The Value of Increasing the Minimum Wage

One obvious way to increase the value and attractiveness of working is to increase the minimum wage. The federal minimum wage has been $7.25 per hour since 2009 but Congress does not seem interested in increasing it. Individual states, however, can set a higher minimum wage. West Virginia’s minimum is now $8.75, having been increased in stages over several years. Many other states have done the same. Increasing the minimum wage puts more money in the pockets of low-income people who will spend it in the economy, reduces dependence on public benefits and costs taxpayers nothing. This is seriously good policy.

The Benefits

Raising the minimum wage not only benefits those whose wages were below the new minimum, it benefits most all workers in the economy. Let’s take the example of a hypothetical gas station and convenience store operation open 24 hours, similar to Sheetz. Suppose that before an increase in the minimum wage the store employs a total of four stock clerks paid at the federal minimum of $7.25 to stock shelves and clean up. The store also employs five cashiers at $8.50, two assistant managers at $10 and one manager on salary.

Now suppose that state raises the minimum to $9. Obviously, the stock clerks who were receiving the previous minimum wage will get an hourly raise of $1.75. In addition, the cashiers’ prior wage would be below the new minimum so they will also receive at least a $.50 raise.  But, more likely, the employer will want to maintain the spread between the wages of the stock clerks and the cashiers so the latter will receive an even bigger bump – let’s say to $10.25.

Now the assistant managers will also have to receive a bump to keep them better compensated than the cashiers. The salaried manager will have to be paid more than the new total compensation of the assistant managers, which would include higher hourly pay plus overtime, so even salaried employees might benefit. In this way an increased minimum wage ripples through the employee ranks and the larger economy.

Raising the minimum wage thus puts more money into the pockets of low and middle income workers who will actually spend the money rather than save it. The more money in circulation, the greater the wealth-creating effect. This wealth creation is also “revenue-neutral” for governments since the increase in wages is not paid for with tax money. In fact, an increase in the minimum wage creates more taxable income for governments and fewer government costs in the form of Medicaid, food stamps and other forms of public assistance.

A 2016 report by the Economic Policy Institute concluded that an increase in the federal minimum wage would “unambiguously” decrease government spending on public assistance:

Among workers in the bottom three wage deciles, every $1 increase in hourly wages reduces the likelihood of receiving means-tested public assistance by 3.1 percentage points. This means that the number of workers receiving public assistance could be reduced by 1 million people with a wage increase of just $1.17 an hour, on average, among the lowest-paid 30 percent of workers.

The Costs

Business groups are the typical opponents of increasing the minimum wage. The reason, of course, is that wages are a significant component of the cost of operating a business, particularly restaurants. But businesses constantly have to deal with increasing costs of all kinds, including labor costs. Successful businesses develop strategies for dealing with these increasing costs.

Rarely will a business go under because of a rise in the minimum wage and if one does it was probably not a viable, long-term business anyway. And an increase in the minimum wage applies to all employers so there is no one who will have a competitive advantage, unless it is one that operates more efficiently.

Perhaps in recognition that their business reasons for opposing a higher minimum wage are a bit selfish and unconvincing, opponents argue that the workers themselves will suffer from an increase in the minimum wage. According to this argument, if employers are required to pay employees more they will hire fewer employees or will give existing employees fewer work hours.

But this has never made sense to me. Assuming the employer has a constant level of work, employees paid at the minimum, whatever that is, will still be the least expensive way of doing that work. Hiring fewer employees at the bottom would simply mean that existing workers will get more hours, not fewer.

Opponents are fond of pointing to one-off studies that show employment loss as a result of increasing the minimum wage. A study after the recent Seattle wage increase did find some employment loss among the lowest-skilled portion of the workforce. There the minimum wage was raised from $9.47 to $13 in two years. But usually employment loss is found only when there is a large increase in the minimum wage like this. 

Meta-studies allow us to put these one-off studies into perspective. Meta-studies use a set of well-defined statistical techniques to pool the results of a large number of separate studies. A comprehensive meta-study in 2013 revealed that there is no statistically significant employment effect created by moderate increases in the minimum wage. In the last decade, influential studies using restaurant industry data in many U.S. counties and regions have concluded that minimum wage increases have “strong earnings effects and no employment effects.”

This conclusion has an explanation, or rather several explanations. The natural impulse of employers to hire fewer or fire more expensive employees is balanced by several “adjustment channels.” Some of these involve reducing other employment costs, such as reducing work hours, non-wage benefits or training costs. While the empirical evidence is not conclusive, it suggests that employers don’t adjust by cutting hours or other forms of compensation. If an employer has a steady volume of output it must generate, cutting hours is not an option – unnecessary hours would have been cut before. 

Another adjustment channel is simply to increase prices to pass along to consumers the added costs of new wage levels. While some of this does happen, employers do not substantially pass on to consumers the higher costs of employment. Studies have shown that a 10% increase in the minimum wage will result in between a .4% and .7% increase in prices. 

An increase in the minimum wage does not result in the termination of existing employees because the cost of recruiting, hiring and training even low-wage workers is so high that employers would rather retain even higher paid current employees. And a worker who is paid more is less likely voluntarily to leave a job. A 2012 study found “striking evidence” that separations and turnover rates for teens and restaurant workers fall substantially following a minimum wage increase.

Some argue that increasing the minimum wage will hasten the replacement of workers by technology. For many types of work automation is inevitable. This is no argument to underpay workers in the meantime.

Congress does not seem in any shape to increase the federal minimum wage, although the new Democratic majority in the House may take a run at it. Instead, the progress is being made in the states. In early November 2018, voters in two red states approved ballot initiatives raising the minimum wage – to $11 in Arkansas and $12 in Missouri. Perhaps the West Virginia Legislature will see the wisdom of making a similar change. Doing so will cost taxpayers nothing and the benefits to working people and the economy are clear.