A fifteen dollar minimum wage could lead to job losses. I support it anyway.

*Note — I wrote this for my Urban Planning and Social Policy Class. It wasn’t written for anyone other than my professor to read. If it reads like a term paper — that’s because it is a term paper. But, it helps illuminate why I think a $15 minimum wage is beneficial for Hawai’i — despite any empirical evidence.

Over the last few years, the fight for fifteen has caught on as a rallying cry for liberals across America. As they argue, inequality is rising, families are working more, and it’s becoming extremely difficult to break out of poverty. Yet, those on the right insist that a significant increase of the minimum wage will lead to job losses and that there are other more efficient ways to pull people out of poverty (Sanderson, 2014). As is often the case when political dialogue breaks down, both sides are right. Increasing the minimum wage will reduce inequality and redistribute wages from the top to the bottom (CBO, 2014). Increasing the minimum wage too much will also result in job losses (CBO, 2014). And, at the same time, there are more efficient ways to reduce poverty (CBO, 2014).

The federal minimum wage has remained at $7.25 per hour since 2009 (DOL, n.d.). As the minimum wage has failed to keep up with inflation over the last forty years, every year minimum wage workers have to work increasingly more hours just to afford the same goods and services (Arindrajit, 2014). In response to a lack of federal action, 29 US states now have minimum wages higher than the federal minimum. Each of these individual cases has given researchers some insight into the effect of an increase. But, it’s important to note that while some states have passed legislation for a future $15 minimum wage (California, New York, Washington D.C.), all of them are scheduled to slowly increase to $15 over the next two to four years (State Minimum Wages, 2018). Since no US states currently have a $15 minimum wage, there is no clear evidence of what effect an increase of that magnitude would have on inequality or employment. A $15 minimum wage is also significantly higher than any OECD country in the world (Matthews, 2015). While there may not be clear evidence on the long term effects of a $15 minimum wage, a review of the literature does allow us to make some broad conclusions about the general effects of what happens when a minimum wage is set too low or too high and it can help guide us in setting up an ideal policy.

Effects on Employment

The scholarly literature on the employment effects of a minimum wage are mixed. The large variance in evidence can be partly attributed to research methods and also to regional, demographic, and socioeconomic differences in populations being studied. For example, the effects of a changing minimum wage will be very different in New York City compared to a rural town. As Arindrajit (2014, p. 2), writes, “inadequate minimum wages are exacerbated in high-cost, high-wage areas.” To further confuse the issue, specific industries will react differently to increases in the minimum wage.

According to the CBO (2014), employment will fall more in industries that are more sensitive to price increases than those that are not — because demand for their products will fall as their prices rise and they will have to cut costs. As the CBO writes, industries that either rely on lots of low wage workers or those that can easily substitute technology or other inputs for workers will also see job losses. And, since these changes occur over a long-time frame, employment losses are higher in the long term than they are in the short term.

To further highlight the difference between specific industries, Addison, Blackburn, and Cotti (2009) sum up the research on restaurants and fast food industries as showing that increases in the minimum wage puts downward pressure on employment in those industries, but that it would have either no effect or a positive effect on employment in many retail sectors. In contrast to that study, in a PERI working paper, Pollin and Wicks-Lim show that a $15 minimum wage wouldn’t lead to job losses in the fast food industry, but they do recognize that it would contribute to slower employment growth (which, in the long run, is similar to job losses). Similarly, Black, Furman, Giulano, and Powell (2016) show no decrease in employment in the hospitality industry after statewide minimum wage increases were implemented.

In their meta-analysis of the literature, Neumark and Wascher (2007) conclude that the overwhelming body of minimum wage research shows negative employment effects from increasing the minimum wage — and that the evidence is especially strong if you eliminate industry specific studies (like the ones referenced above) and look only at those which look at an entire economy. The CBO (2014) estimates that 500,000 low income individuals would lose their jobs if the minimum wage is increased to $10.10. But, as a testament to the uncertainty of the evidence, they say that there is a two-thirds chance of the actual employment figures ranging somewhere between a slight loss and a loss of one million workers. A 2016 meta-analysis by Wolfson and Belman show much smaller job losses from minimum wage increases than had been recognized in previous meta-analyses. They credit this difference to a changing US economy with less teenagers working and an increase in eating and drinking establishments (where employment is affected less by a changing minimum wage).

Despite the relative lack of research consensus, it is possible to draw out some broad conclusions from the data. The debate over total job losses ranges from small to very small to zero to slightly positive (in some sectors of the economy). While there is no empirical evidence for the effects of a $15 minimum wage, there is no reason to believe that a more moderate increase in the minimum wage would cause substantial employment losses. But, there is likely to be some level of employment loss for low income families in certain geographic areas in certain sectors of the economy. It’s possible that those total numbers could be made up by employment growth in other sectors of the economy that are positively affected by the increased economic growth of a minimum wage, but not by the same individuals who have lost their jobs (so they need a safety net, as discussed below). It’s also important to reiterate that employment losses are industry specific — with the hospitality industry remaining relatively buffered by the potential for negative employment effects.

