Raising the Minimum Wage and Its Effects
Ko-fi prompt from [name redacted]:
So, what does raising the minimum wage really do to the rest of the economy?
Hecking Complicated! I think I might need a doc of just. References for this one. But here are a few elements!
(Also, the Congressional Budget Office has an interactive model of how different changes to the minimum wage could affect various parts of the economy, like poverty rates and overall employment. Try it out!)
Reduction of Benefits
A common claim that is used to argue against the minimum wage is that it will result in companies cutting hours for their employees in order to recoup losses by having to provide benefits to fewer employees. This isn't 'the minimum wage is bad' so much as 'corporations are assholes,' but it is unfortunately still a thing that happens. (Harvard Business Review)
This is not a problem with the minimum wage itself, in my opinion, but these issues are emblematic of the weight that self-serving elements of capitalism carry. The low minimum wage is just one part of many that contribute to the current wealth disparity; if things like health insurance were universal, then bosses wouldn't be as able to cut them to employees in order to save money. Current regulations incentivize companies to hire more part-time workers than full-time, in order to avoid paying out benefits. Some cities have enacted Fair Workweek Laws in order to combat these approaches, though the impact is as of yet uncertain (Economic Policy Institute, 2018). Early reports, like the Year Two Worker Impact Report on Seattle’s Secure Scheduling Ordinance, do seem to indicate positive results, though:
In addition, the SSO led to increases in job satisfaction and workers’ overall well-being and financial security. In particular, the Secure Scheduling Ordinance had the following impacts for Seattle workers:
- increased work schedule stability and predictability
- increased job satisfaction and satisfaction with work schedules
- increased overall happiness and sleep quality, and reduced material hardship.
(direct quote from the Year Two Eval)
Unfortunately, these were approved at the earliest in 2015 (San Francisco's Formula Retail Employee Rights Ordinances, which went into effect in March 2016), which means that none of them were in play for longer than five years before COVID-19 ground the planet's economy to a near halt. I tried to find results for the San Francisco laws, but I couldn't find any studies for it; I did find an article from March 2023 that summarized which cities in California have brought in fair workweek laws, though, so maybe someone could use that as a jumping off point (What Retailers Should Know About California Scheduling Ordinances).
Companies prevented from cutting benefits by cutting hours would probably find another way to do the same thing, but let's be real: keeping the minimum wage low won't stop them from cutting every corner possible. EPI has some articles, like "The role of local government in protecting workers’ rights," that talk about how these measures can be, and have been, implemented to protect workers from cost-cutting employers.
Cutting the hours and benefits of part-time employees is a real, genuine concern to have about raising the minimum wage, and those need to be anticipated and combated in concert with raising the minimum wage. However, it is not a reason to keep the minimum wage depressed. It's just a consequence to be aware of and plan for.
Passing Costs On To Customers
A common argument against raising the minimum wage is that companies will raise costs in order to cover the raise in expenses, to a degree that nullifies the wage hike. This is, um. Uh.
Really easily debunked?
Like, really easily.
Over a ten-plus year period, research found that a 10 percent increase in the minimum wage resulted in just a 0.36 percent increase in prices passed on to the consumer at grocery stores. A similar Seattle-based study showed that supermarket food prices were not impacted by their minimum wage increase.
- (Minimum Wage is Not Enough, Drexel U.)
I've talked about it before, but in some cases it's just a matter of how US-based labor is such a comparatively small portion of costs for medium-to-large businesses that raising wages doesn't raise corporate expenditures that much.
That said, some companies rely on drastically underpaying their employees, like Walmart. Walmart's revenue in 2020 was approximately $520 billion (Walmart Annual Report, page 29). Now, this report doesn't actually tell us what amount is spent on labor, but it does give us the "Operating, selling, general and administrative expenses, as a percentage of net sales." This is, to quote BDC, "[including] rent and utilities, marketing and advertising, sales and accounting, management and administrative salaries."
So, wages are just part of the (checks) 20.9% of revenue that is operating SG&A expenses. But maybe I'm being mean to Walmart! After all, the gross profit margin is only 24.1%, so only 3.2% is left for those poor shareholders!
Oh, oh, that means the profit is still over 16billion USD? And Walmart cites having 2.2 million associates in that same report? And that's about $7,500 per employee per year that's being withheld? And that's before we take costs up by like three cents per product?
Which, circling back: A study from Berkeley by the name of "The Pass-Through of Minimum Wages into US Retail Prices: Evidence from Supermarket Scanner Data" found that
a 10% minimum wage hike translates into a 0.36% increase in the prices of grocery products. This magnitude is consistent with a full pass-through of cost increases into consumer prices.
Of course, Walmart does sell more than just groceries, but isn't it interesting that raising a minimum wage resulted in such a small cost increase? If we assume this is linear (it's probably not, but I have so many numbers going on already), then doubling wages from 7.25 to 14.50 would still mean only a 3.6% increase costs! Your $5 gallon of milk would go up to [checks] $5.18.
