Second Order Effects $15 Federal Minimum Wage
Premise of Article:
There have been many calls recently, mostly by labor unions, to set the Federal Minimum Wage at $15 an hour. This is double the current Federal Minimum Wage of $7.25. The principal augment is that you can’t support a family on the current Federal Minimum Wage and therefore can’t get off public assistance. This article discusses the potential ramifications of doubling the minimum wage and the impact. We discuss what would be reasonable, given the amount of time that has passed since the last raise. Also, ways that one could get employers to increase wages without a change in the minimum wage.
Bottom line:
A raise in the federal minimum wage is probably due. While many on the left would like to see $15 an hour, a more realistic rate of $8.00-$8.50 can be justified. There are other issues related to rising the federal minimum wage: indexing the wage like Social Security Payments, increasing economic growth to increase demand for low skilled labor and decreasing illegal low skilled workers; again to increase demand for low skilled labor.
Current Events and Basic Positions
The movement to raise the minimum wage to $15 per hour started back in November 2012. As the principal argument for the raise, the National Employment Law Project has stated that the current rate of $7.25 has “lost 30% of its value since 2009”. The history of this is outlined here. We can’t find any way to justify the 30% loss of value since 2009, it appears that they are mistaken, lying or inventing facts.
Today, a number of states that have passed laws that will eventually lead to $15 per hour minimum wage and city of Seattle is already there. At this point, the fight is mostly at the state level but the federal minimum wage would not be far behind if the supporters of this movement have their way.
On the other side of the argument are a libertarians and conservatives that feel that the market should decide the value of labor. Unskilled labor is a commodity like any other and that supply and demand should dictate value. If you want to increase wages, increase demand.
Facts:
Throughout this article the terms federal minimum wage and minimum wage are synonyms. If we are talking about a state or local minimum wage we will say that specifically. CONFLATION of these two things should be avoided.
Minimum Wage Facts:
Today’s federal minimum wage was set on July 24 2009 to $7.25. Most states have minimum wages that are higher than the federal minimum wage, a few are lower. Here is the breakdown:
- 6 States have no minimum wage (5 of these states are in the south east)
- Georgia and Wyoming have state minimum wage of $5.15 per hour
- 13 states and Puerto Rico have a $7.25 minimum wage, 11 of the states are interior states that are not on the coasts
- 29 states, Washington DC, Virgin Islands and Guam have a local minimum wage that is higher than the Federal Minimum Wage: $7.25.
- Washington DC has the highest minimum wage $11.50
- Washington state and Massachusetts are at $11
- California is at $10.50
- Seattle is the first city to have a $15 minimum wage — Not fully implemented until 2022 – for businesses that are smaller than 500 employees.
The 29 states that have minimum wages greater than the federal minimum wage, tend to be higher cost areas. If one thinks about this, it makes sense that higher cost areas would have higher minimum wages, so it would also make sense that the federal minimum wage would be the minimum for the lowest cost of living areas in the country. Using the cost of living in New York City as a justification for a $15 minimum wage in West Virginia is difficult to defend. But, one has to admit that not raising the federal minimum wage since 2009 seems to be a long time.
A potential benchmark for raising the Federal Minimum Wage might be the Social Security Cost of Living Adjustments. The table bellows shows what happens if one applied the SS COLA raises since 2009 to the Federal Minimum Wage:
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Many have stated that if you take the federal minimum wage from an earlier time, say 1974, and if you adjust the $2, 1974, minimum wage using the same technique shown in the table above the correct federal minimum wage should be $9.70. This 1974 federal minimum wage is a 25% increase over today’s $7.25. If you look at all of the changes in the federal minimum wage over the last 47 years. The 1978 federal minimum wage would be an even bigger change, $9.91 or 27% higher. The following table shows all of the years where the federal minimum wage has changed and what they would be if you used that number for the baseline. The whole table with all of the data is available here.
