In 2011, 1.68 million workers in the United States were paid the federal minimum wage. This makes up a little more than 1% of the labor force (another 2 million are paid less than the minimum wage, and are presumably unaffected by changes in the minimum wage either due to exceptions to the law or black market transactions).
The current federal minimum wage is $7.25. However, as Dean Baker of the Center for Economic & Policy Research notes:
“If the minimum wage had kept pace with productivity growth [since the late 60's] it would be $16.54 in 2012 dollars.”
While capital owners have encapsulated the vast majority of the benefits to productivity increases over the past decades, workers have largely been shafted in terms of real wages. Despite this, the minimum wage hasn't really been on the agenda of even Democrats lately, since they got an increase back in 2006.
That's why President Obama surprised many in his State of the Union address when he announced plans to raise the federal minimum wage to $9 per hour.
This can't be done without the cooperation of Congress, of course, and plenty of GOP politicians have come out against this increase.
But it's not just a base increase in the minimum wage to which the Teahadist lawmakers are opposed. Rather, they oppose the general idea of such a policy. Marco Rubio is one case in point:
"I don’t think a minimum wage law works...Minimum wage laws have never worked in terms of having the middle class attain more prosperity."And Paul Ryan as well:
“I’ve never been a fan of that idea. I think it’s inflationary. You end up costing jobs to people who are at the bottom of the economic ladder."It's worth noting that ever since the financial crisis, Paul Ryan has been swearing up and down that inflation will come, any day now. Yes, he has been screaming about this for years, literally (actually literally), despite our persistent flirtation with deflation rather than run-away inflation. More on that later.
Years ago as an undergraduate Economics student, I studied the minimum wage on a very simple P/Q theoretical level, and was a proponent of repealing the minimum wage for many years on Friedmanesque grounds that it prevented people from getting jobs who were willing to work below the minimum wage. I even fleshed out a basic model to illustrate this in a Bachelor's thesis.
The problem of course is that overly-simplistic economic models theoretically tend to ignore details and dynamic effects. It wasn't until graduate school that I began to work on more complex models that include dynamic feedback effects into areas outside of the labor market (in aggregate economic indicators) from a minimum wage increase, that I began to see that this was more of a tradeoff between adequate labor compensation and excessive capital income.
This simple higher price->lower quantity of supply model of a minimum wage increase doesn't do justice to the intricacies of the economy. Those businesses that would crumble under a tiny marginal increase in labor costs aren't sustainable considering they wouldn't be able to match up against natural inflation of prices of cost inputs, let alone a paltry gradual increase in the base wage. On that same point, a job that would be eliminated from such a marginal increase in cost wasn't a job that was very sustainable going forward anyway.
Thus, the short-term negative effects marginally on some jobs and businesses is in likelihood usually eclipsed by the added demand from the wealthier low-level consumers. These various effects depend on the current minimum wage level, as well as characteristics of the economy including inequality, demand, etc., and thus are different at any given time for any given economy.
The transfer into product prices could and usually would lead to marginal inflation, but modest inflation is something that our economy needs very much right now. More on this later.
The over simpified pop-culture-econ models used by right-wing politicians just fail to reflect the reality found empirically in studies. Instead we observe that the results of minor minimum wage increases are actually positive or neutral net-net. One of many examples is a theoretical model that withstands empirical analysis that allows for more dynamic results between variables in a British study on introduction of the minimum wage:
Studying the industry-based British Wages Councils between 1975 and 1992, they find that minimum wages significantly compress the distribution of earnings but do not have a negative impact on employment.So empirically, a minimum wage as analyzed by the Britons not only didn't have a negative effect on employment, it actually helped reduce inequality as well. This is an effect of which our American economy is in desperate need. In addition, an increase as proposed by Obama would lead to more income for individuals with a high propensity to consume, which will feed directly into the general economy, resulting in higher aggregate demand (i.e., it will be a form of stimulus!)
Don't hold your breath though, chances are Boehner and other GOP stars won't be citing raw academic studies, they'll keep pushing the "simple model" that buttresses their agenda.
