Minimum wage reform

Senator Tom Harkin and Representative George Miller’s election-year propositions have pushed minimum wage to the forefront of economic debate in the past year. Their bill, if passed, would raise the minimum wage to $10.10 in three steps over two and a half years. Supporters of the bill point to the resulting increase in standard of living for the bottom 30 percent, while its opponents primarily argue that its costs (especially job loss) are too high. The debate is particularly hard to referee because the econometric tools that are used to defend conclusions are derived from largely subjective assumptions about the labor market. Indeed, we can only know the real effects of raising the minimum wage by raising the minimum wage.

What almost every economist agrees with, however, is that an increase in the minimum wage will ultimately lead to a reduction in poverty. The “elasticity” of the minimum wage in terms of poverty reduction is the economic term that describes this relation. A negative elasticity implies an inverse correlation between wage and poverty, while a positive one implies a direct relationship. Arindrajit Dube, a professor of economics at the University of Massachusetts-Amherst, notes that 48 of 54 notable calculations of this elasticity since the 1990’s have been negative. Supporting this conclusion, the Washington Post’s Wonkblog concludes that the $10.10 minimum wage has the potential to significantly improve the standard of living up to 30 percent of the worst-off Americans, while causing little to no adverse consequence on the median household.

The nonpartisan Congressional Budget Office estimated last Thursday that Harkin and Miller’s bill would force businesses to spend $15 billion more in salaries by the time it is in full effect. Considering the fact that the private sector has spent roughly 5 trillion dollars annually on wages in recent years, this small increase provides a strong support for proponents of the bill. The increase would cause employers to spend only about a third of a penny more per dollar on wages.

The CBO’s research further shows that the bill would increase earning of 16.5 million workers who currently earn below $10.10 per hour. The CBO also estimates, however, a loss of 500,000 jobs as employers adjust to their new cost conditions. Though certainly painful, this loss is small compared to the size of the American labor force (about 155 million). This loss is perhaps slightly more tolerable given the fact that a significant proportion of the estimated 500,000 jobs are held by adolescents in middle and upper-middle class families. In contrast, according to The Fair Minimum Wage Act, single-parent households, women, and workers of color would be the primary beneficiaries of the minimum wage reform.

The cost to local, state, and federal government is a bit harder to disentangle, but still astonishingly in favor of the $10.10 base. Because government agencies have fairly good pay standards, the bill will only increase local and state governments’ spending by roughly 1 billion dollars, slightly more than a tenth of a percent increase given spending statistics in 2012. The federal government will bear even a smaller increase in cost. They will have to pay approximately 2 million dollars in increased wages to their 4,000 employees that earn below the $10.10 minimum.

The academic research continues to build in favor of the bill and suggests that policy makers should be able to implement the reform with little economic and political backlash, but perhaps the picture painted above is overly optimistic. Despite the CBO’s estimate of 16.5 million people to benefit from the increase in minimum wage, it finds that only about 900,000 will be lifted from poverty. Jeffery Dorfman of Forbes highlights the important reality that only a minority of minimum wage earners are currently in poverty. In fact, because business are able to pass off some of the burden they receive from the minimum wage increase to customers, the CBO estimates that only about one fifth of the bill’s benefits go to its primary targets, or households below the poverty line.

That said, Harkin and Miller’s proposal to raise the minimum wage certainly seems to be a step in the right direction, and, fortunately, it is one that should be possible at a relatively low cost. Republicans on the Hill, however, still seem likely to rally the votes to block the measure this summer. Regardless of the outcome, the problems of wealth inequality and poverty in America will remain dire.