Proposed U.S. minimum wage increase has economists divided

When it comes to the idea of a $15 minimum wage in the U.S. the only thing economists can agree on is how contentious it is.

The $15 minimum wage in the U.S. is gaining political momentum following proposals in New York and California. But such a large wage increase is uncharted territory for U.S. policymakers and remains a contentious issue across the aisle. To get an insight into the proposals we spoke with Richard V. Burkhauser who is the Sarah Gibson Blanding Professor of Public Policy (Cornell University) and a Professorial Research Fellow at the Melbourne Institute (University of Melbourne).

ResearchGate: The $15 minimum wage is gaining traction in New York and California, while Democrats introduced a proposal to increase the federal minimum to $12. What is your opinion on these proposals? Why do you think they are gaining political momentum now?

Richard V. Burkhauser: Economic recovery in the United States from the Great Recession has been weak with little increase in real wages, especially for low skill laborers. This has only added to the problems that low-skilled workers have as our economy becomes increasing open to international trade. Employers of low-skilled workers in the US have to compete in the same product market as employers of low-skilled workers in third world countries.

While international trade is good for the country as a whole, the lower prices it provides to consumers in the product market means lower wages for our low-skilled workers. There have been major efforts by President Obama and the Democrats since the 2008 elections to raise the minimum wage at the national level but they have been stopped by the Republican majorities in the House and Senate. So now private sector labor unions and other activists have shifted their efforts to increasing the minimum wage at the state or city level. This has been successful in states like California, Washington and others.

Governor Cuomo of New York failed to gain passage of his bill to raise the minimum wage in New York State. But he used an obscure law from the 1950s to empower a three member board that he appointed to recommend an increase in the minimum wage for fast food workers only. This will raise the minimum wage only for them to $15 per hour over the next three years in New York City and over the next five years in the rest of the state.

My view of these proposals is that they will, by mandate, increase the minimum wage well above the wage that would have otherwise prevailed in the state or city labor markets they target. This is especially true in the case of New York State where the increase is only for fast food workers. Furthermore, it will not be very effective at helping the working poor in some of the cities that have passed such legislation and is likely to cause a substantial reduction in the employment of the very low-skilled workers these laws are meant to help.

RG: For some workers the proposed minimum wage increase would see their hourly wage more than double. The Economist has called this move towards sharply higher wages “accelerating into a fog.” What do you think of such a large wage increase?

Burkhauser: Even economists who support modest increases in the minimum wage that “do not bite” are nervous about the employment effects of such large increases in the minimum wage that will substantially up the lower tail of the wage distribution. The Economist’s “accelerating into the fog” is an apt metaphor. The Congressional Budget Office (CBO) estimated that an increase of the minimum wage to $10.10 per hour would, given the distribution of wages in the US, not have much of a bite. So the percentage of workers effected would be modest and the negative effect on employment even more modest—between half a million and one million jobs lost.

But Holtz-Eakin and Gitis (2015), using the same assumptions as the CBO, argue that a national increase to $15.00 per hour would have a much more significant bite and a substantial negative effect on employment.

Holtz-Eakin and Gitis (2015)
Holtz-Eakin and Gitis (2015)

Holtz-Eakin and Gitis (2015)
Holtz-Eakin and Gitis (2015)

RG: Even if these proposals are politically viable, do you think they are economically viable?

Burkhauser: If the numbers that Holtz-Eakin are showing are even close to accurate they are very troubling and suggest that there are far more effective ways to increase the wage earnings of low-skilled workers in poor families.

RG: The argument that an increased minimum wage will lead more business to invest in technology to replace low-skilled workers (checkouts, receptions etc.) rather than pay them more is often used to defend low minimum wages. What is your opinion on this?

Burkhauser: This will not happen overnight but there is no question that this is exactly the kind of longer term effect that artificial increases in the wages of low-skilled workers will induce. But in the short run it will also lead to creative ways for firms to change their business models to reduce their use of low-skilled labor. I just completed a two night stay at a Double Tree Hotel in Washington DC and hanging on my door was a notice that if I told them that I did not need my bed made and my room cleaned that night it would help the environment and they would reward me with an $8.00 food voucher at their restaurant. What they didn’t mention is that if I, and a lot more environmentally concerned customers, did not require their rooms refreshed or their sheets and pillowcases replaced on the second night of their stay they would not have to hire as many low-skilled workers.

RG: Paul Krugman, writing in the NYT, argues that the labor market is different to other markets because it involves people. Paying people more can boost morale, increase productivity, and retain employees longer (saving business money by not having to train new people). Can these benefits offset the cost of a higher minimum wage?

Burkhauser: What makes Paul Krugman think that he is smarter and better informed than the owners of the mostly small businesses who hire low-skilled workers? If this was the case why aren’t they doing so already, especially now that they can purchase Paul’s advice for less than $1.00 by buying a copy of the New York Times?

But more seriously, Paul is correct that labor markets are different from other markets in that they involve workers who are people and whose welfare is a concern for all of us. But that is precisely why such large increases in the minimum wage have liberals like Harry Holzer as well as conservative economists worried. If the low-skilled fast food workers of New York are given a raise to $15.00 per hour but no other lower or moderately skilled workers see increases in their wages then higher skilled workers now working in jobs that pay less than $15.00 are likely to crowd out the teenagers and other workers who take on these entry level jobs in the fast food industry. So many current fast food workers may lose their jobs even if the overall number of jobs lost in the industry is more modest.

RG: There is no consensus on whether increased minimum wages actually combat poverty. Recent research also claims earned-income tax credit are better at reducing poverty. What is your opinion on the benefits of increased minimum wages for the people living in poverty?

Burkhauser: What the CBO report makes clear is that even an increase in the minimum wage to $10.10 would have primarily helped low-skilled workers who were not living in poor households. The reason for this is that most low wage workers are not the primary earner in their household. Hence, it is far better to target wage subsidies on low income households rather than low wage workers.

The vast majority of those who will be helped by a $15.00 per hour wage do not live in poor households. The negative employment effect of such a large increase in the minimum wage is likely to disproportionately affect low-skilled workers in poor or near poor household than low-skilled workers in higher income households. A far better alternative is to increase the earned income tax credit for single mothers and to raise the credit for workers without children who now only get a very small credit to that same higher level. Experience with the earned income tax credit shows that unlike the minimum wage, it does not have a negative effect on the demand for labor and in fact has been a major reason for the increase in labor supplied by US single mothers since its increased use in the 1990s.

RG: Do you have anything to add? What other arguments (if any) do you feel make a strong case for or against minimum wage increases?

Burkhauser: The minimum wage is an early 20th century solution that may have made sense before government tax and transfer policies existed. The earned income tax credit is a far more cost effective mechanism for providing short run subsidies to low-skilled workers who live in low income households. But the most fundamental way of increasing the wages of low-skilled labor is to provide them with education and job training. This will increase their productivity in the labor market and allow them to earn wages above the minimum wage like the vast majority of workers in the US and other modern industrial countries.

Feature image courtesy of Wikimedia Commons.