Since 1938, when President Franklin Delano Roosevelt introduced the first federal minimum wage in the U.S., a debate has raged about whether wage floors help or hurt workers. But thanks to a radical economic experiment in California, we may be only a few years away from having a definitive answer.
California Gov. Jerry Brown and state legislators have reached an agreement to raise California’s minimum wage to $15 an hour by 2022. Under California’s plan, its minimum wage — already one of the highest in the nation at $10 an hour — would rise to $10.50 in 2017, $11 in 2018 and a dollar each year through 2022.
By 2022 we should know for sure how the change will affect California. In the meantime, here are ten things you should know about the ongoing minimum wage debate:
1. Both sides of the debate believe they are arguing in defense of the poor. Most people who support or oppose minimum wage laws and/or increases share a common objective — helping the working poor. Because both sides have noble intentions, the merits of the debate over minimum wage laws and minimum wage increases should be based on empirical evidence that it will actually help, rather than harm, the poor.
2. Economists disagree about the effects of small increases in minimum wages. It’s true that economists disagree about the effects of the minimum wage on employment and the living standards of minimum wage earners. But almost all of the disagreement is about relatively small increases (less than 20 percent). Almost all economist agree that significant increases to the minimum wage or attempts to bring it in line with a “living wage” (e.g., $12-15 an hour) would lead to significant increases in unemployment. Even some liberal economists warn that increasing the wage to $15 an hour would harm employment.
3. The primary argument for minimum wage increase is that is increases the value of the worker’s labor. — The efficiency wage theory of labor holds that higher real wages improve labor productivity by reducing worker turnover and the associated costs of hiring and training new workers, by reducing the incentive for workers to unionize, and by increasing the opportunity cost of being fired — thereby giving the worker incentive to be more productive. Under this view, small increases to the minimum wage will have no deleterious employment effects.
The assumption is that paying higher wages increases worker satisfaction, thus reducing turnover. This is a reasonable assumption only it there is a price disparity between similar jobs. Given a choice between working at American Eagle for $7.25 an hour and at the Gap for $10, most would prefer to fold sweaters for the higher wage. They will even be willing to work harder (thus increasing their labor value) to appeal to an employer paying the higher wage. But if every store in the mall (and every other job in the area) is required to pay $10 an hour, then the decision to switch jobs will be based mainly on non-monetary factors.
But there is another element that is often overlooked in discussions about minimum wage increases. Because of the labor price differential, Gap can be more choosy about who they hire; their willingness to voluntarily pay a higher minimum pay gives them an advantage over other employers since they’ll have more applicants to choose from. Unless their store managers are incompetent, Gap will only be hiring people whose labor is truly valued at $10 a hour. In other words, they will be getting what they are willing to pay for.
That is why conservatives claim government-mandated negates the effects of the efficiency theory and can kill jobs. Not only will businesses that were willing to pay more lose their advantage in hiring, those not willing to pay more will fire/not hire people whose labor is valued at less than $10 an hour. Once minimum wages are raised, turnover rates also increase as people decide to stick with or leave a job based on other factors. And the people who will never be hired (e.g., low-skilled workers, new immigrants) are shut out of the labor market completely.
4. The primary argument against minimum wage increases is that it discriminates against those who have low-skills. Milton Friedman once described the minimum wage as a requirement that “employers must discriminate against people who have low skills.” As Anthony Davies explains, “the minimum wage prevents some of the least skilled, least educated, and least experienced workers from participating in the labor market because it discourages employers from taking a chance by hiring them. In other words, workers compete for jobs on the basis of education, skill, experience, and price. Of these factors, the only one on which the lesser-educated, lesser-skilled, and lesser-experienced worker can compete is price.”
5. The minimum wage redistributes wealth from the low-skilled poor to the more skilled working poor and middle class. Many supporters of minimum wage increases mistakenly believe that increases in wage rates are transfers of wealth from employers and investors to the workers. But as Anthony Davis explains, the money to pay for the increased wage must come from at least one of four places: higher prices for consumers, lower returns to investors, lower prices to suppliers, or a reduced work-force. Empirical research has shown that the primary effect of minimum wage increases is reduced employment, which essentially transfers the wealth (in unearned wages) from the less skilled to the more skilled working poor and middle-class teenagers.
6. The most frequently cited empirical research in favor of minimum wages increases was proven wrong. — The most famous empirical study in favor of the minimum wage is David Card and Alan B. Krueger’s 1994 study of New Jersey’s minimum wage hike of 1992. Their study found that the increase in the minimum wage had no negative effect on employment—in fact, it had a slightly positive effect (though it also found that prices at fast-food restaurants increased). The main criticism of the research was that they did not measure actual employment data, but only surveyed store managers by telephone, asking whether the managers had hired or fired, or intended to hire or fire, workers following the increase in the minimum wage. However, two follow-up studies that looked at the actual payroll data found that the increase in the minimum wage in New Jersey led to a decline in employment in the fast-food industry — the opposite effect claimed by Card and Krueger’s study. (Note: In New York Times op-ed last fall, Krueger wrote that “a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences.”)
7. Minimum wage increases disproportionality affect African Americans. Employment among African American males between the ages of 16 and 24 is disproportionately responsive to the minimum wage. A ten percent increase in the minimum wage would reduce employment by 2.5 percent for white males between the ages of 16 and 24, 1.2 percent for Hispanic males between the ages of 16 and 24, and 6.5 percent for African American males between the ages of 16 and 24. Professors Even and Macpherson estimate that in “the 21 states fully affected by the federal minimum wage increases in 2007, 2008, and 2009,” young African Americans lost more jobs as a result of minimum wage hikes than as a result of the macroeconomic consequences of the recession.
8. Few people actually earn a minimum wage. Workers earning $7.25 per hour represent only 4.7 percent of the nation’s 75.3 million hourly-paid workers and 2.8 percent of all workers.
10. Historically, minimum wage laws have been used to discourage immigration and oppress the poor and minorities. A minimum wage was seen to operate eugenically through two channels: by deterring prospective immigrants and also by removing from employment the “unemployable.” As Thomas C. Leonard explains, progressive economists in the early 1900s believed that “the job loss induced by minimum wages was a social benefit, as it performed the eugenic service ridding the labor force of the ‘unemployable.’” More recently, businessman and political activist Ron Unz has argued that increases in minimum wages are necessary to reduce both legal and illegal immigration. As Unz says, “Critics of a rise in the minimum wage argue that jobs would be destroyed, and in some cases they are probably correct. But many of those threatened jobs are exactly the ones that should have no place in an affluent, developed society like the United States, which should not attempt to compete with Mexico or India in low-wage industries.”