2017-2018 Essay Contest First Place Essay

Do Rising Wages Bring Rising Risks?
Benjamin Harvey
Spectrum High School
Elk River, MN

When Minnesota increased its minimum wage to $9.50 in 2014, President Obama urged Congress to “follow Minnesota’s lead, raise the Federal minimum wage... and help ensure that no American who works full time has to raise a family in poverty.”[1] The initiative symbolizes the goals of the “Fight for $15”, a lobbying effort committed to a $15 minimum wage for all Americans.[2] The idea may seem persuasive, but the dangers of doubling the wage as a public policy may outweigh any promise of the proposal.[3]

Basic economic theory suggests the risks of a higher federal wage. The law of demand states that raising the price of a good or service (labor) reduces quantitative demand.[4] Laid-off workers seeking new employment at a higher wage point and those harmed by a reduction in work hours may long for the labor security held at the current wage. Businesses that rely on low-wage labor (i.e. the food industry and retail) would be the most vulnerable, especially those in the South.[5] They might pass on markedly higher production costs (increased cost of labor and payroll tax) to customers by proportionally increasing prices. Firms with elastic product demand, or those facing international competition, may then see customers flee. Substituting workers with technology may be an option, but could small firms afford the capital investment or the transition time? A more expensive workforce thus may lead to a net exit of firms from an industry.

Considering the complexity of America’s economy, does new minimum wage research still support traditional theory? Recent debate is divided, particularly as most studies concentrate on city- or state-wide cases.[6] Work mobility, which can significantly impact the outcomes of a local increase, would be negated by a $15 federal floor, since low-skilled workers would have no financial incentive to move based upon the minimum wage. Studies on the short-term effects of wage hikes underestimate the quantity of labor cuts: as companies have more time to develop cheaper and more efficient technology to replace workers, more employees may be let go.[7] With all these factors, it may be difficult to extrapolate short-term state or local data to a wider long-run perspective. However, research still suggests risks that may translate to the national level.

To test theory, one should look to domestic cases where recent laws substantially raised the local wage. In 2014, Seattle became the first major city to establish a $15 minimum wage, to be reached incrementally by 2019.[8] Proponents argue the wage lowered unemployment, but the national rate has been falling steadily since the end of the Great Recession. In fact, a 2016 study by the University of Washington found that Seattle was “lagging behind” comparable cities across the country. Isolating the effects of the wage ordinance, the study concluded, “the minimum wage appears to have slightly reduced the employment rate of low-wage workers by about one percentage point.”[9] The same research team deduced that the new wage reduced hours in low-wage jobs by 9%, lowering the average monthly earnings of low-wage workers by $125.[10]

New research substantiates the risks of a $15 wage on businesses as predicted by theory. A 2017 study from the Harvard Business School looked at small restaurants in the San Francisco area and found that each dollar increase in the minimum wage led to a 14% increase in the chances of an average (3.5 star) restaurant closing its doors.[11] In an interview for this essay, Rep. Jim Knoblach recalled how a 2006 minimum wage increase impacted his district. “Within 30 days, there were six different restaurants that closed. Some were replaced by other restaurants, but instead of service restaurants, they were restaurants that didn’t have waiters or waitresses.”[12]

Evidence suggests a $15 federal wage may hurt non-working Americans, too. Only 9% of “blue collar” employees have cost-of-living adjustments built into their retirement plans.[13] Elderly living on private pensions may struggle to make ends meet with a fixed income that is quickly shrinking in value because of rising prices. Even those living on inflation-indexed welfare might be in trouble. The number of social security beneficiaries has increased by more than 33% since 2000.[14] As more Americans live longer into retirement, these programs face disconcerting long-term financial solvency issues that would be exacerbated by a $15 wage floor.

