Much hand-wringing among political, media, and business elites has followed the decisions by New York and California to raise the minimum wage. New York has mandated a raise in the minimum wage to $15 an hour by 2018, while California has mandated a $15 wage by 2022. Support for a higher minimum wage is articulated by Democratic presidential candidates, as Bernie Sanders supports a $15 an hour minimum wage, while Hillary Clinton supports a $12 an hour wage. Their rhetoric aside, however, Democrats have consistently failed or refused over recent decades to prioritize regular raises in the minimum wage. Republican presidential candidates rail against such raises. They predict dire consequences, should government mandate higher wages for the working-class. Donald Trump claims that: “I want to create jobs so that you don’t’ have to worry about the minimum wage, they’re doing a great job and they’re making much more than the minimum wage…I think having a low minimum wage is not a bad thing for this country.” Similarly, Ted Cruz argues: “Every time you raise the minimum wage, the people who are hurt the most [are] the most vulnerable.” Cruz supported a filibuster in the Senate in 2014 to prevent a vote on raising the national minimum wage from $7.25 to $10.10 an hour, claiming on the Senate floor that “the undeniable reality, the undeniable truth, is if the president succeeded in raising the minimum wage, it would cost jobs from the most vulnerable.”
Cruz’s comments reflect long-standing reactionary thinking that raising the minimum wage will increase inflation and unemployment among working Americans. As the rationale goes, if employers have to pay more for employee wages, they will lay off workers in increased numbers to offset the cost of a growing wage. Alternatively, employers will not hire new employees as old ones quit. Furthermore, employers will increase the cost of goods in order to offset the costs of a higher wage, thereby contributing to a significant growth in national inflation rates. These claims are brought up in right-wing media and by Republican officials every time the minimum wage is discussed. If accurate, both claims suggest raising the minimum wage will harm low-wage workers; but the key question is whether such claims are accurate. Fortunately, much research has been done in recent years suggesting that the standard reactionary arguments against the minimum wage are either exaggerated or wholly inaccurate.
Misrepresenting the Scope of the California and New York Raises
A jump to $15.00 an hour sounds large within the context of a national minimum wage of just $7.25 an hour today. But the increase is not as large as it seems. One should remember that the current wages in California and New York are higher than the national wage, and that the national minimum wage is extremely low, relative to its higher value in past decades. Also the value of the minimum wage should be radically higher, if working class wages had kept pace with growing worker productivity over the last few recent decades. The minimum wage, adjusted for inflation and measured in 2016 dollars, reached a high value of $10.90 an hour in 1968. The current rate of $7.25, then, represents a 33 percent decline in the purchasing power of the minimum wage over nearly 50 years, despite the U.S. economy having grown far more profitable, productive, and larger in that time. This decline in value occurred because both parties raised the minimum wage so infrequently from the 1970s through today, compared to earlier decades.
Minimum wage raises in California and New York look far less radical once one understands that the federal minimum wage is put in place to reflect a base pay rate across the U.S. It is not tailored to meet cost of living needs in the most expensive states in the country such as California and New York. Restoring wages to their national high from 1968 of $10.90 an hour, and adjusting the national rate to the value needed to provide a higher purchasing power due to higher cost of living, wages in California and New York would need to be even higher. In California, the cost of living is 127 percent higher than the national average, so a 1968 minimum wage of $10.90 would translate into $13.85 an hour in California if adjusted for cost of living. Similarly, the cost of living in New York is 132 percent higher than the national average, meaning that a $10.90 minimum wage in 1968 would need to translate into $14.40 an hour after being adjusted for cost of living.
