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Understanding the Impact of a Federal Minimum Wage Increase

By Michael Lewis

minimum wageOn February 11, 2014, President Barack Obama signed an executive order raising the minimum pay for workers employed by companies that have federal contracts. The pay per hour would be lifted from $7.25 to $10.10 and go into effect on January 1, 2015.

As might be expected, the move ignited a fire storm of dueling statistics and questionable conclusions from both sides of the political spectrum. Consequently, the average American is likely confused about who the order affects and its potential impact on the economy.

The Driver for Change: Income Inequality in America

The words “income inequality” presuppose that the current distribution of income between various levels of the population is unfair, a conclusion both supported and contested by many. The facts are that an increasing share of pre-tax cash market income – such as wages and salaries, dividends, interest, rent, investment returns, and business profits – has gone to the top 1% of Americans, while the share of the bottom 90% has fallen since the mid- to late-1970s. According to figures compiled by Emmanuel Saez, economics professor at UC-Berkely, the top 1% received around 22.5% of all pretax income while the bottom 90% dropped below a 50% share for the first time in history.

Whether or not this represents a problem depends upon your perspective and political leanings. According to a Pew Research Factank report from December 2013, 61% of Democrats and 50% of independents said the gap was a big problem – versus only 28% of Republicans.

In 2012, former partner at Bain Capital and author of “Unintended Consequences: Why Everything You’ve Been Told About the Economy is Wrong,” Edward Conard, aggressively argued that the enormous and growing income inequality was a sign that the U.S. economy was working, and, if we had a little more inequality, everyone – particularly the 99% – would be better off. According to the New York Times, Conard is not only a member of top 1%, he is a member of the top 0.1%, with an estimated wealth of hundreds of millions of dollars. Are Mr. Conard and his 1% cohorts just protecting their assets as their opponents claim, or do they have the solution for a better America?

On the other side of the issue, Nobel laureate economist Joseph E. Stiglitz claims in his book “The Price of Inequality” that rising inequality is putting a brake on growth and promoting economic instability. British epidemiologists Kate E. Pickett and Richard G. Wilkinson, writing in “The Spirit Level: Why More Equal Societies Almost Always Do Better,” go even further to claim that income inequality undermines social bonds, contributes to mental illness, and increases obesity and teenage pregnancy while fostering crime and lowering life expectancy. Conservatives claim such opinions are akin to Chicken Little’s hysteria that the sky is falling – but what if they’re right?

A third perspective on income inequality was presented in a 2013 Forbes article by Shah Gilani, a hedge fund manager and a former manager of the futures and options division of Lloyd’s Bank. Gilani proposes that the tax code should be revamped and simplified while improving educational opportunities and skill-based opportunities for the middle class. He argues that the middle class are the real victims of inequality, and if not helped they “will increasingly slip into poverty and the backbone of America’s increasingly brittle skeleton will turn to dust.”

What is the truth among the rhetoric and partisan claims? Is America’s economy in decline, or is it on the cusp of a tide that can raise all ships? Social scientist and Harvard professor Christopher S. Jencks claims that, while actual evidence does not exist to prove the potential damage that might result from rising inequality, there are also enough facts to cause worry. “Something that looks bad is coming at you. Saying that we shouldn’t do anything about it until we know for sure would be a bad response.”

minimum wage

Minimum Wage Politics

Democratic Senator Tom Harkin of Iowa and Representative George Miller of California each introduced legislation to raise the minimum hourly wage from $7.25 to $10.10, and to tie future increases to inflation. As of April 2014, however, neither had found sufficient support to move their bills forward.

At this time, 21 states plus Washington, D.C. have minimum wage rates above the federal rate of $7.25 per hour. Some cities have raised minimum wage levels, as well – San Francisco is going from $10.74 per hour to $12.30 by 2017. The proposed raise to $10.10 would affect an estimated 28 million workers across the country, with more than five million in California and Texas alone, according to the White House.

On February 26, 2014, CNN reported that Democrats expect to make the minimum wage increase an issue in 2014 midterm elections with the hope that Republican candidates have difficulty justifying their opposition. A March 2014 poll by Hart Research Associates & Public Opinion Strategies for NBC and “The Wall Street Journal” appeared to bolster their strategy, indicating that 58% of the public is more likely to vote for a candidate who “supports raising the federal minimum wage to $10.10 per hour.” As evidence of the political potency of this issue, both parties are flooding the airwaves with their own version of the typical minimum wage worker and the impact of the proposed raise upon the economy.