Raising the federal wage to $15 could accelerate the movement of American jobs to other countries. In 2014, Duke professor Campbell Harvey surveyed 400 U.S. CFOs to gauge the potential impact of a $10 federal minimum wage. About 70% indicated they would “increase contracting, outsourcing, or moving actual production outside the United States.”[15] If the wage floor was raised to $15, how many more firms would ship jobs south or across the Pacific?

Decreasing poverty rates among families with children is an admirable goal, but a $15 floor carries imposing risks. Is there a different route Congress could take? One option is to expand the Earned Income Tax Credit (EITC) program, which offers tax refunds to low-income households. Economists David Neumark and William Wascher isolated the effect of the EITC on Americans with an income-to-needs ratio of 1.5 or less. They found that, if implemented on state and national levels, the program increased the rate of families with children transitioning from poverty to above poverty-level earnings by between 25 and 33%, affirming that “the EITC is more beneficial for poor families than is the minimum wage.”[16] A 2011 survey of the American Economic Association also found that 62.5% of its members favored expanding the EITC in some way.[17] Only 29 states and the District of Columbia currently offer a state-level EITC.[18] Congress should consider expanding the federal EITC so that all of its beneficiaries across the nation get the same help as those currently residing in states with their own EITC program.

The “Fight for $15” movement is noble, but doubling the national wage floor poses too many risks, especially since a more proven method of attacking poverty among U.S. families exists in the EITC. Congress should expand the EITC instead of considering a federal wage hike.

References and Endnotes

[1] Administration of Barack Obama, “Statement on the Minnesota Legislature’s Passage of Legislation To Raise the Minimum Wage,” Apr. 10, 2014, retrieved from https://www.govinfo.gov/app/details/DCPD-201400257.

[2] The “Fight for $15” movement appears to promote a $15 minimum wage for all American workers, disregarding their age, field of employment, or the size of their employer. Many states with their own minimum wage laws have exemptions that allow certain employees to be paid less (such as workers under the age of 18, tipped workers, and those who work for very small businesses). Some locales that have passed a $15 minimum wage have such exemptions: Seattle’s minimum wage law allows employees to include tips and medical benefits payments towards the compensation threshold (see https://www.seattle.gov/laborstandards/ordinances/minimum-wage/small-employers). However, some do not: Minneapolis employers were unsuccessful in their plea for a tip exemption (see https://twincities.eater.com/2017/6/30/15904480/minneapolis-city-council-passes-15-minimum-wage-tip-credit-penalty). While a federal $15 wage floor may or may not include exemptions for certain employees, it is important to note that any increase would still raise the minimum compensation requirement for even those employees who qualify for an exemption. Therefore, the effects of such a hike would still be relevant to every American employee and employer, no matter their employment status.

[3] I would like to thank the following people whose teaching or insight helped me write this essay: Mrs. Rachel Chrest, my validator at Spectrum High School, Prof. Philip Hampton and Prof. Jane Ruliffson, my economics professors through the PSEO program at Anoka-Ramsey Community College, Dean King Banaian and Dr. Monica Garcia-Perez, professors in the economics department at St. Cloud State University whom I interviewed, and Rep. Jim Knoblach (R-St. Cloud), Chair of the Minnesota House Ways and Means Committee from 2003-2006 and from 2014 to present, who also agreed to be an interviewee for this project.

[4] Campbell R. McConnell, Stanley L. Brue, and Sean M. Flynn, “Microeconomics: Principles, Problems, and Policies,” 21st edition, McGraw Hill (2018): p. 49.

[5] Southern states such as Georgia, who has a minimum wage lower than the federal floor, Texas, Oklahoma, and North Carolina, who have the same minimum wage as the federal floor, and Louisiana, Mississippi, Alabama, Tennessee, and South Carolina, who have no state minimum wage and therefore follow the federal floor, contrast with Northern and Western States, most of which have their own established wage that is higher than the federal minimum.

“Minimum Wage Laws in the States,” United States Department of Labor, Jan, 1, 2018, retrieved from https://www.dol.gov/whd/minwage/america.htm.

