Why a $15 Minimum Wage Is Good Economics

(Photo: Kaitlin McKeown/The Herald-Sun via AP)

Brandon Ruffin holds a sign during a Fight for 15 rally in Durham, North Carolina, on November 29, 2016.

In our last column, we offered two bold policy ideas: Medicare for All and a job guarantee. Now, we’re pleased to see Democrats in the House and the Senate step up with an idea of their own: raising the minimum wage to $15.

The Raise the Wage Act of 2017, co-sponsored by Senators Patty Murray and Bernie Sanders and House members Bobby Scott and Keith Ellison, would hike the federal minimum wage to $15 an hour by 2024. It would then index the minimum wage to the median wage (to keep low-wage workers’ pay changing at the same pace as the pay of middle-wage workers) and would gradually phase out the loopholes in federal minimum-wage law that set subminimum wages for tipped workers, teenagers who’ve just started their jobs, and workers with disabilities.

The value of the federal minimum wage peaked in 1968, at $9.68 in inflation-adjusted terms. Based on forecasts of inflation, a $15 minimum wage in 2024 would be worth about $12.50 in 2016 dollars, representing a substantial increase above what this country has ever experienced. In 2024, $15 would also likely put the value of the minimum wage close to an unprecedentedly high 60 percent of the median wage. (Back in the 1960s, the minimum wage was around 50 percent of the median.) Almost 30 percent of the workforce would be expected to benefit from the proposed raise by the time the increase was fully phased in, a level far higher than the 10 percent of workers who’ve benefited from the more modest raises of recent decades.

The uncharted nature of the proposed increase means that past minimum wage research, though it is of very high quality, is not necessarily a reliable guidepost in this case. Moderate increases of the magnitude we’ve often seen, in both national and subnational cases, have been found to have very few, if any, of the negative impacts on jobs that their opponents have predicted. But the magnitude of this proposed increase, even with the long phase-in, takes it “out of sample” relative to most past research.

That doesn’t mean, however, that the increase will hurt those it’s intended to help.

In this as in many other economic policy debates, proponents of progressive policies have allowed ourselves to be painted into analytical corners by focusing on the wrong questions. The criterion for an acceptable minimum-wage increase cannot be that if even one person loses a job, it’s not worth doing. Suppose we applied that standard to trade policy, or to technological progress. We’d have to dock every cargo ship and smash the machines!

The questions we should be asking are about workers’ experiences: First, how many workers would benefit from this policy, who are they, and how badly do they need the money? Research by David Cooper at the Economic Policy Institute finds that the Raise the Wage Act of 2017 would give 41 million workers a raise. It would disproportionately benefit women and people of color and would provide additional income to the families of nearly one-quarter of the nation’s children. Fifty-five percent of the workers who would benefit come from families with incomes currently lower than $50,000 a year, and these are families that generally rely on those workers for the bulk of that money.

Second, among the much smaller number of workers who could potentially experience some form of displacement, what might the impact on their living standards be? How likely would they be to get another job at the new, higher wage?

Forthcoming research by Cooper, Larry Mishel, and Ben Zipperer shows that turnover in the low-wage labor market is already quite common. More than one-fifth of the lowest-wage workers can be expected to transition either into or out of a job during any three-month period. As Mishel notes, “We don’t live in a binary world where people either work or get excluded from employment forever. A reduction in total work hours can be absorbed over the course of a year in many ways—reduced weekly hours, fewer weeks worked, fewer multiple jobs.” In other words, the increase could lead to some low-wage workers ending up with higher annual earnings while working fewer hours over the course of a year.

There’s another way in which minimum-wage opponents’ analysis is too simplistic. Their mantra tends to be that higher wages have dangerous macroeconomic effects, because, “if you raise the price of something, people will buy less of it.” But as economists Michael Reich and Jesse Rothstein of the University of California, Berkeley, noted in a recent brief, “Theory suggests that minimum wages have both positive and negative effects on employment.” While increased labor costs can lead to more automation and higher prices, which can reduce both sales and jobs, higher-paid workers can help offset their cost through greater productivity, lower quit rates, fewer turnovers, and fewer vacancies. Minimum-wage increases also generate “more purchasing power among households with higher propensities to spend their income. … Adding up these negative and positive effects yields ambiguous theoretical predictions. The net effect of a minimum wage increase on employment therefore is a matter of empirical evidence.”

Why take any chances by seeking an “out-of-sample” increase? Because if you think wages too low to cover a full-time worker and her family’s basic needs are unacceptable in a multi-trillion-dollar economy—that is, if you think the minimum wage should be a living wage—even $12.50 in 2016 dollars doesn’t cut it. MIT researchers have calculated that, on average in the United States, each of the two adults in a family of four needs a full-time job paying at least $15.84 an hour to make ends meet. In Mississippi, the lowest-wage state in the nation, a single parent with one child would need $20.74 an hour to get by. This is one reason why a higher minimum wage and an increased Earned Income Tax Credit (a wage subsidy for low-wage workers) are such important complements.

Critics of minimum-wage hikes often complain that the workers who are paid the minimum are preponderantly teens working to supplement their spending money, rather than earning dollars their families actually need. In fact, the average age of workers who would be affected by the bill is 36, and this group is much more highly educated than low-wage workers of past decades. Indeed, 82 percent of them have a high school degree, and a higher percentage (13 percent) have a bachelor’s degree or higher than the percentage who are teenagers (10 percent). If the minimum wage had kept pace with productivity growth for the past 50 years—as the changing demographics of the low-wage labor market in particular suggest it should have—it would already be well above $15.

As the success of ballot measures raising state minimum wages in red states as well as blue makes abundantly clear, minimum-wage increases are popular across the political spectrum. Low-wage workers are in the streets demanding them, for good reason: They need more money to meet their day-to-day needs and invest in their children’s futures. In this regard, the question that always pervades this debate—“What about unintended consequences?”—should be accompanied, if not preceded, by the question: What are the consequences to low-income families of minimum wages lower than what’s needed to get by?

Holding down wages for 41 million workers is not the way to address potential downsides from a minimum-wage increase. Instead, we should remember that the minimum wage is only one policy among many designed to help low-income people. Along with an expansion of the safety net for those who fall on hard times, direct job creation would also complement the minimum wage by guaranteeing that low-wage workers get the opportunities they deserve.

In the meantime, the Raise the Wage Act of 2017 deserves our support. Regardless of how the bill is received by this president and the Republican Congress, we welcome and applaud the initiative shown by some of our policymakers in fighting for a raise their constituents and their country clearly need.

Tax Cuts for the rich. Deregulation for the powerful. Wage suppression for everyone else. These are the tenets of trickle-down economics, the conservatives’ age-old strategy for advantaging the interests of the rich and powerful over those of the middle class and poor. The articles in Trickle-Downers are devoted, first, to exposing and refuting these lies, but equally, to reminding Americans that these claims aren’t made because they are true. Rather, they are made because they are the most effective way elites have found to bully, confuse and intimidate middle- and working-class voters. Trickle-down claims are not real economics. They are negotiating strategies. Here at the Prospect, we hope to help you win that negotiation.

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