Hm. Those 18 cents might be meaningful to our poorest citizens, but if those poorest citizens are more likely to be raised out of poverty by raising the minimum wage, then it might just be the case that they too can afford the new price of milk, and have more money left over for things like... rent. Or education. Or healthcare.
Maybe even a cost cutting loss leader like Walmart can reasonably increase its wages. After all, they still have 13 stores on Long Island, where the minimum wage is $15, and has been since 2021.
(I could have just cited the Berkeley study and moved on, but after a certain point I was too deep in parsing the Walmart report to not include it.)
But also... minimum wage increases are often staggered. They start out on the bigger companies, which have the resources to accommodate those changes (unless they've been doing stock buybacks), and then later on the smaller businesses, now that a portion of the economy (those working for the big companies) has the spare change to spend money at those smaller businesses that are raising their prices by a little more than the corporations.
And at that point, all I can really say is, well.
If you can't afford to pay your employees a living wage, you're not an oppressed company. You're just a failing company. Sorry, Walmart&Co, your business model is predicated on fucking over poor people, and so it's a bad business model.
Being a dickhead, while successful, is not actually 'smart' business practice.
(This doesn't even get into the international impacts, like what an "American companies should pay higher wages abroad, especially if they charge higher-than-American pricing for their products, but also at factories where we know they're committing human rights abuses" approach could be but this is already long as fuck so that'll have to wait for another post.)
Anyway.
Inflation
This one is tied into the cost argument above, but like...
Inflation is already a thing? Inflation is happening whether we raise the minimum wage or not. Costs go up whether we raise the minimum wage or not. Who is this argument serving? Not the people who can't afford rent, surely.
Quoting the earlier-mentioned Drexel report (red highlights mine):
While the minimum wage has been adjusted numerous times since its implementation in 1938, it has failed to keep up with inflation and the rising cost of living. The purchasing power of minimum wage reached its peak in 1968 and steadily declined since. If it had kept up with inflation from that point it would have reached at least $10.45 in 2019. Instead, its real value continues to go down, meaning minimum wage employees are essentially being paid less each year.
Additionally, some economists argue if minimum wage increased with U.S. productivity over the years, it would be set currently at $26 per hour today and poverty rates would be close to non-existent with little negative impact on the economy. However, because gradual change was avoided, the extra funds were instead shifted to CEO compensation.
A sudden change in wages now could possibly make a more noticeable impact on the economy, which is often cited as reasoning for a slower increase over time moving forward. Gradual increases with inflation and productivity could have avoided any potential economic ripple effects from wage increases and should be considered in ongoing plans.
Increasing Unemployment
A common argument is that the unemployment rate would jump as employers were forced to let employees go. Assuming they didn't just hire more employees so they could give them less hours in order to cut benefits... not really!
A 2021 article from Berkeley News summarizes the issue, along with several others, covering some thirty years of research that started with "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," published in 1993. They also touch on the issue of subminimum wages for tipped workers, though they do not address the subminimum wages set for underage and disabled workers.
“A minimum wage increase doesn’t kill jobs,” said Reich, chair of UC Berkeley’s Center on Wage and Employment Dynamics (CWED) . “It kills job vacancies, not jobs. The higher wage makes it easier to recruit workers and retain them. Turnover rates go down. Other research shows that those workers are likely to be a little more productive, as well.”
- Berkeley News article, "Even in small businesses, minimum wage hikes don’t cause job losses, study finds"
Lower turnover rates also save money for employers, as it causes them to have much lower HR expenses. How much money do you think large employers spend on using sites like Indeed or Glassdoor to find new employees?
This article from Richmond Fed does, admittedly, encourage a slightly grayer analysis:
In a 2021 review of some of the literature, [researchers] reported that 55.4 percent of the papers that they examined found employment effects that were negative and significant. They argued that the literature provides particularly compelling evidence for negative employment effects of an increased minimum wage for teens, young adults, the less educated, and the directly affected workers. On the other hand, in a 2021 Journal of Economic Perspectives article that analyzed the effect of the minimum wage on teens ages 16-19, Alan Manning of the London School of Economics and Political Science wrote that although the wage effect was sizable and robust, the employment effect was neither as easy to find nor consistent across estimations.
Thus, although the literature supports an effect on employment among the most affected workers, it does not appear to be as sizable as theory might suggest.
The International Labor Organization has a similarly mixed result when taking a variety of studies into account. (I left in their own reference links.)
In high-income countries, a comprehensive reviews of about 70 studies, shows that estimates range between large negative employment effects to small positive effects. But the most frequent finding is that employment effects are close to zero and too small to be observable in aggregate employment or unemployment statistics (1). Similar conclusions emerge from meta-studies (quantitative studies of studies) in the United States (2), the United Kingdom (3), and in developed economies in general (4). Other reviews conclude that employment effects are less benign and that minimum wages reduce employment opportunities for less-skilled workers (5).
And there's the 60-page "Impacts of minimum wages: review of the international evidence" from University of Massachusetts Amherst, which looks at data from both the US and UK. I'll admit I didn't read this one beyond the introduction, because this is very long already.