[6] Interview with Dr. King Banaian, Apr. 12, 2018. Banaian, a former member of the Minnesota House of Representatives, currently serves as the Dean of the School of Public Affairs at St. Cloud State University.

The heated conflict between American economists on the effects of a substantial minimum wage hike on businesses and their employees is personified by an ongoing debate between pro-wage economists Sylvia Allegretto, Arindrajit Dube, et al. and anti-wage economists David Neumark and William Wascher. In response to Allegretto and Arindrajit’s article, “Credible Research Designs for Minimum Wage Studies,” Neumark and Wascher wrote an extensive counterargument which was published in the Industrial and Labor Relations (ILR) Review (see http://journals.sagepub.com/doi/full/10.1177/0019793917698429). Allegretto and Arindrajit, in turn, wrote a response to the counterargument, which was published in the same issue of the ILR Review (see http://journals.sagepub.com/doi/full/10.1177/0019793917692788).

In contrast, according to Dr. Banaian, research from other nations, especially those in Europe, are more consistently against using substantial wage hikes to as a public policy to help the working poor.

[7] Interview with Dr. Monica Garcia-Perez, Apr. 12, 2018. Garcia-Perez, an economics professor at St. Cloud State University, contributed to a study for the city of Minneapolis, Minnesota, on the effects on a proposed minimum wage hike two years ago.

The majority of modern studies on minimum wage can be categorized as short-term, especially those relating to the “Fight for $15” movement.

[8] Martin S. Garfinkel, “Minimum Wage Ordinance,” City of Seattle Office of Labor Standards, retrieved from https://www.seattle.gov/laborstandards/ordinances/minimum-wage.

[9]The Seattle Minimum Wage Study Team, “Report on the Impact of Seattle’s Minimum Wage Ordinance on Wages, Workers, Jobs, and Establishments Through 2015,” University of Washington, Jul. 2016, retrieved from https://evans.uw.edu/sites/default/files/MinWageReport-July2016_Final.pdf.

[10] The Seattle Minimum Wage Study Team, “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle,” University of Washington, Jun. 2017, retrieved from https://evans.uw.edu/sites/default/files/w23532_0.pdf.

[11] Dara Lee Luca and Michael Luca, “Survival of the Fittest: The Impact of Minimum Wage on Firm Exit,” Harvard Business School, Apr. 11, 2017, retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2951110.

[12] Telephone interview with Representative Jim Knoblach, Apr. 4, 2018. Knoblach served as the Chair of the Minnesota House Ways and Means Committee from 2003-2006 and from 2014.

[13] “National Compensation Survey: Employee Benefits in Private Industry in the United States, 2000,” Bureau of Labor Statistics, Jan. 2003, retrieved from https://www.bls.gov/ncs/ebs/sp/ebbl0019.pdf.

[14] “Social Security Beneficiary Statistics,” Social Security Administration, retrieved from https://www.ssa.gov/oact/STATS/OASDIbenies.html.

[15] Campbell Harvey, “Duke Prof: $10/hour Minimum Wage Would Cause Mass Layoffs, Slash Benefits,” Duke Fuqua School of Business, Sep. 10, 2014, retrieved from https://faculty.fuqua.duke.edu/~charvey/Media/2014/WB_September_10_2014.pdf.

[16] David Neumark and William Wascher, “Using the EITC to Help Poor Families: New Evidence and Comparison with the Minimum Wage,” The National Tax Journal 54 (June, 2001): 281-317, retrieved from http://www.jstor.org/stable/41789549.

[17] Dan Fuller and Doris Geide-Stevenson, “Consensus Among Economists — An Update,” The Journal of Economic Education 45 (2014): pp. 131-146, retrieved from https://doi.org/10.1080/00220485.2014.889963.

[18] “State Earned Income Tax Credit Programs,” Governing Institute, Sep. 25, 2017, retrieved from http://www.governing.com/gov-data/finance/state-earned-income-tax-credit-list-map.html.