The Sound Reasoning Behind a $15 Minimum Wage

The New York Times Editorial Board recently endorsed a $15 federal minimum wage.  A proposal at the federal level would phase in $15 an hour in small increments over a period of several years and would still, as the Times mentions, set a wage floor in 2020 below what most low-wage workers need to provide for their families.  Yet Slate’s Jordan Weissmann believes that “the argument in favor of a $15 federal minimum is…extremely weak,” and that the endorsement is “emblematic of a progressive movement that has fixated on a much higher minimum as the answer to the problem of low-wage work while refusing to grapple with the potential downsides.”

Weissmann supports a federal minimum wage above $10 an hour and possibly in the $12 an hour range; like Alan Krueger, one of the economists who authored some of the landmark research on the minimum wage, his argument against $15 surely comes from a good place.  His assertions are substantively wrong, however; proponents of a $15 federal minimum have grappled with the points he makes and have decided that the case for a $15 federal minimum is actually much stronger than Weissmann’s.

The crux of Weissmann’s argument is that, “if the government forces wages too high, businesses will eventually cut back on hiring.”  $15 would be “too high,” he argues, because it is higher than “historical and international norms.”

Weissmann is correct to note that a $15 minimum wage would affect a larger share of low-wage workers in Little Rock, Arkansas than in Seattle, Washington, where a minimum wage increase to $15 an hour is already being phased in.  He is also correct to note that the research literature on the minimum wage largely speaks to moderate increases in the minimum wage, not to what might happen if it were increased to $15 an hour.  Proponents of a $15 minimum wage know these facts; they just don’t agree that they’re disqualifying.

The thing is, opponents of the minimum wage have been claiming for years, based on flawed but standard economic theory, that the mere existence of a minimum wage will kill jobs.  A huge body of research over the past twenty years has shown that these arguments are wrong: most studies suggest that the minimum wage has negligible effects on employment, and while there are credible studies that find small negative employment effects, there are also alternative theories out there, and a few findings to back them up, about why a higher minimum wage could, in some cases, actually lead to more employment.  Not having research about what would happen at $15 does not mean that it would cost jobs – it just means that, if we go to that level, we can’t be certain that the minimum wage’s opponents will continue to be so wrong about its effects on the job market.

Whether you think $15 will pose an employment problem is thus a matter of conjecture.  Weissmann is entitled to his beliefs, but it’s worth highlighting that a) the proposed increase is phased in in increments, giving businesses time to adjust, b) corporate profits are near all-time highs (as is executive compensation), suggesting that most businesses that employ low-wage workers can easily absorb the labor costs (one recent analysis of the fast food industry even suggests that firms could absorb a $15 minimum wage without a reduction in profits), c) Weissmann’s arguments mirror those of the minimum-wage-increase naysayers who have repeatedly been wrong, d) Weissmann’s summary of the evidence from Puerto Rico is woefully incomplete; a more thorough look does not actually support his case, and e) even economists, who typically lean towards embracing standard but flawed supply-and-demand theory, have split opinions on what might happen under a gradually phased-in $15 federal minimum wage.*

The fact that a $15 federal minimum wage would affect more workers in Little Rock, Arkansas than in higher-wage states can also be viewed as an argument in favor of larger increases in the minimum wage – they provide more help to a larger number of low-wage workers who are struggling to get by!  As Weissmann himself acknowledges, it takes around $20 an hour for a single parent to raise a child even in states with the lowest costs of living.  He gives surprisingly short shrift to the huge risk in not raising the minimum wage high enough: that it will lock in insufficient income support for millions of low-wage workers who desperately need additional money.  The fact that the nationwide movement for $15 has been driven by the very workers who would be affected by the policy change suggests strongly that they view the definite downside posed by a lower minimum wage – less compensation for their hard work – as a whole lot scarier than the indefinite possibility that $15 might cause some reductions in employment.  The argument against $15 could theoretically be used to reject every bold new policy proposal that helps people; it’s really hard to make progress if you don’t push past historical and international norms every so often.

