1903 Sweats Shop Chicago

The Minimum Wage Argument

June 28, 2014

 

NOTE FROM THE AUTHOR

I believe our democracy is only as strong as our citizens are well-informed.   However, the issues are so complex that it is doubtful anyone working all day, with kids to raise and community obligations to fulfill has either the time or the inclination to spend what spare time they have pursuing all the sources of information necessary to achieve a truly informed opinion, but must rely largely on instinct to make their political decisions.   Maybe I can help.   I’m retired, the kids have fled the nest, and I am by nature a political junkie who loves research because I learned in my years in Washington, D.C. that whoever has the facts, as opposed to the ideology, can persevere, but only after they’ve cut through all the misinformation ladled out by the special interests.   So, every week or so I or some of my friends, will try to address a national issue of interest and concern to all of us in the hopes that it will be useful to those wanting a quick overview based on research that owes no allegiance to any ideological point of view.  I will do this by spending several hours every week scouring as many web sites on the Internet as seem to be pertinent to the issue, pro and con.  I will then compile, condense, and quote from a wide range of experts and organizations in the hope that what emerges is as close to the truth as predicting the future will permit.   When I insert my own opinion into the narrative, it will be obvious or clearly marked as such.   – Warren Dunn.

 

THE MINIMUM WAGE ARGUMENT

THE MORAL QUESTION     (You can skip this part if you support raising the minimum wage.)

Let’s dispense with the moral issue quickly, because it really isn’t in contention except from those pure capitalists who regard any restriction on the accumulation of capital as interference with their personal “freedom,” which they also believe is most beneficial for the collective, a sort of trickle-down theory.   I believe the moral issue was settled by the Founding Fathers (FF) when they wrote into the preamble to the Constitution that “We the people of the United States, in order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common Defense, promote the general Welfare, and secure the Blessing of Liberty to ourselves and our posterity, do ordain and establish this CONSTITUTION for the United States of America.”  

It is hard for me to imagine that promoting the general Welfare by assuring a minimum wage wouldn’t help “insure domestic Tranquility.”   Unless I am misreading the dozens of books I’ve read on the French and Russian revolutions, income disparity was a critical factor in the unrest that led to those revolutions.  It scares me to think of the growing income disparity in our own country, especially when coupled with the increasing polarization of the fringe elements of our society.  That can lead to a level of unrest sufficient to foment revolution.  Fortunately, we do seem to be a nation of laws and we’ve been able to sidestep revolution caused by income disparity.   Perhaps that’s because there has always been a champion to stand up for a “fair deal” for our citizens.  For example, in the dark days of the Great Depression (the one in the Thirties) Justice of the Supreme Court Harlan Stone said, “There is a grim irony in speaking of freedom of contract (for setting wages ) of those who because of their economic necessities, give their services for less than is needful to keep body and soul together.”   He was making a case for, in effect, the federal government’s constitutional right to set a minimum wage.

In 1954, the legendary economist George Soule wrote:  “…competition at the expense of labor must be limited on a national scale, in the interest of public health and welfare.”  Again, a potent moral argument for a minimum wage.

In 2000, two economists, Jared Bernstein and John Schmitt, analyzing the impact of the minimum wage, demonstrated convincingly that only the minimum wage and the food stamp programs were keeping full-time, minimum wage workers barely above the then poverty level, a kind of bread and circuses approach to “insuring domestic Tranquility.”   Not exactly the kind of moral argument one would admire, but one that is nevertheless based on the understanding that government has a moral obligation to help its citizens survive forces other than nuclear attack.   (By the way, if you are a Jon Stewart fan, he had a blistering critique of the neocon argument that America somehow has a responsibility to help other countries build their infrastructure while ignoring our own.)

In other words, the issue of whether a minimum wage is justifiable is a well-established moral imperative, carved in stone in the Constitution, upheld by the Supreme Court, and advocated by economics.   The quarrel is only over how best to “promote the general Welfare.”

THEN WHY IS IT AN ISSUE?  (A lot of this is my opinion.)