With incredible timing, the Center for Economic & Policy Research, an organization to which I am a donor and supporter, has just released an in-depth study of meta-analyses of this issue, entitled Why Does the Minimum Wage Have No Discernible Effect on Employment? For a brief discussion of this paper, Brad Plumer at WonkBlog has given a rundown on the broad strokes. The discussions set forth in the paper will guide the analysis in this essay, namely the argument that minimum wage laws are net-positive and marginal gradual increases don't create detrimental shocks to any aggregate economic variables.
Personally, I don't believe a minimum wage is necessary when when there is adequate bargaining power by labor unions, and an honest dialogue between workers and employers, and bodies of evidence support this opinion. Unfortunately, this is impossible in the deunionized United States, and repealing the minimum wage would likely only lead to worsened inequality.
The policy of no minimum wage works in Scandinavian nations like Sweden and Denmark, where union labor makes up 2/3 of all employed, and there is no mandated, legislated minimum wage. Instead, collective bargaining keeps employers honest, and community pressure keeps all workers dignified in their work.
But, in a nation like the United States or France, where union penetration has been on a persistent decline in the post-War period, and is currently barely above 10%, this isn't really an option. Instead, these nations who don't have a so-called "Nordic Model" must use minimum wage laws to prevent exploitation and encourage basic living wages among unskilled laborers.
The problem arises then, that the minimum wage can actually serve as a way for low-skilled service employers to fix the price of unskilled workers, by colluding to pay the minimum wage and not a cent more. So if the level is too low, it encourages underpaying of workers and avoids competition that would benefit workers, which defeats the purpose. That's why it's important for the minimum wage to be of a sufficient level to adequately support workers, rather than enticing employers to underpay them.
Note: This issue of a minimum wage law is separate from a "universal living wage" for all individuals regardless of employment, a concept that I support wholeheartedly. I don't think there's any reason why someone should be punished with homelessness or destitution simply for "losing the game of capitalism." Instead, this essay focuses on the wisdom of a minimum wage policy given effects of price-setting on market mechanics as well as general conditions of the American labor market (I support the minimum wage in the US, but don't think it's necessary in economies that have adequate labor bargaining power).
Click below and I'll give an analysis on minimum wage laws, including the opposition by Republicans, and the the context of the marginal increase proposed by President Obama, in light of empirical evidence and more dynamic models to analyze such effects economically. Additionally, I will discuss how a minimum wage policy fits into the works of classic liberal economic thinkers like Adam Smith and John Stuart Mill, and how given this, the ideas of modern GOPers is rather extreme in the anti-government rhetoric used to oppose positive policies aimed at reducing inequality.
I'll address first the GOP opposition in light of current empirical evidence, followed by the context of the current minimum wage and a discussion of the historical economic narrative on this issue.
Concern #1: Inflation (as per Paul Ryan's concern)
There's that concern over inflation again. We hear this argument from the right when discussing cutting spending (promoting austerity), and now it's making an appearance in the minimum wage discussion. Setting aside the lack of empirical evidence to support this claim, I wonder why Paul Ryan is making this argument in an environment of pronounced deflation risk, not inflation risk. After all, this is the same guy who back in 2011 tried to scare Americans over inflation, by using headlines referring to inflation in emerging markets.
Well, we know inflation is not currently a valid risk in the economy. But again the simple model would show that raising minimum wage leads employers to have higher costs, and they will raise product prices in order to make up the difference. The basic theory here seems to support the contention that it is inflationary.
But why would this be inflationary? Because it would be pumping more money to consumers, who would then be more able to afford more goods, at higher prices, which leads to more growth in the economy. And would a little inflation not be a good thing for the current economy, which is suffering from depressed growth?