| Year MW changed | Minimum Wage (MW) | Adjusted
2017 |
Difference From Current | Percent |
| 1974 | $2.00 | $9.70 | $2.45 | 25% |
| 1975 | $2.10 | $9.43 | $2.18 | 23% |
| 1976 | $2.30 | $9.70 | $2.45 | 25% |
| 1978 | $2.65 | $9.91 | $2.66 | 27% |
| 1979 | $2.90 | $9.87 | $2.62 | 27% |
| 1980 | $3.10 | $9.23 | $1.98 | 21% |
| 1981 | $3.35 | $8.97 | $1.72 | 19% |
| 1990 | $3.80 | $7.24 | $(0.01) | 0% |
| 1991 | $4.25 | $7.68 | $0.43 | 6% |
| 1996 | $4.75 | $7.43 | $0.18 | 2% |
| 1997 | $5.15 | $7.83 | $0.58 | 7% |
| 2007 | $5.85 | $6.91 | $(0.34) | -5% |
| 2008 | $6.55 | $7.56 | $0.31 | 4% |
| 2009 | $7.25 | $7.91 | $0.66 | 8% |
| Average | $8.53 | $1.28 | 14% | |
The thing that the proponents of a $15 per hour minimum wage don’t show you is that they have cherry picked the year to justify a higher new federal minimum wage. If one used the 2007 minimum wage and adjusted it for inflation, the minimum wage should be 5% less than it is today. So, it is possible to defend almost any position using historical data.
Statistics on who is earning at the Federal Minimum Wage
The Bureau of Labor Statistics has published a study outlining all of the percentages associated with federal minimum wage earners for 2015. In the study here are some select facts:
- 870,000 individuals are making the federal minimum wage
- 1,691,000 individuals are making less than the federal minimum wage
- 395,000 of the federal minimum wage earners are older than 24 years.
- 1,013,000 wage earners make less than the federal minimum wage and are over 24 years old
- 1,056,000 wage earners working in food service professions make less than federal minimum wage
- 161,000 individuals older than 24 years, making the federal minimum wage are married
In the same study, the historical table shows the following:
- 2008 — 286,000 individuals making the federal minimum wage
- 2008 — 1,940,000 individuals making less than the federal minimum wage
The US Population On Jan 1, 2015 was: 319,854,907 and on Apr 1, 2010 it was: 308,745,538.
Living Wage Facts:
Many that support a raise in the minimum wage, want a living wage as the minimum wage. The following definition is the one we will look at:
Definition: The living wage is the amount of income needed to provide a decent standard of living. It should pay for cost of living in any location, and should be adjusted to compensate for inflation. The purpose of a living wage is to make sure than anyone who works full-time should have enough money to live above the poverty level and avoid homelessness.
Living Wage, based on Fed Poverty Level
| Persons in Household | Fed Poverty Level | Living Wage |
| 1 | $12,060 | $5.80 |
| 2 | $16,240 | $7.81 |
| 3 | $20,420 | $9.82 |
| 4 | $24,600 | $11.83 |
| 5 | $28,780 | $13.84 |
| 6 | $32,960 | $15.85 |
| 7 | $37,140 | $17.86 |
| 8 | $41,320 | $19.87 |
Discussion:
Assuming one thinks that there should be a minimum wage, many localities have good reason to have a minimum wage that is higher than the Federal Minimum Wage. These reasons are mostly related to cost of living and other factors that the local elected officials find important. The Federal Minimum Wage however, should be the lowest number for the whole country and localities with requirements for a higher minimum wage taken care of locally. Currently, there are 29 states with a minimum wage higher than the Federal Minimum Wage. Most of the states at the Federal Minimum Wage are in the south or Midwest where costs of living are low. So, the system of minimum wages (federal vs state/local) seems to be working as one would expect.
How Does a Minimum Wage Raise effect businesses and jobs?
The labor unions have been picking at McDonald’s and so we will use the cost of a Big Mac as labor rates change to demonstrate different issues. For the sake of argument, most of the variable cost of a Big Mac is labor to cook it and hand it to the customer. If we assume $1 for the bun, the burger and fixed costs like the rent for the building. The rest of the cost is labor. If you double the cost of labor, you should roughly double the cost of a Big Mac. If you adjust for the fixed costs of the materials and overhead one can calculate a reasonable model for the effects of raising labor rates. For the sake of this discussion the following is our notional changes in prices based on changes in labor rates if everything else stays the same:
- $7.25/hour = $4 Big Mac
- $11/hour = $5.50 Big Mac
- $15/hour = $7 Big Mac
The states and localities with higher minimum wages are largely higher cost areas of the country. As an example, Washington State has an $11 per hour minimum wage and Seattle has a $15 per hour minimum wage. Given the state’s minimum wage and Seattle’s geography, the $15 per hour wage would probably work there. You don’t have people working for $7.25 just outside the city and $15 inside, so you won’t get a $4 Big Mac two blocks from a $7 Big Mac. In addition, the geography (Seattle is a long city, bounded by large bodies of water on the East and West) prevents most people living in the city from choosing a $5.50 Big Mac over a $7 Big Mac, by just driving a short distance.