If the general Welfare includes freedom from want and, as Joshua Holland in his fine report for Campaign for America’s Progress points out, 73% of Americans (including 53 percent of registered Republicans) favor hiking the minimum wage to $10.10 an hour from its present $7.25, then why is Congress still dithering about raising the minimum wage?   Those opposed clothe the issue in the economics of the free market system.   Our capitalistic approach to providing for the general welfare assures us that the gifted, the privileged, the well-educated, and the entrepreneurial have a better than even chance of grabbing hold of the prosperity the FF promised and few among us would deny the successful the fruits of their labors.  Back when the FF were pondering the form of government best suited for the United States, most Americans earned their living off the land or as an artisan providing a critical service and who had some control over the course of events affecting their lives.  They could accumulate capital because of their hard work and willingness to take a risk, especially in a nation that hadn’t yet closed the frontier.   Today, unfortunately, there are too many who, for whatever reasons, fall short of what the purely capitalist system requires to be successful and become subject to events and forces over which they have little or no control.   In our society today, they stand naked to enemies they can’t even see.   By contrast, those who have ascended to some level of prosperity in our present-day capitalist economy are prone to hold on tight to their success and to coalesce around a defensive position manned by their ideological colleagues.  That may be human nature, but a compassionate government, such as our FF so obviously intended, is at its best when it rises above the narrow interests of the privileged.

The sociologist Max Weber may have described capitalism accurately in his lecture series in 1919-1920.   One lecture that is relevant to our discussion of minimum wage, stands out:  (Capitalism depends) “upon persons…who are not only legally in the position, but are also economically compelled, to sell their labor on the market without restriction.”   One is left with the impression that, if Weber is correct, capitalism, in order to work most efficiently, is naturally exploitative unless the individual is able to negotiate his or her wages from a position of strength.   Weber goes on to explain that “Rational capitalistic calculation is possible only on the basis of free labor…where…workers who, in the formal sense voluntarily, but actually under the compulsion of the whip of hunger, offer themselves (s0) the cost of products may be unambiguously determined by agreement in advance.”   Therefore, the philosophical argument against minimum wages is based  largely on the efficiencies occurring when (my analogy) the factory owner (i.e.: the capitalist) is free to negotiate directly with labor over wages and working conditions without interference by government, labor unions, or religious institutions, otherwise prosperity will decline.”   Those organizations that subscribe to this philosophy, at least as indicated by their public positions on the minimum wage increase, include, as identified by the Center for Progressive Politics:

o  The National Chamber of Commerce

o  The National Retail Federation

o  The National Restaurant Association

o  The National Federation of Independent Businesses

o  The National Association of Truck Stop Operators

o  The Society of American Florists

Obviously, these organizations represent businesses that hire millions of Americans at the minimum wage (or slightly more, for competitive reasons) and stand to see their payroll costs increase, so their concerns are less philosophical and more practical.

Our national history is replete with the contest between efficient capitalism and providing opportunity for the individual’s “pursuit of happiness.”   This has led to what we call “reforms,” but which I might characterize as “corrections.”  Much of governing is spent pushing back against the more strident forms of capitalism, or what is sometimes called “free markets.”   The progressive income tax, the breakup of monopolies, the fair labor laws, the welfare programs, universal education, and safety regulations are examples of our government’s attempt to curtail the excesses of capitalism and provide opportunities for those who have no bootstraps with which to pull themselves up.

The current arguments against the minimum wage are not really about whether people have a right to expect that their labor will result in a living wage (the moral argument) but whether the minimum wage is a restriction on the efficiency of capitalism in its pursuit of maximum prosperity for the many.  The argument, then, is not about a moral imperative, but an economic reality, and it is in this light that the issue of raising the minimum wage must be examined.