Regardless of whether this is viewed in a positive or negative light, the effect, as it has been studied in depth, is marginal on price inflation. Case in point from the CEPR paper:
Sara Lemos has conducted a comprehensive review of the 30 or so academic papers on the price effects of the minimum wage. She concludes: "Despite the different methodologies, data periods and data sources, most studies reviewed above found that a 10% US minimum wage increase raises food prices by no more than 4% and overall prices by no more than 0.4%"Such marginal inflation would actually be welcomed in the current environment, as it would put more money in the hands of low-income individuals with a high marginal propensity to consume. I could see higher inflation being an issue if we were in the 70's and 80's, with inflation above 8%, but right now we're flirting with deflation, and we should be finding ways to actually encourage more growth and higher price pressures.
Concern #2: Costing jobs
Let's get one thing straight, the minimum wage law as it is implemented now is filled with loopholes that protect businesses that would be adversely affected by an increase.
Department of Labor outines the details, including exceptions, of the minimum wage law on a federal level. The minimum wage law already has so many exemptions that would protect employers from having to absorb higher costs that they would otherwise not be able to handle. Read through it to get an idea of just how lax this law is, and how easy it is for firms to get around it, by hiring students, or creating a lower-revenue-generating entity to contract out work that would be able to get around paying the minimum wage.
So there are already many safeguards in place for employers that a minimum wage increase couldn't possibly be disastrous. It's likely that a few jobs and businesses would be hurt by this, but that increased cost of labor is similar to, say, a hike in gas prices that would be sustained. Businesses must adjust to the environment, and there are mitigating effects that help counteract the short-term negative effect on those who would be hurt.
In fact, marginal increases, such as that proposed by Obama and others in the past, have historically had a negligible effect on employment, partly because of how the law protects so many employers who are unable to afford this cost. That leaves only the employers who can clearly afford it, and the empirical evidence shows that they tend to just accept the higher cost and engage in adjustments, rather than fire people or reduce hours unilaterally, as the CEPR summed up:
The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners ("wage compression"); and small price increases.Thus, employers would not really be unduly harmed by the phased-in increase, as the ~1% of American workers who are affected by the minimum wage law tend to have a negligible effect on prices and general economic indicators. In fact,it can even be stimulatory:
Given the relatively small cost to employers of modest increases in the minimum wage, these adjustment mechanisms appear to be more than sufficient to avoid employment losses, even for employers with a large share of low-wage workers.
"Using... standard fiscal multipliers to analyze the jobs impact of an increase in compensation of low-wage workers and decrease in corporate profits that result from a minimum-wage increase, we find that increasing the national minimum wage from $7.25 to $9.80... would result in a net increase in economic activity of approximately $25 billion over the phase-in period and... generate approximately 100,000 new jobs."More money in workers' hands through a minimum wage increase is often just a transfer from the wealthy capital owners to the workers, which leads to higher consumption (a driver of the US economy). The change in minimum wages tends to make a big difference for those dependent upon it, and not as big of a difference for employers bearing the cost.
Thus the Paul Ryan theory on negative effects from the minimum wage is less grounded in empirical evidence than it is in his well-known Randian ideology that inspires an opposition to any and all government interference in the market. Which is fair enough. He's an ideologue, we know that very well by now, but he shouldn't lie to promote his views.
Minimum Wage in Context
In the above discussion I've gone over the fact that modest increases in the minimum wage have no discernable significant effect on employment, and can even have myriad positive effects on demand and reduction of inequality.
Contextually, the minimum wage right now is rather low, whether you look at the historical minimum wage inflation-adjusted, and productivity-adjusted.
Let's look first at the inflation-adjusted history of the minimum wage:
We've made some progress then since the Democrats took over congress in the last couple years under Bush, but we're still well below the high in the late 60's, when the American middle class was most robust. And there's been a consistent post-War decline in real wages (both minimum and general) from that time period.
Not only has the minimum wage declined in real-terms since the 1960's, but in terms of productivity, there has been a serious split. Even though productivity of workers has skyrocketed, minimum wages have stagnated, and even fallen in real terms. In other words, corporations and capital owners have been receiving the vast majority of the benefits of higher productivity by the American workers.