The experience in Seattle has been analyzed by many during the first year of application. The Seattle example is not anywhere near a complete implementation, so far only businesses with more than 500 employees are effected. In addition, at the same time that minimum wage increases were taking effect, Seattle’s economy was improving dramatically; the Seattle region’s economy experienced job growth at a rate three times faster than the national average. As a result, job growth in the Seattle area has swamped any projected losses based on the raise in minimum wage. A recent study by the University of Washington has found that the low wage job growth in Seattle was found to be 2.6%. In the region around Seattle, the low wage job growth was found to be 4%. So there has been a 35% lower growth rate in spite of the geographic isolation of Seattle’s economy and the rapid overall job growth. To quote the report:
“The major conclusion one should draw from this analysis is that the Seattle Minimum Wage Ordinance worked as intended by raising the hourly wage rate of low-wage workers, yet the unintended, negative side effects on hours and employment muted the impact on labor earnings.”
Again this is for an incomplete implementation. It is likely that the effect will be more profound as the implementation continues. If one tried to raise the minimum wage in Philadelphia or Pittsburg the outcome might be really different. Pennsylvania has a $7.25 minimum wage, if one or both of these cities raised their minimum wage to $15 per hour you would have $7 Big Mac’s within blocks of $4 Big Macs. What do you think would happen to the stores with $7 Big Macs, customers would drive a little further for the cheaper burgers and many of the stores inside the city would fold if they didn’t change their business model. So if you double the cost of labor, stores inside the city would have to cut their labor force in half. How could they do that? AUTOMATION. Go into a WAWA or Sheets and order a sandwich, you enter the order into a terminal yourself and don’t really talk to a human. So, it is likely that raising the minimum wage with sharp geographic breaks will encourage automation and loss of jobs for low wage employees.
How Many Try to Live on a Minimum Wage?
Many that support a $15 minimum wage claim that one can’t raise a family on the current minimum wage. This position has two assumptions built into it:
- There is a huge pool of individuals that can’t find work paying more that minimum wage or close to it.
- This group of individuals have to pay for a family of four on one minimum wage
If we go back to the statistics in the fact section, we will find that both of these assumptions are really not true.
It is likely that most of the wage earners over 24 years old and making less than minimum wage, make significant income from tips in the food service industry. This tip income is not included in these wages and in most cases is significantly more than minimum wage. So, the adults that make less than minimum wage are really not part of the group that are trying to live on a minimum wage. The 400,000 individuals over 24 years, making the federal minimum wage are where the hardships that proponents of the $15 minimum wage live. But only 161,000 of this group are married and could be potentially trying to raise a family. So this group – those couples trying to raise a family of 4 – makes up about 20% of minimum wage earners.
The calls for a living wage seem to be largely based on the cost of living in large cities, like New York. The proponents of the $15 federal minimum wage make it sound like everyone that makes the federal minimum wage will always make minimum wage and have to support a family on it. One might hear that while there are individuals that are chronically in minimum wage jobs, we suspect that they are few. Most individuals should find their way out of these jobs over time. The other effect of a raise in minimum wage is that individuals that make more than the minimum but less than $15 per hour would get a raise as well. This is really where the chronic working poor are.
