Summary
An estimated 46.3 million workers would be affected by
a lifting of the federal minimum wage to $15.00/hr. Public policy research is split
on the minimum wage issue. However, there is case evidence that increased salaries
are a net positive for business. A sterling example is a case study comparison,
in 2006, of two similar and ultra-competitive stores, Walmart’s Sam Club and
Costco. Costco’s stable, productive workforce more than offsets its
higher labor costs (Cascio) , estimated at the
time as $17.00/hr at Costco compared with $11.52/hr at Walmart. Evidence from recent minimum wage rises at the state level in New York and California support this view.
Background
The federal minimum wage is $7.25/hr. This was set in
2009 as part of the Fair Labor Standards Act (FLSA). “[FLSA] applies to
employees of enterprises that have annual gross volume of sales or business
done of at least $500,000. It also applies to employees of smaller firms if the
employees are engaged in interstate commerce or in the production of goods for
commerce, such as employees who work in transportation or communications or who
regularly use the mails or telephones for interstate communications. Other
persons, such as guards, janitors, and maintenance employees who perform duties
which are closely related and directly essential to such interstate activities
are also covered by the FLSA. It also applies to employees of federal, state or
local government agencies, hospitals and schools, and it generally applies to
domestic workers. (U.S. Department of Labor) ” The minimum wage
does not increase with inflation or cost of living rises. Congress must pass
legislation to raise it (U.S. Department of Labor) . This fact can make
it much more difficult to raise the minimum wage especially compared to
automatic increases tied to the cost of living. Especially now, in the
hyper-partisan environment in Washington, any compromise can be difficult. States
have begun to pass minimum wage laws on their own; two states have passed $15/hr.
minimum wage laws (National Conference of State
Legislatures (NCSL)) . Eleven states (as of June, 2016) have
tied their minimum wage laws to the cost of living (National
Conference of State Legislatures (NCSL)) with more in the
works. Along with the momentum in
state legislatures, there is a growing national activist movement to raise the
minimum wage to $15 (Lathrop, Tung and Sonn) . The activists have used
protests, lobbying, strikes, social media campaigns, and other advocacy tools.
Impact
About 42% of U.S. workers currently make less than
$15/hr. (Lathrop, Tung and Sonn) and about 73% of the
full-time U.S. workforce is covered by FLSA (Eisenbrey, Gornick and Heron) . Using these data as
an approximation, extrapolating to the employed labor force of 151 million as
of May 2016 (Bureau of Labor Statistics) , an estimated 46.3
million workers would be affected by a lifting of the federal minimum wage to
$15/hr. Many industries would be
affected substantially by this change, especially those with high ratios of
salaries to operating expenses, like health care services (52%) and educational
services (50%) (Majesky) and, of course, industries
with high ratios of low-wage workers, like the food and restaurant industry. Even those with lower ratios of salaries to
operating expenses and higher salaries like construction/mining and oil/gas
(22%), and retail/wholesale trade (18%) (Majesky)
still could be potentially see a rise in operating expenses and so have some
tough decisions to make. Due to the
current political and social environment surrounding the minimum wage fight,
companies that pay their workers at or near the minimum wage can often face
backlash, which could hurt their image, brand, and potentially bottom line.
Business Case for Minimum Wage
Policymakers should raise the minimum wage to $15 by
2021 and create automatic increases tied to the cost of living. The economic
evidence favors the pro minimum wage hike argument. Low pay and benefits
don’t necessarily translate into lower costs in the long run due, in a large
part, to the effects of turnover. The comparison of Costco and Wal-Mart’s Sam’s
Club is a relevant case study. Harvard Business Review looked at the case in
2006. Walmart has since begun to change its wage policies (Lam) . While some see the
moves as purely public relations - “after Walmart’s last wage increase
stunt, many workers almost immediately saw their hours cut and take-home pay go
down (Lam) ” - it may actually
make sense from a cost perspective. At the time of the case, Costco and Walmart’s
Sam’s Club competed fiercely on low-margin, low-price merchandise. Costco had
about 50% of the warehouse retailers market. Sam’s Club - with 551 stores and
110,200 employees in the United States - was number two, with about 40% of the
market. The average wage at Costco was $17
an hour. It was estimated Sam’s Club’s average hourly wage was $11.52. On the
benefits side, 82% of Costco employees have health-insurance coverage, compared
with less than half at Wal-Mart. Costco’s
practices are clearly more expensive, but there is an offsetting effect: turnover
was unusually low, at 17% overall. In contrast, turnover at Wal-Mart was 44%
per year. The estimated cost of replacing a worker who leaves is typically 1.5
to 2.5 times the worker’s annual salary. The studied assumed, conservatively,
that the total cost of replacing an hourly employee at Costco or Sam’s Club was
only 60% of his or her annual salary (rather than 1.5-2.5 times). So, if a
Costco employee quits, the cost of replacing him or her was therefore $21,216.