This trend is the same for general wages. Productivity-adjusted wages have been stagnant since the 70's, while corporate profits have been extremely healthy:
It's interesting then that the trend for general wages stagnating begins at the point where the real minimum wage peaked, in the late 1960's. In this regard, it could be that the minimum wage serves as a symbol to the general labor market. Who knows how the economy would look today had minimum wages and general wages kept up with productivity and corporate profits.
This disturbing trend has been at the heart of the growing inequality in America. Laborers are working harder, producing more, and even working longer. But they aren't being adequately compensated for this additional work. Instead, the financiers and middle men have been enjoying more residual income on the backs of workers.
Just for an international comparison, the United States' minimum wage sits comfortably below one of the GOP's favorite comparisons, Greece:
If the Republicans get their way, we'll be stuck in the company of Spain and Greece. Whether or not you agree with a minimum wage on principle, this besmirches the image of the United States and shows woeful disregard for the weakest of those in our society.
Behind the Opposition
GOP ideologues aren't the only ones who oppose the minimum wage on anti-government grounds. Since the minimum wage only affects 1% of the labor force, this is something that a select few employers and industries are also concerned about.
The main lobbyists opposing this are the NRA. No, not the Lapierre NRA, but the National Restaurant Association, which has always opposed the minimum wage.
The vast majority of those stuck with the minimum wage are low-skilled young workers, who are largely employed in the restaurant, food-service industry. But there are numerous other costs, beyond just the wage itself, that employers in this industry are faced with. These costs are reduced when the minimum wage is increased, as described by Dube, Lester, and Reich (2012), who find:
"...striking evidence that separations, new hires, and turnover rates for teens and restaurant workers fall substantially following a minimum wage increase..."It's hard then to find glaring evidence that employers are disproportionately injured by such a policy. But the NRA doesn't seem to care much about the comphrensive analysis of a minimum wage policy. Instead, they see it as merely an increase to input costs, disregarding any positive indirect effects for the macroeconomy. And that's what democracy is all about, a competition of policy ideas. The problem is that labor interests are far less powerful than corporate interests.
But could a minimum wage actually have unintended negative consequences beyond reduced employment and other issues that opponents tout?
A question I ask myself is, does the minimum wage encourage collusion among employers? I myself have worked minimum wage jobs. Namely as a McDonald's employee at the age of 16-17 (about ten years ago), I was paid $5.15 an hour. It was increased to $5.50 as part of a phased-in increase of the minimum wage. There is a significant number of employers who will only pay the bare minimum wage, and the statutory figure is often an implicitly agreed-upon price fixation that could prevent competition for unskilled laborers, suppressing their wage potential.
This is merely a hypothesis of mine, which is difficult to analyze because there are no real examples of a repeal of the minimum wage to see the effects in the low-skilled labor market. Such a repeal could lead to more competition in some areas, resulting in higher wages, but also lower wages in other unskilled jobs.
However, I fear that in an economy where unions have no real penetration in the labor market anymore, that a minimum wage is a necessary evil that helps prevent exploitation of individuals who don't have bargaining power. It could also be a valuable symbol to the greater labor market that wages must go higher, and help prevent employers from exploiting workers of varying skill levels, not just unskilled minimum wage recipients.
This psychological effect can't go unignored, the knowledge that a worker is guaranteed a certain base income if he works full-time is a sense of security that is valuable to the proliteriat.
Given the divergence of corporate profits and productivity-adjusted real wages, the minimum wage may be the only thing preventing the elite 1% from taking even more advantage of the 1% desperate workers who depend upon the minimum wage. Without more union power, as the Nordic countries have, a minimum wage policy is something that helps to keep employers honest more so than it allows them to actually collude to take advantage of workers by fixing wages at the minimum wage.
Additionally, the fact that the minimum wage directly affects such a small portion of the overall labor market (indirect effects on union contracts and other laborers is estimated to be as high as 20 million by the Economic Policy Institute), shows just how desperate the free-market policymakers and service-industry employers are to maintain their market power.
