Should we raise the US minimum wage? Why people disagree — and what solutions might really work.
You've heard it before: Most Americans have seen pay stagnate, while the costs of education, rent, health care, buying a home and starting a family keep rising. Those are among the reasons states and cities from Illinois to Minneapolis are currently weighing whether to raise their minimum wage to $15 per hour, as Seattle did in 2014.
Today more than half of all U.S. states have pegged pay above the present federal minimum of $7.25. Proponents of raising the wage argue that it is inhumane to pay people so little, since it leaves no room for unexpected expenses — like a medical bill, for example — that could mean going without food or housing. But some economists argue that setting legally mandated pay too high could actually backfire, by reducing the number of jobs available to people living close to the poverty line.
What is the truth? Unfortunately, it’s complicated: A pair of recent studies studying Seattle’s minimum wage experiment were both released this month, and they seemed to reach conflicting conclusions.
The first, from University of Washington researchers, found the minimum wage actually decreased earnings for the lowest-income workers by about $125 a month on average. Their findings have since been criticized by the progressive Economic Policy Institute and the Center for American Progress, while a separate study, this one from scholars at the University of California at Berkeley, found no evidence that wages or employment fell. That second study has been criticized as well, with the Seattle Weekly pointing out that the timing of the studies’ release is adding to the confusion.
The latest developments in Seattle just go to show how politicized the topic of the minimum wage is — and how quickly proponents or opponents seize on whatever data out there seems to support their opinion.
Need more help sorting out the facts? Here are some leading arguments for and against raising the minimum wage, plus a few ideas for innovative solutions to actually help lower-income Americans.
The case for raising the minimum wage
A true living wage — meaning enough money to cover basics like food, medicine, housing and transit — would be about $16 an hour, according to 2016 research out of the Massachusetts Institute of Technology, which looked at the needs of a hypothetical U.S. family with two kids and two working adults. Even a single adult with no dependents, living in an inexpensive city like Mobile, Alabama, for example, needs more than $11 an hour to survive, MIT found, while that person might need closer to $13 in a pricier city like Seattle.
That's a far cry from the sub-$8-an-hour federal minimum wage, and includes just the bare essentials — leaving no room for retirement or other types of saving. "The living wage model does not allow for what many consider the basic necessities enjoyed by many Americans," wrote MIT professor Amy Glasmeier, who noted examples like prepared meals, entertainment and leisure time. "It does not provide a financial means for planning for the future through savings and investment or for the purchase of capital assets."
Sounds compelling, right? Not so fast.
Minimum wages can have downsides
Unfortunately, helping the most financially vulnerable Americans might be more complicated than simply raising minimum hourly pay. Indeed, some economists argue that higher mandated wages could increase poverty — since increased labor costs may reduce the number of open low-skill jobs.
At least that's a common interpretation of the paper from the University of Washington, which was commissioned by the city to study effects of Seattle's 2014 ordinance hiking the minimum wage to $15 an hour over four annual increments. The authors found that Seattle's minimum wage experiment might be backfiring.
"The page in the playbook that businesses really went to was to cut back on labor," Jacob Vigdor, a University of Washington professor who led the study, said in an interview. "That seemed to be what it boiled down to."
Cutting back on labor led to fewer hours for minimum wage workers, which in turn meant less money: about $125 per month in reduced take-home pay, the authors found. Conservative media was quick to take a victory lap on the news that Seattle's progressive experiment seemed to be failing. On Thursday, the study was the subject of a Wall Street Journal editorial: “Political wage-setting hurts the least skilled and lowest-paid workers.”
But this same month, the second report — from researchers at the University of Berkeley, commissioned by Seattle's mayor — also looked at effects of Seattle's minimum wage. What the Berkeley authors found was that the "policy achieved its goal," noting that pay for minimum wage restaurant workers increased and employment was not affected. Their study of Seattle was in line with "with the lion’s share of results in previous credible minimum wage studies," the authors wrote.
That's not soon enough for Minneapolis and Illinois, where politicians are voting on the minimum wage this summer. But the fact that two practically contradictory studies on the same city's minimum wage came out within weeks of one another naturally begs the question: Is a $15 minimum wage really a good solution for fighting poverty?
There's evidence raising the minimum wage has negative "side effects"
Measuring the effects of a minimum wage is challenging. Many people work in different locations from where they live, for example, which makes it hard to figure out who is getting what benefits. Some minimum wage workers get tips or work part-time, which leaves variables for economists to untangle.
Faced with a higher minimum wage, employers might lean more on a smaller number of higher-paid workers — and that also creates something of a conundrum for economists: Do those employees count as minimum wage workers who got a raise, or as a sign of cutting back on hours for the lowest-wage workers? Indeed, one of the chief criticisms of the University of Washington study, said University of Berkeley's Michael Reich in an email, was that Vigdor's team counted "workers who moved to higher minimum wage jobs in fast food as job losses, rather than pay gains."
"Much of the previous literature focused on the restaurant industry," Vigdor said, but "the majority of low-wage jobs ... are not in the restaurant industry."