One should also take into account how much inflation, held constant at rates seen in recent years, will wear away at the cost of minimum wage raises in California and New York. The purchasing power of the minimum wage will fall significantly by late 2018 to early 2019 – when the increase will be put into effect in New York, and by 2022, when the full raise will be phased in throughout California. If average inflation rates seen in the last half-decade hold constant for the next three years in New York, and the next six years in California, the minimum wage will be worth more like $14 an hour in California, and $14.33 in New York, in 2016 dollars. In sum, after accounting for inflation, geographic cost-of-living adjustments, and returning the minimum wage to its 1968 height, the values of the minimum wages in California and New York do not look so out of place. They are hardly out of line with reasonable expectations for what low income workers could (and should) be paid in higher cost-of-living states.
Recent studies that examine growing productivity of American labor, as measured in production of goods and services per hour, suggest that the current value of the minimum wage is radically below what it should be had it kept pace with growing productivity over the years. As the Economic Policy Institute reports, “Had the minimum wage been raised since 1968 at the same rate as growth in productivity—i.e., the rate at which the average worker can produce income for her employer from each hour of work—it would be nearly $18.50 per hour.” A rate of $18.50 an hour is significantly higher than the wage rates being put in place in New York and California. In short, discussions about radical wage hikes in New York and California seem misplaced, for a variety of reasons.
Effects on Unemployment and Inflation?
The minimum wage is one of the most heavily studied issues in public policy and economics. Meta-studies, summarizing dozens of previous research papers on the minimum wage, suggest little evidence of any significant effect of raising the minimum wage on employment levels. For example, one scholarly review in 2009 by Doucouliagos and Stanley looked at 64 previous studies of the minimum wage and teenage employees in the U.S., finding that the average “effect” of raising wages on employment levels clustered across the vast majority of scholarly papers and their estimates at zero or near zero. Similarly, a second meta-study by Wolfson and Belman examining 27 minimum wage papers published post-2000 found no consistent record of a statistically significant negative effect of raising the minimum wage on employment. These numbers correspond with my own academic research on state minimum wage raises during the first half of the 2000s. Examining employment levels and median earnings for fast-food service workers in states that did and did not raise the minimum wage between 2000 and 2006, I found that states raising their minimum wage saw no noticeable changes in employment compared to states that failed to raise the minimum wage. However, for states that raised their minimum wage, median pay rates among food service workers increased by 1 percent in the year after a wage raise compared to the year prior to raise after adjusting for inflation. In contrast, food service workers in states without a wage raise saw median wages fall by one-half a percent, after inflation, from one year to the next. These studies suggest little serious evidence of a link between minimum wage increases and employment levels for low-wage workers.
It is also difficult to find a meaningful relationship between national minimum wage rates and national inflation rates. If raising wages really does exert a huge cost on employers and businesses, one would expect to find that inflation rates grow during years that the national minimum wage is raised. This is not the case. Examining a time-series from 1945 through 2014, I find no statistically significant correlation between annual inflation rates and the inflation-adjusted value of the minimum wage. From 1945 through 1965, the inflation rate in the U.S. fell dramatically from 8 percent per year to less than one percent a year, while the inflation-adjusted value of the minimum wage increased from approximately $4 an hour to nearly $11 an hour, in 2014 dollars. From the late-1960s through 1980, the value of the minimum wage steadily fell from nearly $11 an hour to less than $10 hour in 2014 dollars, while the inflation rate grew dramatically from less than five percent a year in the late-1960s to about 10 percent annually in 1980. From 1980 to 1990, both the inflation rate and the minimum wage value fell, and in the post-1990 period, the national inflation rate and value of the minimum wage have both fluctuated positively and negatively at times, but with no noticeable correlation between the two factors. In short, the obsession with inflation and the minimum wage appears to be much ado about nothing, despite propagandistic warnings in the corporate press and among right-wing political and business elites. The real reason for conservative opposition to higher wages has nothing to do with inflation or employment, but is motivated by business elites’ efforts to avoid paying a higher cost for labor that cuts into corporate profits.
