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Minimum Wage: Not a Simple Supply and Demand Curve

September 25, 2017
The federal minimum wage was last raised in 2009 to $7.25. [1] However, 29 states and the District of Columbia have already raised their state wages above the federal minimum. This is largely due to the fact that low-wage workers are being left behind by the modernized U.S. economy. As productivity, inflation, and cost of living have all risen, wages have not kept up.

By Willy Thomas

According to the National Low Income Housing Coalition [2], this wage disparity has reached the point where “there is not a single county or metropolitan area in which a minimum-wage worker can afford a modest two-bedroom home”. Furthermore, since the 1980s, a full-time minimum-wage employee has consistently earned below the poverty line for a two-person family. [3] If the goal of minimum wage is to protect workers from unfair compensation and poverty, the modern minimum  seems to be failing.

The U.S. federal minimum wage has shown dramatic changes in value over time.The U.S. federal minimum wage has shown dramatic changes in value over time.

There are many reasons why raising minimum wage is staunchly opposed by many people. Basic principles of a capitalist labor market, conservative economics, and stigmas against low-wages have been the routine counterarguments to a new minimum. However, as cities like Seattle adopt progressive wage increases, more salient research has been conducted and economic theories and stereotypes have been put into question.

The Low-Wage Employee

One of the more prominent stereotypes surrounding minimum-wage workers is that it is a demographic dominated by teenagers searching summer jobs. In reality, 89% of minimum-wage workers are 20 years or older3 and represent America’s underserved populations: women, blacks, Hispanics, and the poor. A study conducted by the Economic Policy Institute found that raising the minimum wage to $15 by 2024 would lift wages for 41 million American workers. 56% of these workers are women, 23% are Hispanic, 17% are black, and 7% make up other minorities. Through a wage hike, over 40% of all black workers in America would directly or indirectly receive a raise. 34% of all wage-earning women would receive a raise. Minimum wage also affects single parents. Giving a boost to 40% of all single parents, 45% of single mothers, and over 11.6 million parents would raise wages for the parents of 19 million children in the U.S. This trend continues with minorities. An increase to $15 minimum wage would directly and indirectly give 40.1% of black workers and 33.5% of Hispanic workers a raise through labor market adjustments.[4]

These statistics shed light on multiple issues and possible solutions in America. The effects of gender inequality, systematic racism, and wealth inequality can be clearly seen by who is working minimum-wage jobs. When opportunities for advancement are not evenly offered, unjust repercussions are unavoidable. Finding disproportionate percentages of America’s suppressed populations is not a coincidence.

With the compelling data above as evidence, many states and cities have chosen to institute new minimum wage requirements. Seattle has recently raised its minimum wage to $15 after incremental increases. This progressive approach has provided an opportunity to research the real effects of increased wages.

Seattle and Contemporary Studies The increases in the wages in Seattle were phased in over time. Beginning in 2014 with an increase to $11, then $13, and now $15, the effect has varied throughout the process. The Centre on Wage and Employment Dynamics and University of California, Berkeley used the food industry to measure the success of the increases in comparable counties around the country. The study found that after increasing to $11, there was “no detectable effect on employment”. [4] However, a significant amount of jobs and hours was lost when the jump to $13 dollars was made. However, this transition can be explained by the indirect wage increases that occur when minimum wage rises. This “ripple effect” can affect wages that are 50% higher than the actual minimum-wage raise, as employers try to keep the basic pay grade structure. [5]

In a study that aimed to measure the minimum wage’s ability to fight poverty, researchers concluded that negative effects on employment are “too small to be statistically detectable” as moderate increases are phased in over time. Another study found that for each 1% increase in the minimum wage, employment in these establishments would decline by 0.05%. By this measure, doubling the minimum wage to $14.50 would result in a 5% increase in unemployment.

Estimated minimum wage effects.

This coincides with past research that has found that modest increases to the minimum wage have little impact on employment. In fact, the Federal Bureau of Labor Statistics found that Seattle set a new record for employment in the food services and drinking industry. This confirms research as studies have found that the elasticity of labor is nearly zero. Similar success has been found in other states that have instituted new minimums. These states are experiencing faster wage growth and more wealth equality. [6] The bottom 10% of workers in these states saw a 5.2% increase in wages compared to 2.5% in other states. In the case of Seattle, it is still extremely early to determine definitive results.

However, the early results are encouraging. Progressive cities like Seattle offer isolated grounds for research in discovering the most effective mode of implementation, concrete market reactions, and real-life tradeoffs. As this new data becomes available, it will be important for the federal government to prudently weigh its value and make responsible and informed policy decisions.

References

  [1] “It’s Time to Raise the Minimum Wage.” Economic Policy Institute. Accessed July 10, 2017. http://www.epi.org/publication/its-time-to-raise-the-minimum-wage/.

  [2] Gee, Alastair. “Earn minimum wage in the US? You can afford to live in exactly 12       counties.”The Guardian. June 08, 2017. Accessed July 10, 2017. https://www.theguardian.com/us-news/2017/jun/08/minimum-wage-affordable-housing-rentals-study

  [3] Cooper, David. “Raising the minimum wage to $15 by 2024 would lift wages …” Economic      Policy Institute. April 26, 2017. Accessed July 10, 2017.  

  [4] “Economists argue about minimum wages.” The Economist. July 08, 2017. Accessed July 10, 2017. https://www.economist.com/news/finance-and-economics/21724802-two-studies-their-impact-seattle-reach-opposite-conclusions-economists-argue.

  [5] Quinn, Joseph, and Kevin Cahill. “The Relative Effectiveness of the Minimum Wage and the Earned Income Tax Credit as Anti-Poverty Tools.” Religions 8, no. 4 (2017): 69. doi:10.3390/rel8040069.

  [6] Talton, Jon. “New minimum wage data don’t settle Seattle debate.” The Seattle Times. March    15, 2017. Accessed July 10, 2017. http://www.seattletimes.com/business/economy/new-minimum-wage-data-dont-settle-seattle-debate/.

[7] Bencasselman. “Seattle’s Minimum Wage Hike May Have Gone Too Far.” FiveThirtyEight.     June 26, 2017. Accessed July 10, 2017. https://fivethirtyeight.com/features/seattles-minimum-wage-hike-may-have-gone-too-far/.

[8] Bernstein, Jared. “So far, the Seattle minimum-wage increase is doing what it’s supposed to do.” The Washington Post. August 10, 2016. Accessed July 10, 2017. https://www.washingtonpost.com/posteverything/wp/2016/08/10/so-far-the-seattle-minimum-wage-increase-is-doing-what-its-supposed-to-do/?utm_term=.61afae124b90.

[9] “Higher minimum wages may make bad restaurants close.” The Economist. April 29, 2017.      Accessed July 10, 2017. https://www.economist.com/news/united-states/21721389-do-job-opportunities-vanish-too-higher-minimum-wages-may-make-bad-restaurants-close.

[10] Sherman, Erik. “Higher Seattle Minimum Wage Hasn’t Hurt Restaurant Jobs Growth After A Year.” Forbes. January 09, 2017. Accessed July 10, 2017. https://www.forbes.com/sites/eriksherman/2017/01/07/seattle-restaurant-jobs-keep-growing-with-higher-minimum-wages-after-a-year/#7aa4a0043579

[11] Spielberg, Ben, and Jared Bernstein. “The truth about the minimum wage.” MSNBC. November 17, 2015. Accessed July 10, 2017. http://www.msnbc.com/msnbc/the-truth-about-the-minimum-wage.

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  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

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