Minimum wage increases breaking out all over!

January 2nd, 2015 at 8:36 am

As some wit tweeted a few months ago, the American electorate wants legal pot, higher minimum wages, and the most conservative Congress ever.

At any rate, the newly legislated higher wage floors in states and cities across the land, in tandem with a number of annual adjustments in minimum wages for inflation, just went into effect in the new year:

All told, 29 states will exceed the federal minimum wage of $7.25 an hour at the beginning of January, according to the National Conference of State Legislatures.

The initial changes will enhance minimum pay by as little as a few pennies to as much as $1.25 an hour, affecting about 3.1 million employees, according to the Economic Policy Institute, a liberal research group.

By now, about 60% of the workforce is covered by minimum wages above the federal level.

I’ve been getting a number of queries about all this, so here’s some Q&A:

Q: What with all these sub-national increases, do we even need a federal minimum wage anymore?

A: Yep. There’s still that 40% that’s covered by the federal level. Though Arkansas just raised their minimum, the federal minimum is still largely the southern minimum. Given the differences in costs of living across the land, state variation makes sense. But even so, to let those in low-wage labor markets just covered by the federal minimum fall so far behind the rest of the country is to foster greater geographical inequalities.

Q: What about the unintended consequences? Won’t there be job losses?

A: I’ve written many posts about this which you’re welcome to dig up, but there’s now such a large body of research based on all this regional variation that any debate quickly devolves into cherry picking the study that has the answer you want (i.e., opponents like to see significant job loss effects and vice versa). Therefore, I think it’s efficient to be informed by the two meta-analyses I know well, both of which come to the same conclusion:

Belman and Wolfson: “Bearing in mind that the estimates for the United States reflect a historic experi­ence of moderate increases in the minimum wage, it appears that if negative effects on employment are present, they are too small to be statistically detectable.”

Stanley and Doucouliagos:“…with 64 studies containing approximately 1,500 estimates, we have reason to believe that if there is some adverse employment effect from minimum-wage raises, it must be of a small and policy irrelevant magnitude.”

It is of course plausible that some workers experience hours’ reductions or job losses from minimum wage increases. But even the NFIB (small biz lobby) guy quoted in the NYT piece linked above says, “The likeliest scenario won’t be layoffs,” claiming instead that employers will look for ways “to avoid creating new jobs.”

What is implausible is to suggest that the benefits to low-wage workers are outweighed by the costs. Not even close. Even the oft-cited CBO study, which some believe highballed the job loss impacts, found 24.5 million would get a wage bump (16.5 million directly and 8 million through spillovers) and 500,000 jobs lost, implying a benefit/cost ratio of 49/1.

Q: We’ve already got a problem with labor saving technology displacing workers. Do we really want to incentivize more of that by mandating wage increases?

A: This is the “let’s be a third world economy!” wage strategy: keep wages low enough to dis-incentivize capital investment. Bad idea.

First, there’s no evidence of any acceleration in the pace at which machines or AI are replacing humans. To the contrary, both productivity growth and capital investment have been laggards of late. But more to the point, to discourage such investments/innovations by ensuring wages stay low is to work against improving productivity, a strategy that’s antithetical to economic progress.

And again, given the dozens of increases taking place as we speak, if raising the minimum wage displaced large numbers of workers, we’d know it and those meta-analyses would yield much different results.

Q: But because it’s not keyed off of income the minimum is poorly targeted. Wouldn’t it be better to raise the EITC?

A: It takes both. The minimum wage and the EITC are make-work-pay complements, not substitutes.

First, the minimum wage reaches many poor and near-poor people. The CBO estimates that a federal increase to $10.10 would raise 900,000 out of poverty; Dube finds that increases in the wage floor have historically lifted twice that many out of poverty. And basing targeting judgments wholly on our unrealistically low poverty line is too restrictive: most of the benefits from the typical increase flows to low- and moderate-income households.

But let’s be very clear about this point: the minimum wage is more than a targeted or means-tested program. It’s a labor standard, a floor below which Congress will not allow wages to fall. As with overtime, child labor, or safety standards, the motivation is to block a practice that we as a nation consider inconsistent with our values, in this case, the payment of wages below an agreed upon level.

At a practical level while about half the states have state versions of the EITC that piggy back off of the federal one, one just doesn’t see states putting higher EITCs on their ballots the way we do with minimum wage increases. I’m not sure why that is, but it may be something about inherent limits to how much governments are willing to redistribute through the tax code.

At any rate, given the success of minimum wage ballot initiatives, the momentum of the movement, and the continued evidence regarding their benign impact (if that’s how all of these new changes pan out), I suspect we’ll continue to see more sub-national action on this issue.

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2 comments in reply to "Minimum wage increases breaking out all over!"

  1. Wisconsin Reader says:

    What is the criteria to determine which states receive more federal money than is paid by its residents in federal income tax? . . . For example, I recently read a real estate flyer that the state property tax on a $1 million dollar house on a lake in Alabama is only $2,300 – and obviously several states do not have a state income tax. . . Does that make them “poor enough” to qualify because their state revenues are so low? . . . And, of course it would disqualify higher tax states who then pay in more than is rebated. . .

  2. dwb says:

    We now live in a low inflation world where the costs of bad policies cannot be masked by raising prices along with everyone else. Keep in mind, the majority of people can be in favor of a policy that creates barriers to entry for low-skill workers -popularity is not proof of economic efficiency. The model where you can just regulate and impose costs is less bad when inflation is 5% and the effects can be masked. The costs are not easily masked when inflation is 1%.

    Living standards go up when we promote service sector productivity. Minimum wages do not raise skills or promote productivity, they merely create barriers to entry and raise costs (probably only a small amount since employers have significant schedule flexibility to substitute higher skill workers). They do nothing for unemployed. At the margin, most of these min wage hikes were in markets with already high labor costs, so I doubt they were truly binding.

    If the issue is a “living wage” and affordable housing (and education), the way to make housing affordable is to reduce land use restrictions in major markets – not restrict housing supply and then try to raise labor costs. The way to make health care affordable is health care productivity. The way to improve job skills is promote education productivity.

    As the housing market improves and fewer people are underwater, I expect migration and mobility to pick up, further disadvantaging high cost blue states. Blue states will have to figure out how to deliver the same services as now, more efficiently and cheaply (or people will migrate).

    States that outperform in a low inflation environment are not going to be the ones that raise costs or spending. Nor will they be the ones that spend nothing. They will be the ones that get the most value for the education, health care, housing, crime (police), transportation, and environmental cleanup dollar. They will be the ones with accelerated service sector productivity.