The Impact Of A Higher Minimum Wage

For all of my 60-plus years on this planet, there have been two relatively constant economic mantras that were, until recently, rarely ever questioned. First, artificially raising the minimum wage would kill jobs and small businesses. Second, low unemployment will invariably lead to higher wages. In fact, those two assumptions largely underpinned the decision to give ever increasing economic advantages to those mythical, so-called “job creators” in the belief that they would create so many new jobs that wages would actually rise. Our 21st century economy has put lie to both those premises.

After two years of near record low unemployment, the real (inflation adjusted) wage growth has barely crept above 1%. That is not what was expected after months of unemployment numbers under 4%. In fact, even in this statistically booming economy, workers’ share of domestic income has continued to drop, now just a point or two above 50%, while business profits continue to rise.

Economists are seemingly baffled by this phenomenon and have offered up a myriad of theories to explain it. Some believe that the unemployment rate has severely underestimated the amount of slack in the labor force. Others point to globalization and competition from low-wage workers overseas. Others assume that automation and robotics are the primary factors.

As Krugman notes, the robotics argument looks merely like “diversionary tactic” designed to keep us from really focusing on the underlying structural problems. If robotics really were replacing workers at a rapid rate, we would expect to see rising productivity. Instead, productivity growth is actually below the levels we saw in the initial computer revolution of the early 2000s. In this way, “the robots” premise is comparable to the “skills gap” theory which tried to explain away the incredibly slow recovery from the Great Recession. Similarly, in post WWII America, technological change has always disrupted labor markets but wages still managed to grow for most workers.

What many economist do now agree on is that workers’ reduced bargaining power has been a driving factor in the last forty years of wage stagnation. Part of that has been the destruction of unions begun under Reagan. Union workers made up a quarter of the work force forty years ago. Today they barely make up more than 5%. In addition to union hostility, the tax code has been modified to benefit the capital class, encouraging companies to actually move their operations and profits overseas and shifting wealth from the bottom to the top. Furthermore, the concept of the primacy of the shareholder almost requires that the executive and shareholder class gets rewarded before the employees who actually do the work.

Lastly, the refusal or inability to address the falling value of the minimum wage is another important factor. Even as productivity has grown by 150%, the real (inflation adjusted) value of the federal minimum wage has fallen by one-third. Over the last few years, localities and states have finally begun to address this issue. Studies indicated that not only was the employment effect of a higher minimum wage minimal but that it also had little effect on the actual median wage. Raising the minimum wage did have an extraordinary and not unexpected salutary effect, however, for the lowest wage earners.

From 2014 to 2016, 22 states raised their minimum wage. The Center for Economic Policy Research documented the wage growth in those states across income groups and industry sectors. As their graph below illustrated, low wage workers in the leisure and hospitality industry in states that raised the minimum wage (in yellow below) benefited enormously compared to those in states that did not (in blue).

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Per Kevin Drum, 23 states have raised their minimum wage in 2017–2018, some of which also raised them in the prior three years. And, as we would expect, low wage workers have again benefited the most.

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In fact, it could be effectively argued that what little real wage growth we have seen in this remarkably low unemployment environment is due far less to that environment per se than to states’ decisions to raise the minimum wage. And raising the minimum wage has certainly been more effective for American workers than Trump’s tariffs or trade wars. If Trump was really interested in raising workers’ incomes, a far more effective strategy than those, but one that Trump and the GOP would never enact, would be to actually raise the federal minimum wage.

It is remarkable that the GOP constantly frames their desire to return to the halcyon days of the 1950s. Bob Dole was almost explicit in that idea in his 1996 presidential campaign when he declared “Let me be the bridge to an America that only the unknowing call myth. Let me be the bridge to a time of tranquillity, faith, and confidence in action”. Both Reagan and Trump used the “Make America Great Again” slogan in order to evoke similar feelings. But it appears the party only wants to return to the racial policies of the 1950s rather than the economic ones. Strong unions, high marginal tax rates, and a minimum wage that actually was close to a living wage are policies that the Republican party currently rejects. But, in fact, those policies are the ones that are truly likely to restore the economic benefits to the most Americans.

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Thoughtful discussions on politics and economics with some sidelights in photography and astronomy.

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