Minimum Wage Roulette
WASHINGTON -- The minimum wage -- long relegated to the sidelines in the war against poverty and inequality -- is back in the game. Los Angeles has just decreed that by 2020 the city's minimum should rise in steps to $15 an hour, a 67 percent increase over California's minimum of $9. Previously, San Francisco and Seattle had approved $15. Although the federal minimum of $7.25 isn't likely to be raised soon, other localities are considering steep increases.
The stampede toward higher local minimums seems based on the notion that it's both good politics and good economics. You get to advocate for the poor. Countless millions of low-paid workers would see huge increases in take-home pay. That's the good politics. As for economics, the conventional wisdom has been upended. It was once widely believed that businesses would react to higher minimums by cutting jobs. But scholarly research concludes -- with some dissent -- that recent increases exacted little employment penalty.
In a 2014 book, "What Does the Minimum Wage Do?" economists Dale Belman of Michigan State University and Paul Wolfson of Dartmouth College reviewed more than 200 minimum wage studies. Most increases "had little or no effect on employment or hours." Higher minimums seem a painless choice. We can raise the low-income workers' pay without killing their jobs.
Well, maybe not.
There are two caveats. The first involves the size of the proposed increases. As Belman and Wolfson note, most increases in the minimum since the 1960s have been "moderate." They've been infrequent and in the 10 to 15 percent range, Wolfson said in an interview. The rapid increases now being advocated dwarf this, as Los Angeles shows. "Our suspicion is that large increases could touch off ... disemployment," wrote Belman and Wolfson in their study.
Arguably, what has limited job losses is that, over time, the minimum wage has lost ground to both inflation and middle-class wages. Adjusted for inflation, the federal minimum of $7.25 is worth only 76 percent of the minimum in 1968, says the Economic Policy Institute (EPI), a left-leaning advocacy and research group. It's precisely this erosion of value that liberal and labor groups seek to reverse.
EPI urges a $12 federal minimum in 2020, which (it estimates) would be worth, after inflation, 111 percent of the minimum's 1968 purchasing power. More workers would be covered by the minimum than now -- and run a greater risk of job loss. In 2020, the $12 federal minimum would cover 23 percent of workers, up from 4 percent today, EPI says.
Even some supporters of higher minimums fear that large increases will cost low-wage jobs. Kevin Drum is a well-known blogger for the leftist magazine Mother Jones. He lives in Southern California, and though supporting a higher minimum for Los Angeles, he suspects that $15 is too high. More realistic would have been $10 or $12. In a blog post, he speculated on possible job losses.
Most restaurants would be fairly safe, because people "need to eat in Los Angeles." But higher wages would "increase the incentive for fast-food places to try to automate." More vulnerable would be low-cost apparel manufacturers, where jobs might be wiped out or moved to surrounding counties, where (it's assumed) the minimum would remain lower. Hotels could "easily become less competitive for convention business and end up shedding jobs."
The second caveat is that minimum wage studies may miss long-term effects. These studies typically examine whether companies eliminate jobs soon after an increase in a state or local minimum wage. But what if the full effects are delayed? What if a company that might have been started five or six years later is scratched -- because the potential owners judge the labor costs too high? Or what if a business that survived the original increase slowly succumbs to higher costs and shutters five years later?
Maybe we'll find out. The increases create, Drum writes, "a great set of natural experiments to figure out what happens when you raise the minimum wage a lot." For economists studying the minimum, it's a bonanza.
(c) 2015, The Washington Post Writers Group