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.  

 

The West Virginia Workplace Freedom Act

In early February 2016, West Virginia became the 26th state to adopt a “right to work” law, called the Workplace Freedom Act. The new law does not simply prohibit an employer and a labor union from requiring membership in the union as a condition of employment. It goes further and also forbids requiring an employee to pay any dues or fees to a labor union as a condition of employment. The law was vetoed by Governor Tomblin on February 12, 2016 but that veto was overridden by the Legislature on the same day. The new law was to take effect July 1, 2016.

Outlawing any required fee payment to a union is a significant step for West Virginia to take. It reveals that our Legislature was not so much interested in protecting employees from compulsory membership in an organization they might not support, as it was in financially crippling labor unions. In so doing the Legislature advanced a conservative political agenda of long standing. It is the financial harm created by the new law that led the West Virginia AFL-CIO and a number of individual unions to seek an injunction in Kanawha County Circuit Court. The injunction was granted on August 11, 2016 and the implementation of the law postponed until a full decision can be rendered.

To understand this legal and political struggle, a little background is necessary. Unions can gain the right to represent employees only within a bargaining unit — a plant or department. Being an employee in a bargaining unit is not the same as being a dues-paying member of the union. But once a union becomes the bargaining representative of employees in a unit, it has the right and obligation to bargain for and prosecute grievances for all of them, whether or not they are dues-paying members. This frequently involves large sums for trained staff, arbitrators, meeting halls, offices, libraries, and more.

Over time, union security contract clauses were developed requiring an employee to become a dues-paying member of the union within a certain period after employment. If he refused, the employer was contractually bound to terminate him. But because unions engage in political as well as bargaining activity, federal courts refashioned the deal so that no employee is obligated to pay dues for political activity to which he does not subscribe, but can be required to pay a “fair share fee” to cover the collective bargaining and grievance activity the union must provide him. This was the status of the law in West Virginia until last year.

In 1947, Congress allowed individual states to forbid union security clauses altogether. Almost immediately, states in the south and west passed “right to work” laws. Recently as the strength of Republicans grew in state legislatures, RTW laws passed even in industrialized states like Wisconsin and Michigan. Not wanting to be outdone by their conservative brethren elsewhere, the West Virginia Legislature took up the issue in January 2016. The Legislature commissioned a study by WVU predicting the effect of a RTW law on union membership, job growth, GDP growth and wage growth in West Virginia.

The method used in the WVU study was to compare the group of states with RTW laws to the group without them on these various economic factors for the period 1990 to 2012. To determine whether the RTW laws actually caused any of the observed differences, a complicated regression analysis was used. The WVU study predicted that the rate of union membership in West Virginia would fall by around 20% as a result of the adoption of an RTW law. The study also predicted a long term .4% employment growth benefit and a .5% annual increase in GDP growth.

But the WVU study found no causal relationship between RTW laws and wage growth, even though nearly all other studies like this have found a robust negative effect created by RTW laws on state-wide wage growth. For example, a 2015 study by the Economic Policy Institute found workers in RTW states earned $1,558 less per year than similar workers in non-RTW states. These results did not apply just to employees covered by a union contract but to all employees. “Where unions are strong, compensation increases even for workers not covered by any union contract, as nonunion employers face competitive pressure to match union standards.”

Behaving as if the modest coercion involved in requiring an employee to pay a fair share fee was an outrageous affront to liberty, the Legislature blew past the economic benefit to all workers that exists in non-RTW states. The Workplace Freedom Act states that a person may not be required to “pay any dues fees, assessments or other similar charges . . . of any kind or amount to any labor organization.”

The legal attack by the AFL-CIO on this law is that the state has unconstitutionally deprived unions of their property without just compensation by prohibiting them from charging nonmembers the proper fee for the services unions are required to provide. Ken Hall, President of Teamsters Local 175, testified that members would end up paying an extra $172 in union dues to cover services provided to employees who benefitted from them but refused to pay. These arguments were enough to convince Judge Jennifer Bailey of the Kanawha County Circuit Court to enjoin implementation of the law until a full decision could be made in the next few months.

It is hard to predict how this legal battle will be resolved. Like any human institution, labor unions have had their share of bureaucracy, incompetence and corruption. They have also had their share of success in advancing the interests of working people. Unions improve the economic lives of members and non-members alike. Progressives don’t generally support coercion, but requiring a fair share fee from non-members who benefit from union representation seems appropriate. What is really at stake is not some grand concept of freedom and liberty. It is instead the economic viability of unions and the Republicans in the Legislature know this. Without viable unions, corporate power to set compensation will be virtually unchallenged and working class compensation will continue to stagnate.