$15 Minimum Wage is Uncharted Territory

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent GardnerFightfor15I recently participated in a discussion of Governor Cuomo’s proposed $15 minimum wage on WXXI public radio’s Connections with Evan Dawson. A listener contacted the host, referred to the recently-passed increase for fast food workers, and said, “Hey, I’m a skilled machinist earning $18/hour. Why should someone at McDonalds earn nearly the same?” That’s an interesting question—it points out that the $15 minimum wage could have far more impact than we might think at first blush. First I’ll summarize what research tells us about the obvious and short run impacts, then tentatively explore the broader implications raised by this comment.

On the left, we’re led to believe that a minimum wage rise will significantly improve the well-being of the poor and that employment could actually increase as a consequence. The right declares that jobs for the most disadvantaged would disappear and that the increase might trigger a recession.

An across-the-board minimum wage increase to $15 an hour is very different from the incremental increase we’re experiencing right now in New York. The minimum wage statewide rose to $8.75 at the end of last year and is scheduled to increase to $9 on Dec. 31. The federal minimum wage remains at $7.25.

For New York, a $15 minimum wage is an increase of two-thirds from $9 an hour. The median wage for several of New York’s regions is barely above $15 (remember that the median is the “middle” wage if you sorted all wages—half are above, half are below). The federal 2014 Occupational Employment Statistics series indicates that nine of the 13 metro areas in New York have a median wage under $18. The median wage is roughly $17 an hour in Rochester, Buffalo and Syracuse.

Universally, studies of the minimum wage predict that an increase will disproportionately affect teen employment. Although young workers can be fabulously productive and creative, they often lack the “soft skills” that make them a “safe” hire. They haven’t mastered the subtle skills—such as dress and demeanor—and not-so-subtle skills—like arriving on time—that make an employee successful. Arguably, teens of color are even more likely to be denied employment as racial discrimination continues to influence hiring decisions.

Employing the methodology adopted by the Congressional Budget Office, Douglas Holtz-Eakin at the American Action Forum estimates that about 3.3 million workers nationally (out of 40.6 million total) would lose their jobs with a $15 minimum wage. Offsetting this bad outcome is an income gain of $119 billion, estimated by netting losses to those who lose their jobs from higher wages to those who do not. That’s only a model, of course. Holtz-Eakin cites other estimates with worse outcomes—more jobs lost and either a smaller net income increase or a net reduction in income.

Median Wage 2014
The Empire Center for Public Policy engaged Holtz-Eakin to replicate the study for New York. The share of total workers affected by a $15 minimum wage varies by region. The study estimates that a third of all workers in New York would be affected by the change—ranging from 25 percent in high-income Long Island to 46 percent in the North Country. The estimate for Central New York, the Finger Lakes and Western New York is about 36 percent. Job losses using the CBO estimate would total about 200,000 statewide; net income would rise by $3.8 billion. Roughly 14,000 people would be expected to lose their jobs in the Finger Lakes region with offsetting earnings gains of about $600 million. Again, other estimation models showed more job loss and lower net income gain.

If we stick with the CBO approach, these figures highlight the trade-off: Workers who retain their jobs are better off. But not all do. Personally, I believe that the earned income tax credit is a better tool for addressing poverty. Workers who lose their jobs due to the higher minimum wage are likely to be the least employable, making it even less likely that they will gain a foothold in the mainstream labor market.

Let’s return to our machinist’s question. Is it reasonable to assume that we can increase the wages of unskilled workers to $15 an hour and not create significant pressure on wages across the spectrum? While this is uncharted territory, a $15 across-the-board minimum will set in motion an increase in wages that could carry through the entire hourly wage spectrum. We already expect that the $15 fast-food wage (imposed by Cuomo’s Labor Department earlier this year) will spill over into other sectors employing low-skilled labor.

Let’s also consider what increasing wages across the board will do to business costs. The Bureau of Labor Statistics reports that employee compensation averages 68 percent of total business costs for civilian workers. While an incremental wage increase for a portion of the workforce can arguably be absorbed by an otherwise profitable business, a substantial increase in wages across a broad range of occupations would drive up overall prices.

It seems probable that a 20 percent increase in wage cost will be swiftly converted into a 20 percent increase in prices, diminishing the purchasing power of the now-higher wages. Do we then respond by locking the minimum wage to inflation? Experience with cost-of-living adjusters suggests that broad COLAs simply ratchet up the base level of inflation, placing the economy on a hamster wheel of price gains.

Economists note that the impact of a minimum wage increase on jobs and income depends on the relationship between the minimum and the median. A paper from the Brookings Institution reports that the minimum wage has historically hovered around half of the median wage—this figure applies not just to the United States but to all nations that are part of the Organization for Economic Cooperation and Development. The high point for the United States was 55 percent of the median in 1968; today it is at about 38 percent. The author finds consensus that a modest increase will have modest negative consequences. Yet there is also broad agreement among economists that there is a limit—we don’t have the power to simply declare that a third or more of all workers should earn more without setting in motion a range of other impacts.

A jump to $15 an hour is not a modest increase. Such a policy change would either force an abrupt, onetime increase in inflation—negating the change—or we’d have to introduce a set of wage and price controls with unknown consequences. Moreover, an increase to $15 an hour across the board in New York only would shift the state’s competitiveness for every firm that sells into the national market, particularly those firms—take call centers as an example—that rely heavily on less-skilled labor.

I wish we could pass a law or two and improve the lives of many without significant collateral damage. But I’m sorry. In this economy, there is no Santa Claus.