The potential negatives of a minimum wage increase are easily outweighed by the overall benefits to all workers (not just those directly effected). In addition to this, there are numerous positive indirect effects on growth and inequality. It's hard to argue against a minimum wage increase in an environment where wages are totally stagnated in terms of productivity, and more and more of economic growth is benefiting the wealthy over the working class.
Empirically, there's no clear negative effect that can be discerned. The concerns of Teahadists like Paul Ryan and Marco Rubio is rather unfounded in academic literature and in international assessments of natural experiments.
Thus, opposition tends to be more ideological. While having no minimum wage works for nations that have strong union presence in labor markets, it would be potentially disastrous for the United States, where employers are already reluctant to hire at the low wages present in the current economy. It stands to reason then that they would only try to bid wages down further from current levels.
Concerns over runaway inflation are totally unfounded, especially in an economy that is risking Japanese-style deflation moreso than Weimar-style inflation.
Finally, minimum wage increases will help empower workers in an environment where employers have more bargaining power than ever in the post-war period. If the free-markets won't compensate workers for the increases in productivity, and capitalists are instead hoarding all added growth and production, then a valid role of the state would be to support policies that encourage equitable distribution of added growth. Absent this, capitalists in the United States have been leveraging the reduced bargaining power of laborers to produce exorbitant profits and redistribute shares of income upwards from added corporate profits.
To prevent periodic bickering over raising the minimum wage, it should merely be tied to inflation or productivity. This would bind capital owners to provide adequate compensation to workers based on the added production they provide. While this isn't realistic in the current political environment, it would help keep the various balances between workers and capital owners in line without the need for a resurgence in national discourse over the wisdom of the minimum wage on principle.
Additional Historical Discussion
It's odd that the modern Republican Party opposes such a policy on grounds of principle, considering some of the economists who inspired proponents of the free market and capitalism have themselves supported state intervention in the economy, including for the purposes of minimum wage establishment.
This view supporting the state's implementation of the minimum wage is in line with great liberal thinkers such as Adam Smith, whose writings are often incorrectly summed up as promoting unfettered capitalism vis-a-vis the invisible hand, has supported the minimum wage indirectly through his writings on equity for the lower class:
Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers, and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged.If the minimum wage at full-time yields an income that is below the poverty line, is that in line with Adam Smith's promotion of "equity, besides" for unskilled laborers to be able to provide for themselves? Clearly not.
Even though Smith was pre-utilitarian, the later era of enlightened thinkers more overtly supported state involvement in setting a minimum living wage. This is underscored byJohn Stuart Mill, who:
gives the state the license, contrary to classic capitalism, to intervene to put minimum wage, maximum number of work hours, unemployment pensions, free education… and so on.It's rather short-sighted then that modern American politicians on the right-wing would promote an unfettered market that not even the enlightened historical great free-market thinkers would support. The GOP would rather support a more modern Libertarian like Milton Friedman, who opposed the minimum wage, but still conceded the need for the state to have a central role in the economy, which makes him the target of even more-free-market Austrian economists. These Chicago-School deregulation proponents helped contribute to a toxic environment since the 70's which has destroyed the middle class and led to ever-worsening inequality.
To conclude, you can either side with the original liberal economic thinkers who inspired our founding fathers like Franklin and Jefferson, and modern progressives like trust-busting Teddy Roosevelt and safety-net-creating FDR, which led to the emergence of the middle class in the mid-20th century.
Or, you can side with Milton Friedman, Alan Greenspan, and the Chicago-School anarcho-capitalists, whose policies have led to a disastrous collapse in the economy from a housing bubble that was ignored by Eugene Fama and others. Because for them, deregulation and suppression of the state is the true goal, not utilitarian economic outcomes that are socially optimal (a point John Stuart Mill made very clear as a goal in his work Utilitarianism).
I'll side with the Progressives and Utilitarians on this one. Until there is a culture of collective bargaining in the American labor market, the minimum wage is an important symbol for all workers in the United States that must stay alive. For optimal policy purposes, the federal minimum wage should actually be pegged to inflation, rather than having periodic political battles over the increase.