With abortion and gun control dominating the news cycle, I wanted to take some time to cover another controversial topic: minimum wage. This past July 1, we saw multiple jurisdictions increase their minimum wage, including the state of Minnesota and the City of Los Angeles, as well as the City of Chicago and the greater Cook County. It sounds like a great victory for the working class. The minimum wage argument goes something like this: "If you wage the minimum wage to a living wage, it helps out workers. The workers are more productive, which in turn helps out employers. It's a win-win."
American author and political commentator Robert Reich made that argument about a week ago in his piece entitled "4 Myths About Raising The Minimum Wage." For Reich, we should raise the minimum wage to $15 because "it is insult to American workers and it's bad for the economy." Reich attempts to debunk four talking points in the minimum wage debate to make it seem as if you can raise the minimum wage without any consequences. The problem is that Reich is flat-out wrong. I have actually called him out before on his minimum wage information in 2015 and in 2014. I ended up spending my Fourth of July weekend writing this piece and calling him out once more. He addressed four points, and I will respond to his analysis in kind.
1. If businesses have to raise wages, they'll have to cut employees' hours or jobs all together. Reich takes with this argument by saying that "treating workers is worth the price." He then argues that increases in the minimum wage do not reduce the overall number of jobs. Minimum wage increases are increase in labor costs. As we will see throughout this piece today, companies have to account for the increase in expenses.
Even if we were to forget standard microeconomic theory about price floors for a moment, Reich's fantasy does not play out in reality. When Seattle raised its minimum wage to $15, there was both a decline in hours worked and overall number of jobs. A 2019 review from the Cato Institute on the minimum wage similarly found that cutting employee hours is one way that employers compensate for the minimum wage hikes (Clemens, 2019).
Not only is there a reduction in hours, but also an overall reduction in jobs. A report from the National Bureau of Economic Research looked at the impact of federal and state minimum wage hikes since 1992. This report also found that there has decidedly been a negative impact on employment (Neumark et al., 2021).
The Congressional Budget Office (CBO), which is the gold standard for legislative analysis, has analyzed the effects of a federal minimum wage hike on more than one occasion. What does the CBO find? Among other negative effects, there would be a significant loss in jobs if the minimum wage were raised to $15. The last time the CBO looked into the possibility raising the minimum wage to $15, the CBO found that it would reduce employment by 1.4 million workers. While some workers would have a higher wage and be lifted out of poverty (900,000 according to the CBO), another 1.4 million would be unemployed. While a wage less than $15 can be an issue depending on where in the United States one lives, the last time I checked, $0 per hour is an even less livable wage.
2. Small businesses won't be able to afford the higher wages and will be put out of business. Reich argues that a higher minimum wage attracts better workers, leads to better worker productivity, and improve retention of workers. I criticized Reich's turnover argument in 2015 by pointing out that the reason that turnout is lower is because the minimum wage hike disincentivizes hiring more workers.
But let's get back to the main point. Small businesses have less resources to pay for higher wages, especially now after everything that came as a result of the pandemic. Given the wage structures, they do not have the same economies of scale that larger businesses have. It would explain why the average wage for those working for an employer with less than 100 employees is half of what it is for those working for an employee with over 1,000 employees.
A paper from the National Bureau for Economic Research found that minimum wage increases created greater financial stress for smaller businesses, including "lower bank credit, higher loan defaults, lower employment, a lower entry and a higher exit rate for small businesses" (Chava et al., 2019). As another example, a paper from Harvard economists shows that raising the minimum wage by $1 resulted in a 14 percent increased likelihood that a mid-level restaurant would exit the market (Luca and Luca, 2018). Is it any wonder that such large companies as Walmart and Amazon support $15/hour minimum wages? They have the capacity to better pay for such wages while driving their competitors out of the respective market.
3. If the wage is raised, prices for everything will skyrocket and lead to widespread inflation. With the inflation being the highest it has been in over forty years, it is understandable that inflation has become a topic of interest in U.S. politics. I would surmise that there are various contributing factors to this current bout of inflation, although some are more so than others. Even looking at other inflationary periods, I would not put minimum wage at the top of the list as a contributor to inflation, especially if the minimum wage increase is small. After all, minimum wage increases are more likely to be indexed to inflation projections, thereby minimizing impact on overall consumer prices (MacDonald and Nillson, 2017). At the same time, there are inflationary pressures, even if they are modest, as a result of artificially increasing wages for minimum wage workers.