THE ARGUMENTS AGAINST THE MINIMUM WAGE AND THE RESPONSES  (At last, the important stuff.)                                                                                                                                                                                                                                                                                                                          

Joshua Holland, writing for Campaign for America’s Future, labels the most oft-cited argument against raising the minimum wage as “a monstrous job-killer.”  Certainly the eHow web site would agree.  They claim the minimum wage increase causes employers to…hire less workers, sometimes have to let people go, and may resort to outsourcing jobs to find workers willing to perform the duties for less.   The Congressional Budget Office, although it is supportive of raising the minimum wage for many reasons, agrees that raising the minimum wage to $10.10 an hour is likely to result in the loss of 500,000 jobs, although it would help 16 million minimum wage workers improve their living standard.   While many research organizations claim that raising the minimum wage to the $10.10 per hour level would not result in any significant disruption of the job market, the American Legislative Exchange Council, a business-oriented lobbying group, in its report on the effects of raising the minimum wage on employment, says that a change in the research methodology reverses an earlier consensus that raising the minimum wage has a negative impact on employment.   The ALEC cites a Heritage Foundation report that raising the minimum wage to its proposed level of $10.10 would  “likely eliminate an estimated 300,000 jobs per year and lower the national gross domestic product by an average of $40 billion per year.  Tucked into the report is a quote from Milton Friedman:  “What you are doing is to assure that people whose skills are not sufficient to justify that kind of wage will not be employed.  Minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills.”

John Schmitt, of the Center for Economic and Policy Research, challenges the Congressional Budget Office’s estimate that raising the minimum wage to $10.10 would cost the economy those 500,000 jobs.   Schmitt claims the “weight of the evidence points to little or no employment response to modest increases in the minimum wage.”  This conclusion is shared by an earlier study conducted jointly by the University of Massachusetts, the University of North Carolina, and the University of California.   The impact of the minimum increase to its present $10.74 an hour in San Francisco was studied and found that there was practically no impact.  Businesses “absorbed the costs through lower turnover, small price increases at restaurants (2.8 percent), which have a high concentration of low-wage earners, and higher worker productivity.”  UNC studied 318 cases in which the minimum wage was raised in North Carolina and found “no negative impact.”

A study by the University of New Mexico found that when the minimum wage was raised in Santa Fe, there was “no discernible impact on employment per firm and that employment in the city actually increased.  Eating out did dip for a while, but there was no massive closing of restaurants in the city.  Four businesses did lose as result of the increase.”   Analyst Eric de Vita, for the website Spectrum, elaborates on the Center’s study by saying that small business owners support a hike in the minimum wage by a 57 to 43 percent margin and that 82 percent polled say they pay their employees above the minimum.

One must ask why employers would pay more than required if the jobs filled did not require special skills or knowledge.  Some commentators on this issues suggested that it is because employees are motivated by several factors, among them:

0  The local economy is helped because those paid more than the minimum have more to spend.

0  There is reduced reliance on public assistance, especially the food stamp program.

o   Employees are more productive.

The Center for American Progress estimates that raising the minimum wage to $10.10 an hour, which would affect 17 million wage earners, would save taxpayers $4.6 billion in reduced spending on food stamps.  Another commentator suggests that removing the eligibility for food stamps because of the higher income means the value of the increase in wages has been significantly reduced.   The pro-business group The American Legislative Exchange Council disputes at least the first claim.  They say that research has found no link between an increased minimum wage and economic growth.   There can be no doubt that raising the minimum wage will result in some businesses either reducing staff or curtailing hiring, or lowering investment in new equipment, etc.  However, I have read no report that can project that number with any confidence and I have read many reports that indicate that after the minimum wage rate was raised, the impact was marginal or insignificant simply because it affected so relatively few workers.

Claims are made that the majority of workers currently working at minimum wage are teenagers just entering the job market.  Proponents of raising the minimum wage to $10.10 an hour approach the issue differently.   David Cooper and Dan Essrow, writing for Economic Snapshot, make the case that raising the minimum wage to that level would benefit the 88 percent of the workers older than 20 and point out that the average age of affected workers is 35.   One study predicted significant decreases in the number of teenagers hired and blamed past increases in the minimum wage for increased unemployment of young people.