In addition, while I applaud Weissmann for his concern about low-wage workers being able to find jobs, advocating against higher wages for millions of people is an odd way to address this concern.  The minimum wage does not exist in a vacuum; it is one policy among many that can be used to help low-wage workers.  While Weissmann correctly notes that the Earned Income Tax Credit and minimum wage are complementary, he fails to consider whether direct job-creation programs and/or policy that addresses firms’ decision-making in response to minimum wage increases could complement the minimum wage as well.

So while Weissmann thinks the New York Times underweights the potential and unknowable risk of heretofore unseen levels of job loss, I believe (along with hundreds of economists) that he underweights the immediate, definite risk of keeping the minimum wage too low.  I encourage him to, at the very least, consider policy tools that can mitigate his concerns without depriving low-wage workers of much-needed income.

*Update (1/5/16): It’s also worth noting, as minimum wage expert Dave Cooper has reminded me, that “the fear of a negative impact on jobs is a bit too simplistic. The concern is that the higher minimum wage could reduce the total aggregate work hours among low-wage workers, but even if that occurred, those workers would still be better off if, even while working fewer hours, the higher hourly wage caused their annual earnings to rise.”

Correction (1/25/16): The original version of this post misspelled Weissmann’s name.

3 Comments

Filed under Business, Labor

3 responses to “The Sound Reasoning Behind a $15 Minimum Wage

  1. debspiel

    Ben, I finally read your piece and it is great – so well written and sourced. I will share with Marc as he is about to introduce legislation to go to $15 and index to inflation after that. One question – we struggle with the small business owners who say they can’t afford it – the mom and pop pizza parlor, the independently owned coffee shops…Some of them say they’re hiring students who need some extra money and they need the extra help but they can’t afford that high of level….Any thoughts on a response? Love,Debbie

    From: 34justice To: debbiespielberg@yahoo.com Sent: Monday, January 4, 2016 8:02 PM Subject: [New post] The Sound Reasoning Behind a $15 Minimum Wage #yiv3362741196 a:hover {color:red;}#yiv3362741196 a {text-decoration:none;color:#0088cc;}#yiv3362741196 a.yiv3362741196primaryactionlink:link, #yiv3362741196 a.yiv3362741196primaryactionlink:visited {background-color:#2585B2;color:#fff;}#yiv3362741196 a.yiv3362741196primaryactionlink:hover, #yiv3362741196 a.yiv3362741196primaryactionlink:active {background-color:#11729E;color:#fff;}#yiv3362741196 WordPress.com | Ben Spielberg posted: “The New York Times Editorial Board recently endorsed a $15 federal minimum wage.  A proposal at the federal level would phase in $15 an hour in small increments over a period of several years and would still, as the Times mentions, set a wage floor in 202” | |

    • Hi Debbie,

      Great question. The first thing I’d say is that there are typically three ways increased labor costs can be offset: prices, productivity, and profits (I’m including wages in this last category at the moment). I doubt many small businesses have such small margins that, along with price increases and efficiency gains (which they might get from workers who are more invested in a higher-paying job), they can’t at the very least shuffle around their salary and compensation structure to make this work (this paper, linked above, suggests that price increases alone can do the trick: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_351-400/WP373.pdf). Since the increase is industry-wide, their competitors are all held to the same standard; there’s not much basis for small business owners to claim they couldn’t handle such an increase.

      The other thing I’d note is that I care far more about each worker’s right to be compensated fairly than I do about any particular business staying open. If there really are some businesses out there that actually couldn’t survive if they had to pay their workers $15 an hour (and I’m skeptical there are very many, for the reasons noted above), I’m okay with them going out of business. In fact, that reality would suggest a pretty poor business model; anyone professing to be a capitalist should be okay with better businesses getting more market share!

      Hope that’s helpful; happy to answer any other questions you might have!

      Ben

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s