Misrepresentations of the Intent of the Minimum Wage
I commonly hear my students embrace the claim that those earning the minimum wage were never supposed to earn a wage to pull them out of poverty. As the common sentiment goes, most of the people earning this wage are high school kids, so why should they receive a living wage that allows them to pay for the needs of an adult with a family and children? These assumptions reflect a misunderstanding of who earns the minimum wage. As the Department of Labor explains, “The typical minimum wage worker is not a high school student earning weekend pocket money. In fact, 89 percent of those who would benefit from a federal minimum wage increase are age 20 or older.”
Aside from the current demographics of minimum wage earners, it is simply inaccurate, historically speaking, to claim that the minimum wage was developed to ensure that the poor remain in poverty. The minimum wage was introduced in 1938 as part of the Fair Labor Standards Act by the Franklin Roosevelt administration and Democrats in Congress, specifically as a way to ensure basic fairness in pay and social justice for the poor. A minimum floor was developed, to ensure that businesses were not able to severely exploit the working class and poor. In his 1937 speech to Congress on the minimum wage, Roosevelt spoke against the specter of growing poverty in Depression America: “one third of our population, the overwhelming majority of which is in agriculture or industry, is ill-nourished, ill-clad, and ill-housed.” Roosevelt railed against business elites who had denied a livable wage to American workers: “The overwhelming majority of this Nation has little patience with the small minority which vociferates today that prosperity has returned, that wages are good, that crop prices are high, and that government should take a holiday.” Roosevelt continued: “Self-supporting and self-respecting democracy can plead no justification for the existence of child labor, no economic reason for chiseling workers’ wages or stretching workers’ hours.” Roosevelt spoke against “goods produced under conditions which do not meet rudimentary standards of decency,” and advocated for government “to put some floor below which the [worker’s] wage ought not to fall.” In short, concern with limiting big-business exploitation of the working class was the major motivation behind introducing the minimum wage.
Of course, one could point out that the actual value of the minimum wage in 1938 was just .38 cents an hour, or $6.39 in inflation-adjusted, 2016 dollars. This appears to be far from a living wage today, and would not allow for working Americans to pay for many basic needs such as food, health care, education, clothing, and shelter. Still, Roosevelt was clearly unhappy with this basic floor, as he made clear in his 1944 State of the Union address. In that speech, Roosevelt voiced his support for a “Second Bill of Rights,” which voiced support for a living wage for American workers. More specifically, Roosevelt called for the following:
— “The right to earn enough to provide adequate food and clothing and recreation”
— “The right of every farmer to raise and sell his product at a return that will give him and his family a decent living.”
— “The right of every family to a decent home”
— “The right to adequate medical care and the opportunity to achieve and enjoy good health.”
Clearly, the latter three relate directly to the ability to earn a living wage, especially in a country that historically refuses to implement universal health care or generous public housing subsidies.
Previous studies of the minimum wage examined relatively incremental increases in the minimum wage over the years (often less than $1 a year) – not as large as an increase from $9 to $15 an hour (in New York) that is now planned in just three years. It is possible that this large increase could produce higher inflation or unemployment, although there is little in the current economic literature to suggest that this will be definitely be the case. It’s also possible, however, that no such effects will occur. The $15 wage is concentrated across the costly New York City metropolitan area, whereas the rest of the state only has to comply with a minimum wage of $12.50 over five years, by the end of 2020. A raise from $9 to $12.50 over a half-decade is an incremental increase in the minimum wage, representing just .70 cents a year.
In the case of California, attacks on a higher minimum wage seem misplaced considering that a raise from $10 to $15 an hour over six years is incremental, constituting just .71 cents a year. Even if large wage raises in California and New York produce some negative economic consequences, this outcome should be assessed within a broader context of a political-economic system that undervalued American labor for decades and continues to deny a living wage to workers in the world’s richest country. The national minimum wage currently stands at half of what it should be worth had pay raises kept pace with worker productivity growth. Within this context, we should remember that class warfare by the rich against the poor is the true cause of misery among working Americans today. Growing wages in states like California and New York should set a positive precedent for how we value American labor moving forward. They should not become pariah states, to be sacrificed at the altar of corporate-mandated wage-slavery for the masses.