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Why We Can’t Wait to Raise the Minimum Wage
Advocacy efforts to raise the federal minimum wage have been picking up steam since President Obama proposed raising it in his 2013 State of the Union address. The president proposed raising it to $9.00 an hour by 2015, an increase of nearly 25 percent from the current wage of $7.25. Not long after, Sen. Tom Harkin (IA) and Rep. George Miller (CA) introduced legislation to raise the minimum wage to $10.10 an hour.
In the 2014 Hunger Report, Ending Hunger in America, Bread for the World Institute argues the minimum wage should be $12.00 per hour. The obvious question people will ask is: why $12.00 instead of $9.00 or $10.10 (or some other number, for that matter). Our rationale for $12.00 is simple. In 2014, this is the wage a full-time, year-round worker would need just to cross the poverty line for a family of four, which amounts to annual earnings of $24,000. At $12 an hour, more than 40 percent of U.S. workers would get a raise, freeing tens of millions from the threat of hunger.
One of the main ways we will end hunger in America is by making the minimum wage a living wage for everyone in the low-wage workforce. In fact, I dare say we won’t end hunger in this country unless all workers are guaranteed a living wage. There may be alternate ways to define a living wage, but to keep things simple—in dollars and cents—pegging a minimum wage to a modest baseline such as the official poverty line for a family of four seems the least we can fairly do.
Let’s address the main arguments that are usually made to oppose raising the minimum wage. These may not be all of them, but they are the unavoidable ones that those of us who support a minimum wage increase should be prepared to meet with a solid rebuttal.
Raising the minimum wage will cause unemployment rates to rise. We’ve got many years of evidence that show there are few, if any, adverse effects on employment from raising the minimum wage. The example most often cited is a study done in 1994 that compared employment levels in adjoining counties of New Jersey and Pennsylvania. New Jersey set its own minimum wage, which was higher than the federal minimum. Pennsylvania pegged its minimum wage to the federal level. If the critics were right about the effects on unemployment, New Jersey is where you would expect to see levels rise. But the researchers found the employment levels comparable in both counties. Since this study appeared, there have been others that reached much the same conclusion.
One shouldn’t merely be playing defense. There are sound arguments to make as to why raising the minimum wage would actually create more jobs in the low-wage sector. The Economic Policy Institute analyzed the effects of the Harkin-Miller proposal and found that raising the minimum wage from $7.25 per hour to $10.10 would boost the wages of 30 million workers. The additional $51 billion they would be earning would mostly go directly back into the economy, generating demand for goods and services that employers would fill by hiring more workers. We are talking about jobs in food service and retail. These are not jobs that can be offshored. Mechanization is not going to displace these workers either. The science-fiction scenario that these workers can be replaced by robots is, well — science fiction.
The costs of raising the minimum wage will be passed on to customers. Yes, this is true, but the real issue is how much -- what kind of money are we talking about? The evidence shows that the effects on prices are nominal. In the 2014 Hunger Report, we cite a study by Demos on raising wages in the retail sector, which, after food service, has the highest number of low-wage workers. The study proposes a minimum salary of $25,000 for full-time work, which translates into roughly a wage of $12.50 an hour. Catherine Ruetschlin, the author of the study, focused on retailers with more than 1,000 employees (to give some perspective, Walmart has 2 million employees). Ruetschlin determined that it would cost less than 1 percent of a firm’s annual sales -- and if all those costs were passed directly onto consumers, the average household would spend just 15 cents more per shopping trip. The other industry that is worth looking at is food service. Restaurant Opportunities Center United and the University of California published a report on the effects of the Harkin-Miller proposal which found that an average household would spend about 10 cents a day more for food.
You would do less harm to employers by using the Earned Income Tax Credit (EITC) to compensate for low wages. Raising the EITC is a good idea too. The thing is, it’s not an either/or. The EITC is hardly enough to compensate for low wages. A family of four with a full-time minimum-wage worker who is eligible for both the EITC and Child Tax Credit (CTC) still ends up with 13 percent less than a poverty-level income. A popular argument for the EITC has been that it gives people an incentive to participate in the workforce. By the same logic, so would raising the minimum wage. For those of us concerned about hunger in particular, there’s an important reason why raising the minimum wage is paramount -- more vital than the EITC. The EITC comes in a lump sum with a family’s income tax return -- it's a tax refund. It’s great for paying down debts, affording big-ticket items such as getting a car fixed, or buying items that are not affordable when you’re living paycheck to paycheck. For staving off hunger, however, it is cash flow that matters most, which is why food stamps are more necessary in fighting hunger than the EITC. As for the effects on employers, it seems a little disingenuous to be arguing that if you already accept the premise that costs get passed on to consumers.
Most minimum wage workers are teenagers living with their parents. I call this one the "zombie" argument, because it never seems to die no matter how many times you present the data to kill it. The facts: among workers who earn the minimum wage, 88 percent are 20 years old or more. More than half work full-time, and half are in families that earn $40,000 or less per year. These are very likely families with young children, whom we should be particularly concerned with since the hardships associated with living in poverty during one’s earliest years have lasting effects on health, educational outcomes, and other quality-of-life determinants. The younger a child, the greater the chance she and her family will be in poverty. In the United States, in fact, children younger than 3 have the highest poverty rate of all children. In the 2014 Hunger Report, we argue for better policies to make more affordable childcare available to families with young children.
No one flipping hamburgers for a living deserves to be earning $12 an hour. If $12 seems like an exceptionally high wage, it’s mostly because we’ve come to accept very low wages as the norm in our society. In Australia, the minimum wage is $15 an hour—and the unemployment rate is 5.8 percent compared to 7 percent in the United States. The real value of the federal minimum wage peaked in 1968 at almost $10.50 in inflation-adjusted dollars. In other words, if the minimum wage had kept pace with inflation, it would be $10.50 today instead of $7.25. Had it kept pace with productivity growth, the minimum wage today would be $18.67. That sounds incredibly high. But in fact, if wages across the income distribution had been rising along with productivity growth, the median wage in the United States today would be $28.42. Instead, it is $16.30.
Since productivity growth has in fact remained strong, somebody must be reaping the benefits. As it turns out, the higher one’s income, the more gains from productivity growth one has been able to capture. It wasn’t always this way. From the end of World War II until about the middle of the 1970s, hourly compensation (wages and benefits) rose at the same rate as productivity growth for all workers. Income inequality is basically the story of the divergence of wages from productivity growth. As President Obama explained a few days ago in his speech on income inequality, reversing this trend is the defining economic challenge of our time. One place to start is by raising the minimum wage.
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