to increase the hourly wage to something in the range of $1500/hour. Give up your day job as a neurosurgeon!

      And of course, some of the wage increase will come out of the profits of the famer – or more precisely the income of the agricultural landowner. If they could pass along all the costs to the consumer – do you think that the employers would care? Never believe anyone who claims: “We steal from others and pass the savings on to you.”

      Most people who would be affected by the new minimum wage make more than $7.25 now. Let’s say that 20 million people got an average of $1/hr or $2000/year as a result of a higher wage and it was all passed to consumers. How much would that be? $40 billion! So if this was added to the roughly $12 trillion in consumption spending, that would be an increase of 0.33%. The affected workers would get a 12.5% wage increase by have to pay 0.33% in increased costs. They would come out ahead and the rest of us would hardly notice.

      Isn’t sixth-grade arithmetic fun and enlightening?


  12. Bobbie says:

    Raising the minimum wage also helps thousands of older Americans working at big box stores and other companies. Older Americans frequently need to work in order to pay their bills – mortgage or rent, medication and other health care, food, transportation, and daily needs. The older adult workforce should be an important part of the discussion of the need to raise the minimum wage.


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