As previously mentioned, employers are trying to find ways to compensate for the increase in the price of labor that minimum wage laws cause. One of those possible ways is by increasing consumer prices. A Hungarian case study showed that the consumers bore the majority of the minimum wage increase through higher consumer prices (Harasztosi and Lindner, 2019). A research paper led by an economist from the Federal Reserve Bank found a similar response to the minimum wage increases, this time in the U.S. fast food industry. Essentially, fast food prices increased about twice as fast as the minimum wage (Aaronson et al., 2007). Two economists at the University of California at Berkeley who are minimum wage proponents even admitted that passing on the minimum wage increase to the customers is a phenomenon (Allegretto and Reich, 2017).
While increasing consumer prices is shown to be an implemented strategy, there is a limit to how much increasing consumer prices can be used as a business strategy. If the price increases are too high, demand and eventually overall revenue would drop. That is the law of demand for you! That explains why employers find other ways in addition to increasing consumer prices to deal with the minimum wage increases. While Reich is technically correct to say that prices will not skyrocket, he is still engaging in exaggerated language to deflect that there are still upward pressures on consumer prices as a result of minimum wage laws.
4. Most minimum wage workers are teenagers making some extra money on the side; they don't need a wage increase. Reich starts off by talking about teenagers and then goes into the red herring commonly used by minimum wage proponents that minimum wage is not livable. As I pointed out in my criticism of Reich's arguments in 2015, if we strictly look at teenagers and look at the 15-19 age bracket, then yes, there is a small percentage of minimum wage workers in that age demographic. At the same time, this is misleading in terms of what a typical minimum wage worker looks like.
If we use Bureau of Labor Statistics (BLS) data, we see a very different picture than the one that minimum wage proponents paint of a single mother working three full-time minimum wage jobs to make ends meet. I have done this with 2014 data, but I am going to use 2021 BLS data since they are the most recent data from BLS to show that the typical minimum wage worker is far from what minimum wage proponents purport.
- Age: In terms of age, 44.3 percent of minimum wage workers are 25 or less, although they represent one-fifth of hourly wage workers (BLS, Table 1).
- Education: 85 percent of minimum wage workers have a high school degree or less. Let's look at those with college degrees in contrast. College degree holders account for 37.2 percent of the overall population (Pew Research), but 14.7 percent of minimum wage workers (BLS, Table 6). Another demographic statistic to remind us that completing a college degree generally helps people with their professional development and earning power.
- Full- and part-time status. 52.0 percent of minimum wage workers work part-time (BLS, Table 1). 8.9 percent of minimum wage workers work over 40 hours, whereas 5.1 percent work greater than 50 hours (BLS, Table 9).
- Percent Working at Federal Minimum Wage. There are fewer hourly workers working for minimum wage or less than there used to be. In 1979, 13.4 percent of hourly workers, or 6.9 million workers, worked for minimum wage or less. The percentage and raw number have decreased to the point that in 2021, 1.4 percent of hourly workers, or 1.5 million workers, are making minimum wage or less (BLS, Table 10).
Conclusion
"Lies, damned lies, and statistics" is what I think of when I read arguments such as those coming from Reich. Every policy enacted has a tradeoff. Reich would prefer to think that we can simply raise wages without there being any consequences whatsoever as long as one feels as if they can claim moral superiority. The world does not work that way. If laws increase the cost of hiring a worker, employers will find a way to work around that cost increase. We explored reducing work hours, cutting jobs, or increasing consumer prices. There are other ways as well, including automation, scaling back workers' benefits, reducing the quality of the work environment, or playing around with work schedules (e.g., Clemens, 2021; Lordan and Neumark, 2017).
There is a reason why economics is referred to as the "dismal science"; it points out the reality that we have a limited supply of goods and services, also known as scarcity. Economics is supposed to help us figure out how to best allocate that limited supply. Unfortunately for Reich, a $15 federal minimum wage would harm many of the people that he would like to help.
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