NEW YORK, NY — December 3, 2018 — Prof. Oren M. Levin-Waldman will discuss his most recent article: “Do the Democrats Really Want a $15 an Hour Minimum Wage?” By Oren M. Levin-Waldman, on Wednesday, December 5, 2018th at 10am EST on the Westchester On the Level Internet radio broadcast.
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Do the Democrats Really Want a $15 an Hour Minimum Wage?
By Oren M. Levin-Waldman
As the Democrats once again take control of the House of Representatives in January there is every reason to believe that they will introduce a bill to raise the minimum wage to $15.00 an hour. The left flank of the party has certainly made it a plank of the Democratic legislative agenda. Although it is highly unlikely to go anywhere in the still Republican controlled Senate, it nonetheless puts a long neglected issue back on the political agenda.
The last time the federal minimum wage was raised was when Nancy Pelosi first became Speaker of the House back in 2007. It was the first time the Democrats held control of the House since the so-called Gingrich midterm revolution of 1994. And in a legislative effort reminiscent of the first one hundred days of Franklin Roosevelt’s presidency in 1933. Congress succeeded in pushing through quite a few things during the first one hundred days of her speakership.
We can already hear the critics of such a move. A minimum wage as high as $15.00 an hour will no doubt lead to lower employment. They will even cite the 2014 study of the Congressional Budget Office (CBO) which said that a minimum wage increase to $10.10 an hour as Proposed by President Obama would result in as much as 500,000 fewer jobs once fully implemented in 2016.
It is worth rehearsing the theoretical grounds for lower employment. One reason is known as the “scale effect” whereby employers pass on the additional labor costs to their customers in the form of higher prices. This then leads to lower demand for goods and services, in which case firms hire fewer workers. Or if the costs of labor rise relative to other inputs, employers will use other inputs like technology. This is known as the substitution effect.
Or there could be lower employment due to supply side effects. A higher minimum wage attracts more people into the labor market in search of those jobs. Now there are more workers chasing the same number of jobs, which means lower employment in relative terms. Of course, there could be a disemployment effect whereby firms lay existing workers off. The report, however, never mentioned a disemployment effect. On the contrary, it only said a reduction in total employment. That is, there is a difference between laying off existing workers and not hiring additional workers in the future.
The same CBO report also concluded that on the whole the economy would be better off and that 16.5 million Americans would see their incomes increase. Given that fewer than 2 million workers actually earn the statutory minimum wage, how could this be possible? The report seemed to be alluding to the wage contour effects which I have written about many times in this space.
Workers earning in intervals above the statutory minimum wage will get pay raises, as will those in intervals above them. Of course, the more who receive pay increases, the more people can demand goods and services which will lead to firms hiring more workers. Contrary to what the critics allege, this should be good for the economy, shouldn’t it? Well not so fast.
With a federal minimum wage of $7.25, a raise to $15.00 an hour has to be viewed as quite a shock to the system. For employers paying the statutory minimum wage, this more than doubles their wage bill. Let’s also consider the following: in 2016 according to data from the Consumer Population Survey (CPS), the median hourly wage for full-time workers between the ages of 18 and 64 was about $18.75 an hour. If we could assume that the median hourly wage was essentially the equilibrium wage (market clearing wage), then the increase in the federal minimum wage was bound to have limited employment consequences because it was so far below the equilibrium wage.
This is an important concept because the theoretical construct generally assumes lower employment will follow an increase higher than the equilibrium wage. Historically when the minimum wage was raised in the U.S. there have been little if any adverse employment effects because the minimum wage is so far below the equilibrium, and has continued to be following increases, that it could not possibly have an effect.
There have been numerous studies of the minimum wage in the wake of the new political economy of the minimum wage beginning with the famous Card and Krueger studies of the early 1990s. In those studies of the fast food industry, David Card and Alan Krueger concluded that increases in the minimum wage in fast food restaurants in New Jersey (with Pennsylvania serving as a control) actually led to higher employment. In part, this is because the fast food industry is a labor monopsony. That is, they are the largest employer of minimum wage workers.
Still, neoclassical economists argued that there could not be any real consequences because the increase was still so far below a market clearing wage that there could not be an effect. But what if we had a minimum wage that would really bite, i.e. above the equilibrium wage? Even Card and Krueger acknowledged that there was a tipping point, but that it had not yet reached that point.
Now we can return to the $15.00 an hour minimum. In 2018 the median hourly wage is probably even more than $18.75, which means the $15.00 an hour minimum is closer to the tipping point but still not there. By the logic of what we have already said so far, it should not have the effect that critics claim.
Still, there is the size of the increase, which may be what the real concern is all about. It may be wiser to have a graduated increase over a period of say five years. But that means that when finally phased in, it may still be too little and too late for many workers. And yet, there is the additional issue of whether Democrats who have long embraced the global economy really support a $15.00 minimum.
It was Bernie Sanders in the 2016 primaries that called for an increase to $15.00 an hour. Hillary Clinton and all of the Washington think tanks that supported her were only calling for a $12.00 an hour minimum. It is probably a good guess that the House leadership would prefer a smaller increase but will put up a $15 an hour minimum for a vote because they know it will never be passed by the Senate, let alone signed by the president.
Let’s remember that a global economy requires wage flexibility and higher minimum wages are contrary to flexibility. And yet, globalism also requires stronger labor market institutions. A minimum wage is but one labor market institution. Now the idea of a $15 an hour really does present the Democratic party with a real conundrum. At a minimum it places an issue on the agenda, which, if nothing else, should force us all to begin considering a larger issue: what set of institutions are necessary to truly serve the interests of the middle class? It isn’t only about paying low-wage workers more, it is also about the meaning of true independence because the country is subsidizing low-wage workers to the tune of $156.8 billion a year. That is, we are all paying to have a low-wage labor market.
Restoring the Middle Class through Wage / Oren M. Levin-Waldman / Palgrave MacMillan
This book makes the case for minimum wage as a way to improve well-being of middle-income workers, reduce income inequality, and enhance democracy….
Minimum Wage: A Reference Handbook / ABC – CLIO
The Minimum Wage: A Reference Handbook By Oren M. Levin-Waldman. As of 2014, the minimum wage in Seattle is $15 an hour — double the federal minimum wage.
“Wage Policy, Income Distribution, and Democratic Theory” By Oren M. Levin-Waldman
Dr. Oren M. Levin-Waldman, Ph.D., is Professor at the Graduate School for Public Affairs and Administration at Metropolitan College of New York, Research Scholar at the Binzagr Institute for Sustainable Prosperity, as well as faculty member in the Milano School for International Affairs, Management, and Urban Policy at the New School.