If a Sam’s Club employee leaves, the cost was $12,617. Considering turnover of 44%
versus 17% - the total annual cost to Costco of employee turnover is $244
million, whereas the total annual cost to Sam’s Club is $612 million. So, in
return for its generous wages and benefits, Costco has one of the most loyal
and productive workforces in all of retailing and actually saves money relative
to Sam’s Club. While Sam’s Club and Costco generated $37 billion and $43
billion, respectively, in U.S. sales last year, Costco did it with 38% fewer
employees. As a result, Costco generated $21,805 in U.S. operating profit per
hourly employee, compared with $11,615 at Sam’s Club. Costco’s stable, productive
workforce more than offsets its higher costs (Cascio) .
The modest increase in predicted
costs of raising the minimum wage to $15 can be offset with price increases
that are much smaller than inflation. A study conducted by UC Berkeley staff on
the effects of a $15 minimum wage in New York concluded that payroll cost
increases would average 3.2 percent over the entire for-profit economy.
Employee turnover reductions, automation, and increases in worker productivity
will offset some of these payroll cost increases. Businesses could absorb the remaining payroll
cost increases by increasing prices slightly - by 0.14% per year. This price
increase is well below annual inflation of nearly 2% over the past five years (Allegretto, Jacobs and Montialoux) .
There is much evidence that productivity increases as wages increase. A 2016 study
implied that an increase in hourly pay from $10 to $15 increases the level of
productivity by 0.5 percent (Burda, Genadek and Hamermesh) . When the average
productivity growth is 1.0%, 0.5% is a significant level. Reduced employee
turnover means that workers will have more tenure with the same employer, which
creates incentives for both employers and workers to increase training and
therefore worker productivity. A large scholarly literature makes this point,
and it has been used by Walmart, TJ Maxx, and The Gap to justify increases in
their minimum wages nationally to $10 (Allegretto, Jacobs and
Montialoux) .
In addition, wage increases bring about higher worker productivity because when
employers pay workers more, workers are more willing to be more productive, or
they remain with the firm longer and thereby gain valuable experience, or the higher
pay tends to reduce idleness on the job. This result holds whether one company
raises its wages, or whether all do (Yellen and Akerlof) . Productivity and
idleness are an important consideration for businesses.
Public Policy Case for Minimum Wage
First, raising the minimum wage would increase
economic activity. The Economic Policy Institute found that a minimum wage
increase from the current rate of $7.25 an hour to just $10.10 would inject
$22.1 billion into the economy and create about 85,000 new jobs over a
three-year phase-in period (Cooper) . Part of the reason
for this is that lower and middle class households, those who would be affected
by minimum wage hikes, tend to put money directly back into the economy by
spending a much larger percentage of their paychecks on food, housing, and
other goods and services rather than savings and investments like the upper
class (Ehrenfreund) . That is exactly
what a study out of Chicago found. Following a minimum wage hike,
household income rises on average by about $250 per quarter and spending by
roughly $700 per quarter for households with minimum wage workers (Aaronson,
Agarwal and French, The Spending and Debt Responses to Minimum Wage Increases) . In fact, FDR used
this exact argument in his State of the Union in 1938 to advocate for the
original minimum wage law, saying that those “who have the least of it today,
the purchasing power of the Nation as a whole – can be still further increased,
(and) other happy results will flow from such an increase. (Roosevelt) ”
Second, increasing the minimum wage would reduce
poverty. According to a 2014 Congressional Budget Office report, increasing the
minimum wage to just $9 would lift 300,000 people out of poverty, and an
increase to $10.10 would lift 900,000 people out of poverty (Congressional Budget Office) . It is likely,
therefore, that a rise to $15 would lift well over a million people out of
poverty. This poverty reduction would also reduce the pressure on government
programs like Medicare and food stamps as some of the burden is transferred
from government to businesses. The Center for American Progress found that raising
the federal minimum wage by 6% to $10.10 would reduce spending on the
Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps)
by 6% or $4.6 billion (Reich and West) . One can assume that a rise to $15
would reduce the spending even further.
