Business Case for Raising the Minimum Wage

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 Spending and Debt Responses to Minimum Wage Increases. Chicago: The 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.

Autor, David H., Alan Manning and Christopher L. Smith. "The Contribution of the Minimum Wage to US Wage Inequality over Three Decades: A Reassessment." American Economic Journal: Applied Economics (2016).

Burda, Michael, Katie R. Genadek and Daniel S. Hamermesh. "Not Working at Work: Loafing, Unemployment and Labor Productivity." The National Bureau of Economic Research (2016). Working Paper.

Bureau of Labor Statistics. CPI Inflation Calculator. n.d. June 2016.

—. "Employment status of the civilian population by sex and age." Economic News Release. 2016. Table.

Cascio, Wayne F. "The High Cost of Low Wages." Harvard Business Review (2006).

Clemens, Jefrrey and Michael Wither. "The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers." The National Bureau of Economic Research (2014). Working Paper.

Congressional Budget Office. "The Effects of a Minimum-Wage Increase on Employment and Family Income." 2014.

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.

DeSilver, Drew. "5 facts about the minimum wage." Pew Research Center (2015). 2016.

—. "Who Makes Minimum Wage?" Pew Research Center (2014).

Ehrenfreund, Max. "Where the poor and rich really spend their money." Washington Post 14 April 2015. Newspaper.

Eisenbrey, Ross, Janet C. Gornick and Alexandra Heron. "The Work-Family Balance: An Analysis of European, Japanese, and U.S. Work-Time Policies." Briefing Paper. 2007.

Lam, Bourree. "Walmart Workers Get a Raise, but Is That Enough?" The Atlantic (2016).

Lathrop, Yannet, Irene Tung and Paul Sonn. "The Growing Movement for $15." Research Paper. 2015. Document.

Majesky, Dooney, Gray. "Salaries as a Percentage of Operating Expense." Society for Human Resource Management (SHRM) (2008).

Mulligan, Casey B. "The Minimum Wage and Teenage Jobs." The New York Times 18 November 2009. Newspaper.

National Conference of State Legislatures (NCSL). STATE MINIMUM WAGES | 2016 MINIMUM WAGE BY STATE. n.d. Website. June 2016.

ProCon.org. Should the Federal Minimum Wage Be Increased? n.d. June 2016.

Reich, Michael and Rachel West. "The Effects of Minimum Wages on SNAP Enrollments and Expenditures." Report. 2014. Document.

Roosevelt, Franklin Delano. "State of the Union." 3 January 1938. Speech.

U.S. Department of Labor. Wage and Hour Division (WHD): Questions and Answers About the Minimum Wage. n.d. Website. June 2016.

US Department of Labor. "History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 - 2009." 2009.

Walmart 10-K. "Form 10-K." 10-K. 2016. Document.

Walmart. Walmart Policies and Guidelines. 2 May 2013.

Wascher, David Neumark and William. "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research." National Bureau of Economic Research (2006): 2. Working Paper.

Yellen and Akerlof. "Efficiency Wage Models of the Labor Market." Cambridge University Press (1986). Paperback.

Other Works Consulted

Raisetheminimumwage.org “Minimum Wage as Economic Stimulus” n.d. Website. June 2016.