When they looked outside the restaurant sector, Vigdor's team found that employers were reducing labor costs by cutting hours for their least-skilled workers — not necessarily a good thing for labor proponents. As he put it in a Washington Post interview, "we're removing the bottom rung of the ladder."
But does Vigdor's study actually suggest we should do away with the minimum wage entirely? Not quite, and lot of questions still remain, Vigdor said.
For one, Seattle is an unusual place, with a booming tech economy, low unemployment, and expensive real estate costs. It's quite possible, Vigdor said, that rising labor and rising real estate costs at the same time may have been too much of a one-two punch for employers to simply absorb. Vigdor also noted that while a 9% reduction in hours definitely sounds bad, averages can be misleading. "That’s a combination of people whose hours went down 100%, versus people whose hours who didn't go down at all. The mileage may vary for different workers here."
Taken together, Vigdor says his findings indicate that raising the minimum wage is still a possible remedy for people concerned about income inequality, but as with any medication there's a possibility of side-effects: "You have to be a little bit concerned with some of these side effects here, but... there’s still an argument for giving it a try."
The case for raising the minimum wage might be even stronger
Some labor advocates quickly found what they say are problems with Vigdor's findings. "The Seattle study is fundamentally flawed in a series of ways, and because of that, it doesn’t provide any kind of reliable guidance," said Ben Zipperer, an economist with the partially labor-backed Economic Policy Institute. "It’s very unlikely that the minimum wage is causing income and employment gains at the high end” and the growth in higher wage jobs might instead reflect a tight labor market in which job openings outnumber workers.
In other words, it is notable that jobs paying more than $19 an hour grew so substantially in number, Zipperer said, not just jobs paying a little bit above $15.
Another problem with the study? Even proponents of raising the minimum wage, like Zipperer, concede that doing so places a bigger burden on smaller businesses than larger ones. But Vidgor's study didn't look at those multi-location employers, which make up some 40% of employment, Zipperer said.
"It’s harder for small businesses to deal with [higher labor costs], but bigger chains can better weather it," Zipperer said. "So what you see is that employment will shift from single-establishment to multi-establishment. [The University of Washington] study picks that up as job loss, so that makes it biased towards finding job loss even when there’s no job loss at all."
Why were so many multi-establishment employers missing from the data? It has to do with the blurry lines between city and suburb, said Hilary Wething, another researcher on the University of Washington team.
"The biggest drawback is that we don’t have 40% of Seattle’s workforce. This was not an omission of choice," Wething said. "We need a certain identifier to say which workers in multi-site firms are in Seattle. They may be in Seattle, or they may be in a nearby town like Everett or Tacoma."
Wething said the team is working with the city to incorporate those workers from multi-site firms. The team is also working with Washington State Department of Social and Health Services to better understand the law’s impact on poverty, and is compiling surveys from business owners to better understand how they adapted to the new law. All that follow-up work, they say, will leave them with a much clearer picture of how the minimum wage hike is really going.
So what should we do to help minimum wage workers?
At the very least, the two contradictory studies suggest that raising the minimum wage is not an unambiguous way to address poverty. Indeed, not very many Americans actually make the minimum wage: Pew estimates that only about 3.3 million workers are paid at or below that level. That's possibly why one 2016 position paper from the Center for American Progress about falling wages instead focuses mostly on improving labor standards, collective bargaining and public works projects — which can lower the unemployment rate to help ensure more Americans can earn a living.
After all, a minimum wage hike doesn't even help you that much if all of your other expenses are rising even faster. That same CAP study found that rising costs are decimating middle class wealth: Housing and utility costs rose nearly 50% between 2001 and 2016, while medical costs rose more than 70% and education and childcare costs nearly 114% during that same time — all far surpassing inflation.
In light of all that, it should come as no surprise that Seattle's minimum wage experiment was no silver bullet. "We want as many policy arrows in the quiver," Zipperer said. "Sometimes other policies are better at solving certain things." Like what?
Progressive U.S. cities are experimenting with other ways to alleviate poverty that pull levers outside of wages. Portland, Oregon, for example, recently floated the idea of taxing companies with an extremely large ratio of CEO-to-worker pay and using the money to support the homeless. It's a radical idea for sure, but theoretically could accomplish the double feat of creating services for housing while incentivizing companies to pass more profits on to their workers.
A less radical idea, wrote Josh Barro for Bloomberg, would be to expand the earned income tax credit, a policy that would essentially distribute money directly to low-income Americans. It would presumably increase the deficit, Barro notes, but would alleviate poverty without creating a disincentive to hire.
Finally, other scholars argue that complex policy solutions are not the only option. Rather than using middlemen and government agencies to help people, the thinking goes, it would really be much simpler to just give poorer people cash. In places trying this out — like Latin America, Africa and Asia — it is hoped that these so-called cash transfers lead to better health and education outcomes without encouraging "temptation spending" on items like cigarettes.
Perhaps the simplest idea of all? Some thinkers propose a so-called universal basic income, particularly as automation threatens to replace many low-skill jobs. With a UBI — currently being tested out in countries like Finland — everyone gets a small stipend that is enough to cover basic human needs.
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