Thursday, September 26, 2013

Raise the Wage!

            It’s time to raise the minimum wage; in fact, it’s past time.  It would help our economy grow; it would increase federal and state revenues; it would decrease current and future government spending; and it would bring the United States into the family of civilized nations.

            The federal minimum wage today, in real dollars, is lower than at any time since 1956.  Last July, Neil Cavuto on Fox News talked about his first job, when he earned $2.00/hr.  If the minimum wage had kept pace with inflation, it would be $9.47/hr. now.  The $9.00/hr. wage proposed by President Obama wouldn’t even bring wages up enough to cover inflation.

            The claim that the worst effects of a higher minimum wage would be felt by small businesses is partly true and mostly false.  During my stint in the restaurant business, the minimum wage went up several times.  But the cafe where I worked didn’t get into trouble because labor costs were too high.  Even after multiple increases, bumping up prices occasionally by a nickel — not on everything, but only on a few items — was enough to offset the higher wage. 

             In Illinois, the minimum wage for tipped employees is $4.95/hr.  For untipped employees, it is $8.25/hr.  On April 5, 2013, the Sun-Times ran an editorial opposing an increase in the minimum wage, arguing that the raise would drive jobs out of Illinois to neighboring states with lower minimums.
            A decade ago, when the Illinois minimum wage reached $5.15, a version of that editorial hit the papers.  As the minimum wage went up to $6.50, $7.50, $8.00, and so on, the editorial reappeared.  Yet amazingly, in all that time, Dominos Pizza did not abandon the Chicago market for the comparative advantage of Iowa.  Payless Shoes didn’t pack up and leave.  Neither did Target.  None of the national chains did.  (And if they had, wouldn’t that have been good for mom-and-pop operations in Illinois?)  The reality is that if you live in Chicago and want a pizza, you are not going to drive to Indiana to get it.[1]  
            Nor are you going to fly to Indonesia.  Global competition has nothing to do with food service, retail sales, or the great majority of other minimum wage jobs — or even many higher wage jobs.  Carpenters in America are not competing with carpenters in China.

            Earlier this year, McDonalds published a brochure for its employees laying out a sample budget — how to live on McDonalds’s wages. 

Screen capture from
            But course, you can’t live on McDonalds’s wages.  Notice the two top lines on income — first job and second job.  To earn $2060 after taxes, an employee in Illinois making $8.25/hr. would have to work 70+ hours per week. 
            Now look at expenses.  Nothing for heating, and food isn’t listed at all.
            Suppose the monthly expenses for “savings” and “other” went entirely to food costs.  That works out to $6.66 per day.  That’s one McDonalds meal for dinner each day — and nothing else.  No breakfast, no lunch, no late night snack.

            Some commentators contend that a higher minimum wage would mean the end of teenagers working at fast food joints, but they’re wrong.  If the minimum goes up, fast food joints will still have to hire someone.  Besides, only about 20% of minimum wage workers are teenagers.[2]  The median age of fast food workers is 28.  McJobs aren’t just for teenagers anymore.

            Economists are divided on the question of whether a higher minimum wage would increase unemployment.  The connection is not clear-cut; a lot of factors are involved.  So I put together my own graphic about the situation in Illinois. 

            At least for Illinois, it is clear that, until the decline and fall of the economy from 2007 through 2009, employment rose with the minimum wage.  Correlation doesn’t prove causation, but the available data does not support the notion that the minimum wage increased unemployment.

            What the graphs don’t show, but what should be obvious, is that raising the minimum wage means people have more money to spend.  And guess what, they would spend it at businesses! 
            On Friday (8/16), I heard a radio report about an intriguing analysis of the minimum wage.  Assume Walmart and McDonalds increased their minimum pay to $15.00/hr. and passed the entire added expense on to their customers.  On average, the cost of a visit to Walmart would go up 46¢.  The cost of a visit to McDonalds would go up 25¢.
            Naturally, the U.S. will not go to a $15 minimum wage because that would approach the minimum wage of Australia; and they’re supposed to copy us, not the other way around.  But what about a smaller increase to, say, $10.00?
            The Bureau of Labor of Statistics reports that there were 127 million wage and salary workers in the U.S. in 2012.  3.6 million — or 2.83% — were at or below the federal minimum wage.
            Last March, Dr. Arindrajit Dube, professor of economics at the University of Massachusetts, testified before the Senate, along with business owner David Rutigliano and others, about the minimum wage.

Senator Elizabeth Warren:  During my Senate campaign, I ate a number 11 (meal) at McDonalds many, many times a week.  I know the price on that — $7.19.  According to the data on the analysis of what would happen if we raised the minimum wage to $10.10 over three years, the price increase on that item would be about four cents. 
            …I think, Dr. Dube, you’ve looked at the inflationary effects of increasing the minimum wage.  Can you just give us a quick summary on this data?

Dr. Dube:  I think it is uncontroversial amongst economists that a minimum wage increase of this sort would not have a noticeable impact on the overall price level…So the effects on the overall price level?  Very small.
             In short, the number of people potentially affected by a higher minimum wage is less than 3% of the work force; so the cost to businesses would be marginal.  The claim that raising the minimum wage would have terrible effects on the wage/price spiral is false.  It’s a ghost story promoted by fear-mongering about socialism and based on the likelihood that the listener doesn’t know the facts.  
            To the right wing in America, raising the minimum wage to keep pace with inflation is out of the question; and raising it to keep pace with productivity would be little short of treason.
            It’s not hard to see why they think that.  According to the Sun-Times, if the minimum wage had kept pace with productivity, it would now stand at $21.72/hr.!  In other words, for the past five decades, the profits generated by increased productivity have gone almost exclusively to capital — not to the people who actually do the work. 
           The losers in this whole process have been workers and taxpayers.  Walmart advises new employees to apply for food stamps (!) — which you and I pay for through our tax dollars.  Keeping the minimum wage low means that it will cost all of us more in future Medicare and social security payments.  The Walton family is the richest family on the planet.  Why are we subsidizing them?  Is that the free market at work?
            When the minimum wage does not keep pace with inflation or productivity, it becomes a means of transferring wealth from the poor to the rich.  And that is the real reason why the largest employers of minimum wage workers oppose raising the wage — not because they would lose money, but because the growth of their wealth would slow down just a tiny bit.

[1]  The editorial did not distinguish between service sector and manufacturing jobs.  Even so, it is clear that manufacturers would not leave the state because of the so-called QWERTY principle; but that’s a discussion for another time.
[2]  Betsey Stevenson, associate professor of public policy at the University of Michigan and former chief economist of the Labor Department.


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