Republicans

Republicans have made several arguments to justify their unwillingness to raise the federal minimum wage:

  • Small Number of People Affected. During a December 8, 2013 interview on “This Week with George Stephanopoulos,” Republican Senator Rob Portman said, “About 2% of Americans get paid the minimum wage. Of that group, by the way, less than 0.3 of 1% are…under the line of poverty and on minimum wage.” His figures were subsequently backed up by PolitiFact.com, an impartial, nonpartisan fact-checking organization.
  • Loss of Jobs. According to a 2013 editorial in the National Review Online, “Some businesses will be forced to reduce their work forces, and all businesses employing lower-wage workers will have incentives to replace labor with capital – for instance, by investing in automation and moving to self-service models of customer interface.” Republicans also point out that the Congressional Budget Office estimated the raise would cost the economy 500,000 jobs.
  • Teenagers Getting First Job Most Affected. Conservatives claim that many people earning minimum wage are teenagers from reasonably well-off households who work part-time. They argue that raising the wage could destroy, not increase, future opportunity.
  • Ineffective in Helping the Real Poor. The Congressional Budget Office estimates that a minimum wage increase to $10.10 per hour would result in an increase in total wages of almost $31 billion in the next year, but less than $6 billion would go to poor households. Almost $9 billion would go to families earning more than three times the federal poverty rate.
  • Government Interference With Free Market. The National Restaurant Association opposes any increase in the minimum wage, claiming that tipped restaurant servers already make a median wage between $16 and $22 per hour. Bob Garner, co-owner of the Glory Days Grill restaurant chain, says that the minimum wage increase “creates an existential threat to the business model I’ve been involved in for the last 35 years” – a model by which the service staff is paid in tips by guests. This sort of model prompts many conservatives to ask: If someone is willing to work for $6 per hour and a business is willing to pay $6 per hour, why should the government intervene?

Democrats

  • Impact. According to the same Congressional Budget Report cited by Republicans, an increase in the minimum wage rate to $10.10 would lift 900,000 Americans out of poverty. In addition, Democrats claim more recent research by economists proves that increasing the minimum wage should have no notable effect on employment.
  • Primary Beneficiary of Increase Is Young, Working Female. While appearing on “This Week with George Stephanopoulos” along with Senator Rob Portman, Democratic Senator Dick Durbin from Illinois emphasized that more than half (56.6%) of those earning minimum wage are 19- to 44-year-olds who are, most likely, the primary caretakers of children and families. According to a Pew Research report, almost 44% of minimum wage workers are employed in the food preparation and serving industry, and are typically white (77.7%), unmarried females who work part-time (64.4%), live in the South, and graduated from high school (63.8%).
  • Morality. Speaking before a political rally on March 13, 2014, Democratic Governor Pat Quinn said, “If you work 40 hours a week and do things right, you shouldn’t have to live in poverty.” President Obama, in his 2014 State of the Union address, claimed that the increase “will help families” and “give businesses customers with more money to spend” – although the White House is not claiming it can boost the economy.
  • Inequity Among Classes of Workers. Rosie Saia, owner of the Local Table cafe in Acton, Massachusetts, agrees that tipped workers are long overdue for a raise in the federal minimum tipped wage, which hasn’t changed since 1991. Ms. Saia pays her tipped staff minimum wage and lets them keep and treat all gratuity as extra income in the belief that it creates a better workforce. Contradicting the National Restaurant Association claim that tipped workers average between $16 and $22 per hour, the Bureau of Labor Statistics cites the median wage for waiters and waitresses, including tips, as $8.94 an hour in May 2013, the latest figure available.

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Final Word

As with many issues caught in the toxic political environment that has engulfed Congress, there is little likelihood that agreement or compromise on the minimum wage increase is possible. The President’s executive order, covering only workers under federal jurisdiction, should have a small impact, if any, on the economy, and may even be negated before it would become effective in 2015. As a sign of the difficulty facing implementation of the executive order, the National Review, a conservative publication, has opined that the “minimum-wage executive order is unconstitutional.” If implemented, it may be difficult to enforce with a shrinking, demoralized federal workforce already under budget pressures.