Not all US studies suggest small employment effects, and there are notable counter examples. However, the weight of the evidence suggests the employment effects are modest. Moreover, recent research has helped reconcile some of the divergent findings. Much of this divergence concerns how different methods handle economic shocks that affected states differently in the 1980s and early 1990s, a period with relatively little state-level variation in minimum wages.
I'd encourage you to think of it this way:
Employer A pays $7.25/hr. Employer B also pays $7.25/hr. An employee works 25hrs/week for Employer A, and 20hr/wk for Employer B.
The minimum wage goes up to $15/hr. Employer B cuts the employee. Employer A cuts employees as well, but not this one, and instead increases their hours to 30/wk for greater coverage.
The employee has gone from just under $400/wk to $450/wk. They lost a job, sure, but the end result... They have an extra fifteen hours of free time per week! Or more! With time to level out, you have less jobs, but more employment, because people aren't taking up multiple jobs (that someone else could have) just to survive.
This is a very, very simplified example, which doesn't take into account graduated wage increases (see the NYS labor table) or the benefits issue from before, but it does show the reality that "less jobs" doesn't necessarily mean "less pay" or "fewer employed" people, when so many of those employed at this pay are working multiple jobs.
Even the Washington Post agrees that the wage hike wouldn't cost as many jobs as conventional wisdom claims, and they're owned by Bezos. (Though I recognize the name of the article's author as the same person behind that 60-page Amherst report, so there's that to consider.)
The Kellogg Institute also points out that individual workers were, on average, more productive after receiving the pay increase, so the drop in the bottom line was softened. This is a bit debatable; the results varied based on the level of monitoring, but it's worth noting that most minimum wage jobs are pretty high-intensity, high-monitoring. Goodness knows you don't get a whole lot of time to yourself outside of the critical eye of your shift lead or customers if you're working fast food. They also note a decrease in profits, but I'd point out that they speak specifically of profits, not share of revenue.
To explain the difference: imagine you sell $100 of product in a day. The product cost you $50. Overhead (rent, utilities, taxes) cost you $10. Labor cost you $15. Profit, then, was $25, or $25.
A 16% reduction in the profit does not mean you now retain $11. It means that you retain 16% less of the $25. You now retain $21.
(This is, as with many of my examples, INCREDIBLY simplified, but I need to illustrate what the article's talking about, and I don't have infographics.)
Some other articles on the topic are from The Quarterly Journal of Economics, Business for a Fair Wage, The Federal Reserve Bank of San Francisco (more critical), the Center on Wage and Employment Dynamics, the Center for Economic and Policy Research, UCLA Anderson, Vox, and The Intelligencer, which cites another Berkeley article. I do not claim to have read all of these, especially the really long ones, but the links are there if you want to look into them.
In the interest of showing research from groups that do not serve my own political views, I'm going to link an article from the Cato Institute; I do encourage you to read that one with a grain of salt, given that it's written by a libertarian thinktank, and they are just as dedicated to hunting for research that serves their political views as I am. There were a few other libertarian articles I came across, but the way they presented information kept feeling really duplicitous so I just... am not linking those, or the leftist ones I am also uncomfortable with due to the whole "I'm totally not tricking you" vibes. Also eventually I just got tired, there are so many articles on this and I am just one blogger who is not actually working for a magazine or thinktank, I am working for my own personal tumblr.
Negatively Impacting Slightly-Higher Paid Employees
Did you know that raising the minimum wage affects more than just those making minimum? It affects those just above as well. It's referred to as the ripple effect of minimum wage hikes by this Brookings article. They estimate that a wage hike would affect nearly 30% of the country's workforce.
"Price adjustments provide the principal adjustment mechanism for minimum wage increases: higher labor costs are passed through to consumers, mainly for food consumed away from home. Such an increase does not deter restaurant customers. Price increases are also detectable for grocery stores (Leung 2018; Renkin, Montialoux and Siegenthaler 2019), but not more generally. The effect on inflation is therefore extremely small."
- "Likely Effects of a $15 Federal Minimum Wage by 2024," Testimony prepared for presentation at the hearing of the House Education and Labor Committee, Washington, DC (2019)
This overlaps with general criticisms of widening income equality, citing an AEA article I cannot access since it's behind a paywall. I wonder if it touches on companies like Amazon being headquartered in the city and manipulating the job market by sheer size? I can only speculate.
Plus, there are the health benefits! Which are mostly connected to lessening poverty, and through that lessening stress and increasing healthcare access, but still! Some of these results are debated, but I'd need to know more about the details to know how they're related (University of Washington).
------
I've spent most of the day on this, so if you guys have made it this far and are interested in supporting me, please donate to my ko-fi or commission an article. (Preferably for more than the base price; I'm effectively working at a fraction of minimum wage myself, which is ironic considering the theme of this post.)
(I realistically shouldn't have spent more than two or three hours on this, but I have so many strong opinions on the subject that I couldn't stop.)
(Also: There were so many more sources I didn't even get to read the basic premise of because it was so repetitive after a while.)
202 notes
·
View notes