Until Massachusetts just this month raised their minimum wage to $11 an hour, the poster state for a positive outcome from raising the minimum wage was Washington State’s $9.32.  Holland, of the Our Future web site, writes that in 1998, the citizens of Washington State voted to raise their minimum wage and then link future increases to the rate of inflation.  At the time, according to Holland, opponents promised it would kill jobs and ultimately hurt the workers it was intended to help.  He says it didn’t turn out that way.  Reports by Bloomberg claim that in the 15 years that followed,  job growth continued at an average 0.8 percent, which was 0.3 percentage points above the national rate.  Payrolls at Washington’s restaurants and bars, portrayed as particularly vulnerable to higher wage costs, expanded by 21 percent.  Most telling is that poverty in Washington State trailed the U.S. level for at least seven years.

According to Yahoo.Financial, raising the minimum wage is becoming a trend.  The following additional states have approved a higher minimum wage:   Michigan, Vermont, Maryland, Minnesota, Delaware, West Virginia, Connecticut, New York, California, and Hawaii.  This many states apparently agreeing that raising the minimum wage is necessary implies, at least to me, that they cannot have reached a consensus without some examination of the likely impact of taking such action.  To do otherwise would be irresponsible and only a hopeless cynic would claim that there are that many irresponsible legislators in our nation.

One of the most persistent arguments against raising the minimum wage is that the cost will be passed along to consumers, among whom are the very people the hike in the minimum wage is intended to help.   The studies and commentaries I reviewed that take this position rely heavily on fast food and restaurant experiences to make their point.  One study claimed that McDonald’s could increase prices by as much as $2 on certain items.  Other studies claim that wages account for about 30 percent of a fast food restaurant’s budget, so the impact would likely be less than five cents per dollar menu item.  Most studies that support increasing the minimum wage claim that the impact on prices in general is less than the benefit derived from increasing the minimum wage.    One of the most compelling arguments against raising the minimum wage is that, under certain circumstances, those receiving the benefit could find that their eligibility for government assistance is either forfeited or diminished.  Contributing to this likelihood is the fact that the majority of those working for the minimum wage fall into several categories:  those who live with relatives (largely teenagers); those who live alone; those who are part of a two-earner income family, and those who are single head of household and single workers with dependents.    Two-earner families could be negatively affected.

MY CONCLUSIONS 

     After reviewing thirteen web sites, I found that they differ substantially in how they not only apply statistics, but in the statistics themselves.  It is difficult, if not impossible, to draw a clear overarching conclusion by comparing the differing commentaries and analyses on these websites.   Nonetheless, after spending so much time on the issue, I could not with clear conscience throw my hands up and admit defeat.  I decided, instead, to state my conclusions categorically, based on my impressions of the underpinning ideological logic of the presenter.  This admittedly simplistic approach pits those with business interests, which would resist any policy that resulted in increased costs, against those who regard raising the minimum wage beneficial to not just the wage earner, but to the economy in general.   There is also a difference between those who take the long view that supporting business by lowering cost burdens (taxes and regulations) is best for the economy and those who regard raising the minimum wage helps in both the short and long run.  I am reminded of what John Kenneth Galbraith famously said:  “In the long run, we are all dead.” 

     So, these are my conclusions:

     1.  Raising the minimum wage to $10.10 will help more people than it will hurt.

     2. Employers will be more reluctant to hire people whose skills do not, in their estimation, justify the higher wage. 

     3. However, raising the minimum wage has not, in and of itself, been proven to be a big impediment to hiring.

     4.  The actual number of minimum wage jobs has increased in the long run, largely as a result of a growing economy.

     5.  Most of the people receiving the minimum wage increase will not be adversely affected by a loss of eligibility for assistance.

     6.  There is no hard evidence that raising the minimum wage is the determinate factor in a business deciding to close; just as there is empirical evidence that some businesses will close because raising the minimum wage was one factor in the decision.   

     7.  Prices may rise in low-margin operations dependent upon minimum wage workers, but there is no hard evidence that massive closings occur or that the price increases are such that they would cause successful business to become uncompetitive.

     I will close this overlong examination of the impact of the minimum wage by quoting Jared Bernstein, writing for the New York Times:  “There is no policy I can think of that generates only benefits without any costs and policy makers always have to weigh the two sides.”

     That’s what governments are supposed to do.

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