Furthermore, the furor over the minimum wage detracts from a much bigger, needed discussion about the impact of technological and social changes in recent decades. Traditional jobs in manufacturing and construction are disappearing, leaving low-paid service jobs in their place. These jobs may also disappear as the costs of automation continue to decline.

At the same time our economy is heavily dependent upon skilled technical workers, our educational system is in turmoil, infrastructure needs replacement, and a growing percentage of citizens cannot find sufficient employment to support their families. America’s status as the world’s greatest economy is being challenged, our financial leaders focus solely on short-term profits without regard to consequences, and our political leaders listen predominantly to those who can buy the next election. We have a government viewed as too invasive by many, too idle by others, and ineffective by all. Whether or not we eventually raise the minimum wage is of little consequence if we as citizens are unwilling to confront the underlying structural problems that face the nation.

Are you for or against the minimum wage increase?

Michael Lewis
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike's articles on personal investments, business management, and the economy are available on several online publications. He's a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas - including The Storm.

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  • Simple Money Concept

    I believe all workers should get paid enough to properly function in the society. Minimum wage is one way to do it, except it’s not doing a good job. I read it somewhere that 18% (what I can remember) of Wal-Mart employees qualify for food stamps. Now, something is wrong. Will raising the minimum wage solve the problem? I don’t think so. It’s like the title of Charles Barkley’s book, “I May Be Wrong but I Doubt It”. The follows the increase in minimum wage is the increase in prices in general. Doesn’t that just take us back to square one?

    • Michael Lewis

      Thanks for writing. I suspect that most people feel similarly to you – they are sympathetic to the lower wage worker, but unsure of the solution and worried about unintended consequences. To me, minimum wage work is an indication of a much greater and growing problem – as technology evolves, more and more will find themselves displaced and living on the margins. We should be having discussions about the future before it overwhelms us.

      • Simple Money Concept

        I agree. On top of that, we as a nation seems to be more financially illiterate than ever (in part thanks to technology). There was a study (I forgot where) showing that it’s actually the rich, not the poor, who are using coupons! Now that has to be fixed!

  • http://www.paisatalks.com/ ritzpru

    Hi Michael

    Could not understand one point,,teenagers argue that raising the wage could destroy, not increase, future opportunity…How increase in wages will be loss for future opportunity

    • Michael Lewis

      Presumably, raising the minimum wage would result in either older people taking the jobs in which teenagers would have formerly worked, the companies would cut the jobs due to their higher costs, or both. That is the lost opportunity.
      This presupposes that the work being done at the lower wage levels is not critical or necessary for the continued prosperity of the company, i.e., the company provides the job to do unnecessary work. I’m not sure that argument flies either as a justification not to raise the minimum.

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  • Michael Lewis

    Thanks for writing. I suspect that we can use numbers to prove a case for either side. Of course, one question is always who fits the bill? If a company raises its wages, it deducts them from its income, thus sharing a portion of the cost with Fed Govt, depending upon tax bracket.
    I suspect that if raising the minimum wage actually decreased the net cost of Fed program benefits, both parties would be in favor due to the huge deficits we run. Since they are not, I imagine that the numbers used in the Op/Ed piece aren’t universally supported.

    • Uclalien

      Although I think price floors are a terrible idea and have seen a boatload of empirical evidence showing that they are ineffective and/or harmful, that really wasn’t the point of my post. I was simply shedding light on the fact that the intended beneficiary of a minimum wage increase may only receive a portion of the monetary benefit. Some people may mistakenly believe otherwise.

      Your comment reminded me of a handful of analyses I have read over the years showing that with government credits, deductions, taxes, and federal/state programs, families earning less than $5,000/year can be better off than families making ~$40,000. And in some cases, total benefits/services are on par with families earning ~$60,000/year. Of course the government’s bottom line is better off when these people earn more. But it doesn’t mean the added income has actually increased their standard of living.

      • Michael Lewis

        I think that was one of the Republican issues – that the funds spent didn’t really benefit those who need it most. And there is some substance to their stance.
        I’m not sure what is the proper approach, but i do believe that income inequality is a growing issue that can tear the fabric of society if continued unabated. I hope we elect leaders wise enough to consider all of the options and implement the most effective solution and certainly the least harmful.

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