Effects on Inequality

While the impact on employment is murky, the impact on inequality is relatively clear. Because it results in a cash transfer from upper income levels to lower income levels, moderate increases to the minimum wage clearly reduce inequality. Studies on the contribution of our stagnant federal minimum wage to the rise in inequality range from it attributing between 30%-55% (Autor, Manning, and Smith, 2016) to more than 100% (Lee, 1999) of the growth in inequality over the last four decades. Other factors cited in the research as contributing to growing inequality in the US are technological change, the decline in unionization, deregulation, and globalization (Arindrajit, 2014, p. 2).

The CBO (2014) predicts that increasing the minimum wage to $10.10 would bring 900,000 people out of poverty. While they estimate that those in the top income levels would lose $17 billion of wealth, they estimate that families below the poverty threshold would gain $5 billion, those that are between one and three times the poverty threshold would gain $12 billion, and those that are between 3 and 5 times the poverty threshold would gain $2 billion. Notable in their analysis is that just 19% of the gains go towards families below the poverty line, whereas 29% of the gains go towards families earning more than 3 times the poverty threshold. They attribute this to the theory that as low skilled laborers begin to cost more money, firms begin to value higher skilled workers more and so a minimum wage increase increases the value of higher skilled (and higher paid) laborers. They also describe that there are a large number of minimum wage workers (for example, high school kids) who come from families outside of the poverty threshold.

Because low income families spend all of their increased earnings, redistributive effects tend to have positive effects on overall spending as they infuse more cash into the economy. As the CBO (2014) writes, “when a dollar from business owners or consumers is shifted to low-wage workers, overall spending increases” (p. 27). While there is also downward pressure on spending (due to higher prices and some lost jobs), the CBO estimates that the increased spending by low income families would be larger than any reduction in demand. This is the reason that a minimum wage increase has a net positive effect on the economy. As the CBO (2014) predicts, low and middle-income families end up earning more than the high-income families lose. For example, the transfer of wealth described by the CBO in the above paragraph results in a net increase of $2 billion into the economy. Along these lines, a recent study by Black, Furman, Giulano, and Powell (2016) showed that after correcting for economic growth, states that increase their minimum wage saw a 6.6% rise in average wages across all industries that they wouldn’t have otherwise experienced.

It’s important to note that the CBO (2014) predicts that a higher proportion of money would go to low income families from a $9 an hour minimum than a $10.10 an hour minimum wage, but that less total people would rise out of the poverty line. This suggests the idea that as the minimum wage is increased, the gains will go progressively (as a percentage) towards families outside of the poverty threshold. Because of this, the CBO (2014) estimates that “to achieve any given increase in the resources of lower-income families would require a greater shift of resources in the economy if done by increasing the minimum wage than if done by increasing the EITC” (p. 15). The CBO (2007) estimates that to provide equal gains to low income families, an increase in the minimum wage would cost employers more than four times more than what an increase in the EITC would cost the government. In addition to the potential of joblessness, the effects of a minimum wage increase would be blunted for some low income families because of declining EITC benefits. Those near the phaseout range of the EITC schedule would see their income gains “partly offset by a reduction in EITC benefits” and low income families who lose their jobs because of a contraction in the workforce would lose all of their EITC benefits (CBO, 2014, p. 15).

Recommendations

While it’s impossible to know exactly what would happen with an increase to the minimum wage, we can draw some conclusions from the research and use it to develop policy. Too low of a minimum wage will continue to increase inequality and will ensure that workers have to work longer and longer hours to stay at the poverty line. Whereas too high of a minimum wage will lead to significant job losses. Based on the evidence cited above, an appropriate minimum wage will decrease inequality, increase overall economic activity, will have varying impacts on different firms and regions, yet will likely lead to some small level of job losses in some sectors of the economy.

Based on that, I agree with the idea proposed by Arindrajit (2014) to base regional minimum wages off of one half the median wage for the area and to tie future increases to the regional consumer price index. As Arindrajit argues, this rate of one half of the median wage was approximately the US’s median wage throughout the 60s (when inequality was relatively low) and it is the average minimum wage for OECD countries. While he acknowledges that it is still higher than existing empirical evidence can clearly argue for, it is within both historical and international norms. In comparison, he writes that the US currently has the third lowest minimum wage at 38% of median full-time wages. Arindrajit writes that a few US States along with Great Britain have increased their minimum wage to one half of the median without evidence of significant layoffs. By tying it to a regional CPI, it avoids the current situation where minimum wage families have to work more and more just to remain at the poverty line. And by tying it to regional median wages, it helps those in very high cost (and generally high wage) areas while not affecting those in more depressed areas.