Winners and losers
Winners and loser with a $15 Federal Minimum Wage
There are a number of number of individuals that will win:
- Anyone that has, and can keep, a job where the wage is controlled by the federal minimum wage standard
- Anyone that has, and can keep, a job where the wage is between the current federal minimum wage and $15 per hour
- Immigrants that are working in the US illegally, it is likely that even immigrants that work for less than the minimum wage, would get a raise
- Companies that produce automation products that replace low skill workers and a significantly smaller number of high skill workers in the US and other countries that can:
- design;
- produce; and
- fix these products
The first two items on the list above are obvious, if you raise the minimum wage, those effected will make more money. The Seattle study bears this out. But the Seattle study also shows that the job opportunities for low wage workers will be effected. It is likely that more employers would be tempted to cheat with respect to hiring immigrants working in the US illegally. They would be paid less and would not be counted toward the Affordable Health Care Act (AHCA) quotas related to requiring employers to purchase health care. Assuming this is true, more immigrants would be tempted to come to the US for work.
The losers:
Businesses that use large numbers of unskilled workers:
- Agriculture
- Services businesses like foodservice and lodging
Consumers would pay more for goods and services from businesses that use unskilled workers. More agricultural products would be shipped in as US farmers would have a harder time competing. The only solution for US farmers would be more automation, driving smaller farmers out of business or they would be more likely to cheat and use immigrants that are working in the US illegally. Hotels and restaurants would have to raise prices, the Seattle experience hasn’t shown this yet, but they are still early on implementation. One of the potential side effects that hasn’t been studied is the tip income, will the higher prices effect the tips?
The biggest loser would be young working poor that need to learn how to show up for a job, be on time and dress appropriately. These are the high school kids from working class families that need that first job and a chance. This will not effect the rich, they can afford to take non-paying internships that they use to learn the working world and start to develop business contacts and high powered mentors. The working class kids are the ones that make up close to half the minimum wage group. Driving up their salaries will be great for those that can find work, it will be truly detrimental to those who can not. Employers are going to be more careful about hiring and will consider automation first. Again, the Seattle study has shown that raising the minimum wage does effect low wage employment.
What should the Minimum Wage be?
The National Employment Law Project has stated that the current rate of $7.25 has “lost 30% of its value since 2009”. Using the Social Security Cost of Living Increases as a benchmark, and some simple math, the loss of buying power is more like 8.3%. If we looked at the average adjusted minimum wage over the last 40+ years, it looks like 14% raise or $8.50. If we took a couple of years to get there, this sounds doable. Keep in mind that this really only effects the states with a minimum wage that is less than $8.50 per hour. So, that would provide wage increases in the 23 states that use the Federal Minimum Wage and 7 states (DE, IL, MT, NV, NJ, OH, NM, and MO) and the territory of Guam where their current minimum wage is less than $8.50. So in the current low wage areas of the U.S. the minimum wage should be raised to $8.5, if you assume that SS COLA represents the true cost of living increase and that the average adjusted federal minimum wage is a reasonable benchmark.
One last thing, to keep this from coming up again and again being the constant fight, if you are going to have a minimum wage it should be indexed like social security. Both Republicans and Democrats should be for index the minimum wage:
- Both the parties will fight over the baseline number, but indexing should be in everyone’s best interest
- Democrats will fight for $15 per hour as the baseline and will likely vote against anything less, if they don’t get $15 per hour they will be against index any raise.
- Republicans will fight for an $8.00 to $8.50 baseline and may propose indexing but will not fight hard enough for it.
- The politics:
- Democrats are likely to take one of two views:
- The talking point will be that the baseline is too low and they won’t vote for indexing because it will lock workers into too low of a wage.
- The undercurrent could be that if the wage is raised automatically, the minimum wage stops being issue that the Democrats can beat the Republicans up about?
- Republicans will just say $15 an hour is too high and indexing appears to be too hard.
- Republicans should fight harder to index the federal minimum wage so they can take the target off their backs.
- Democrats are likely to take one of two views:
Potential Ways Forward Improve Wages for the Working Poor:
Economic growth is the best cure for low wages. Increase the demand for workers and the price that has to be paid will go up. In 2008, just after a period of decent growth rates, the number of individuals making the minimum wage was 1/4 what it is now. The growth over the last 8 years has be steady but slow, not one year over 3%. So, economic growth can raise wages without any legislation. Another way to raise wages is to reduce the size of the unskilled labor force, the legal way to do this would be to stop employers from hiring individuals that are not legally allowed to work. Changes to our immigration system to detect visa overstays and securing the southern boarder would go a long way toward reducing illegal employment.