Third, the minimum wage has not kept up with cost of
living increases and so purchasing power for low wage workers has eroded. The
minimum wage in 1968 was $1.60, which is equivalent to $11.16 in Jan. 2016
dollars. That is 53.9% higher than today's $7.25 federal minimum wage. Between
July 2015 and the last increase in the minimum wage in 2009, the federal
minimum wage has lost 8.1% of its purchasing power to inflation (US Department
of Labor) (Bureau of
Labor Statistics) (DeSilver, 5
facts about the minimum wage) .
Lastly, increasing the minimum wage would reduce
income inequality. A 2015 study found that the decrease in the
inflation-adjusted value of the minimum wage since the 1980s has been a
contributor to America's high levels of inequality (Autor,
Manning and Smith) . The
implication is that increasing the minimum wage would help to reverse the trend
of growing inequality. This has been a major campaign theme in the current
political year, so there may be support to raise the minimum wage based on the
widespread acknowledgement of this issue.
Public Policy Case
against Minimum Wage
Increasing the minimum wage would force businesses to
lay off employees and raise unemployment levels. The Congressional Budget
Office projected that a minimum wage increase from $7.25 to $10.10 would result
in a loss of 500,000 jobs (Congressional Budget Office) . Raising to $15
could extend that number over one million. Employers may choose to either
eliminate the jobs that used to pay between the old and new minimum wage or
would automate them, if possible. One reason for the discrepancies among
findings regarding unemployment effects is that many studies are centered on
“modest increases” to the minimum wage that find little to no effect on
employment. Raising the minimum wage from $7.25 to $15, for example, would not
be modest. Looking broadly at minimum wage research, there are very few
studies that provide convincing evidence of positive employment effects of
minimum wages. Second, the studies that focus on the least-skilled groups, such
as those making minimum wage, provide relatively overwhelming evidence of
stronger unemployment effects for these groups (Wascher) .
Secondly, raising the minimum wage would increase the
price of consumer goods. A 2013 article by the Federal Reserve Bank of Chicago found
that if the minimum wage is increased, employers with minimum wage earning
employees would pass on almost 100% of their increased labor costs on to
consumers in the immediate aftermath of the wage rise and that other firms may
do the same (Aaronson) . An example of this occurred
when the price of a cup of coffee went up by 10 to 20% in Oakland, California,
after a 36% minimum wage hike in the city to $12.25. The report also found a
6.7% rise in coffee prices in Chicago after the minimum wage rose to $10 (Abramo) . The effect here is
that a section of the labor force makes gains at the expense of a broad base of
consumers who lose out by paying higher prices for consumer goods. This is
potentially a rallying argument for a coalition of consumer groups against
minimum wages hikes.
Third, raising the minimum wage would negatively
impact low-skilled workers, teenagers, and young adults. 50.4% of minimum wage
workers are aged 16-24 (DeSilver, Who Makes Minimum Wage?) . The New York Times
reported that after a rise in the unemployment rate in July 2009, teen
employment fell by 8% in the next three months (Mulligan) .
Granted, it was during a recession, but the rate of job loss did appear to
accelerate after the change. Another study found that minimum wage increases
result in reduced average monthly incomes for low-skilled workers of $100 less
during the first year following a minimum wage increase and $50 over the next
two years due to a reduction in employment for the group overall (Clemens and Wither) . This all adds up to
a big problem if the groups you are trying to help by raising the minimum wage
are actually hurt in the short- and long-term by eliminating the jobs they once
held.
Works Cited
Aaronson, Daniel. How does a federal minimum wage
hike affect aggregate household spending? Fed Letter. Chicago: The Federal
Reserve Bank of Chicago, n.d. Document.
Aaronson, Daniel, Sumit Agarwal and Eric French. The
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Federal Reserve Bank of Chicago, 2011. Document.
Abramo, Allegra. Cost of Cup of Coffee Often
Climbs After Minimum Wage Hikes. 19 July 2015. NBC News Article.
Allegretto, Sylvia, et al. "The Effects of a $15
Minimum Wage in New York State." Center on Wage and Employment
Dynamics, UC Berkeley (2016): 4-5. Policy Brief.
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Smith. "The Contribution of the Minimum Wage to US Wage Inequality over
Three Decades: A Reassessment." American Economic Journal: Applied
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Cooper, David. "Raising the Federal Minimum Wage
to $10.10 Would Lift Wages for Millions and Provide a Modest Economic
Boost." Briefing Paper . 2013. Press Release.
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Other Works Consulted
Raisetheminimumwage.org
“Minimum Wage as Economic Stimulus” n.d. Website. June 2016.