Because of the relatively clear evidence that retail and hospitality industries won’t experience significant job losses from an increase in the minimum wage (Giulano and Powel, 2016; Addison, Blackburn, and Cotti, 2009), I believe that regions dominated by either industry — such as Hawai’i — could slowly phase in a $15 minimum wage. But, it’s important to be cautious here. A $15 minimum wage is slightly more than 75% of the median wage for the US and for Hawai’i. While there have been predictive models based on a $15 minimum wage (such as the Pollin and Wicks-Linn, 2016 study cited above), there is no empirical evidence for what would happen, as no state or OECD country currently has a $15 minimum wage. As Neumark (the author of the meta-analysis cited above) writes about the effects of a $15 minimum wage, “no one knows. No one could know. There’s no experience with that” (as cited by Mathews, 2013). Given that unknown, regions with all of the factors that have been shown to not be as affected by negative employment pressure (such as a dominant hospitality or retail industry) should be the first to experiment with a $15 minimum wage. In an age of unprecedented inequality, we need to begin pushing out of the box, even if it’s into uncharted territory. That said, a $15 minimum wage for Hawai’i should be phased in slowly over a number of years both to give employers a chance to adjust and for legislators to continually review the impacts and be prepared to delay implementation in the event of major job losses.

However, it’s important to be clear eyed that no increase of the minimum wage is an efficient way to move low income families out of poverty (CBO, 2014). To avoid the potential of low income families losing EITC benefits because of an increase in the minimum wage, any increase in the minimum wage should come with a corresponding increase in the state EITC. Because the EITC boosts employment (by giving workers more incentive to work), it will also help counteract any potential job losses. Further, states should be sensitive to potential increases in unemployment in specific sectors and should be prepared to extend unemployment benefits to ensure that workers who lose their job due to a minimum wage increase can find a better long-term career match (Thoma, 2014).

References:

Addison, J. T., Blackburn, M. L., & Cotti, C. D. (2009). Do minimum wages raise employment? Evidence from the U.S. retail-trade sector. Labour Economics,16(4), 397–408. doi:10.1016/j.labeco.2008.12.007

Arindrajit, D. (2014). Designing Thoughtful Minimum Wage Policy at the State and Local Levels. Retrieved from: https://www.brookings.edu/research/designing-thoughtful-minimum-wage-policy-at-the-state-and-local-levels/

Autor, D., Manning, A., & Smith, C. (2010). The Contribution of the Minimum Wage to U.S. Wage Inequality over Three Decades: A Reassessment. doi:10.3386/w16533

Black, S., Furman, J., Giuliano, L., & Powell, W. (2016). Minimum wage increases and earnings in low-wage jobs. Retrieved from https://voxeu.org/article/minimum-wage-increases-and-earnings-low-wage-jobs

CBO- Congressional Budget Office (2007). Congressional Budget Office, Response to a Request by Senator Grassley About the Effects of Increasing the Federal Minimum Wage Versus Expanding the Earned Income Tax Credit. Retrieved from: https://www.cbo.gov/sites/default/files/110th-congress-2007-2008/reports/01-09-minimumwageeitc.pdf

CBO — Congressional Budget Office (2014). The effects of a minimum-wage increase on employment and family income.

Department of Labor (n.d). Retrieved from: https://www.dol.gov/general/topic/wages/minimumwage

Lee, David S. (1999). Wage Inequality in the United States During the 1980s: Rising Dispersion or Falling Minimum Wage? Quarterly Journal of Economics 114 (3): 977–1023.

Matthews, D. (2013). A $15 minimum wage is a terrible idea. Retrieved from: https://www.washingtonpost.com/news/wonk/wp/2013/06/22/a-15-minimum-wage-is-a-terrible-idea

Matthews, Dylan (2015). Will LA’s $15 minimum wage be a godsend, a calamity, or a nothingburder? Retrieved from: https://www.vox.com/2015/5/20/8631639/los-angeles-minimum-wage

Neumark, D., & Wascher, W. (2007). Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research. doi:10.3386/w12663

Sanderson, Allen R. (2014) “Why mandating higher minimum wage isn’t best way to address poverty.” Op-Ed. Los Angeles Times.

State Minimum Wages (2018) retrieved from: http://www.ncsl.org/research/labor-and-employment/state-minimum-wage-chart.aspx

Thoma, Mark (2014) “Can unemployment benefits raise joblessness?” CBS News, Marketwatch, July 15, 2014.

Pollin, R., & Wicks-Lim, J. (2016). A $15 U.S. Minimum Wage: How the Fast-Food Industry Could Adjust Without Shedding Jobs. Journal of Economic Issues,50(3), 716–744. doi:10.1080/00213624.2016.1210382

Wolfson, P.J., and Belman, D. (2016). 15 Years of Research on U.S. Employment and the Minimum Wage. Tuck School of Business Working Paper №2705499. Retrieved from: https://ssrn.com/abstract=2705499