Maximising Economic Equality: Is The $15 Minimum Wage The Answer?

By
Xaxa Sheng Smith
on
May 2, 2021
Category:
Economic Policy

Improving the livelihoods of American workers through a federal minimum wage increase has long been sought-after within the Democratic Party as a means to combat the U.S.’s growing income inequality, with the top 1 percent’s income growing five times as fast as the bottom 90 percent’s since 1979. 

As the COVID-19 recession has disproportionately affected American workers, such a policy has been brought back into the spotlight this year. Late last month, House Democrats introduced the Raise the Wage Act of 2021, which would gradually increase the federal minimum wage from $7.25 to $15 by 2025. The legislation was included in the House version of the $1.9 trillion relief package. 

However, the effort failed in a 58-42 Senate vote when eight members of the Democratic caucus joined all Senate Republicans in voting against the proposal on Mar. 5. "What's important is whether or not it's directly related to short-term Covid relief. And if it's not, then I am not going to support it in this legislation," Sen. Kyrsten Sinema (D-AZ), a Democrat who voted against the proposal, told Politico. "The minimum wage provision is not appropriate for the reconciliation process. It is not a budget item. And it shouldn't be in there." 

The argument about America’s income inequality is central to the widespread effort to raise the minimum wage. According to a tweet by Sen. Bernie Sanders (I-VT), committee chairman of the Raise the Wage Act, “A $15 minimum wage is not a radical idea. What's radical is the fact that millions of Americans are forced to work for starvation wages, while 650 billionaires became over $1 trillion richer during a global pandemic. Yes. We must raise the minimum wage to a living wage." 

So, what does the proposal entail? The Raise the Wage Act seeks to raise the federal minimum wage to $9.50 this year and increase it incrementally until it reaches $15 in 2025. After that, the government will adjust the minimum wage to balance the growth in the median wage. The minimum wage, first enacted in 1938 at $0.25 an hour, has remained constant since it was last raised in 2009. Because of inflation, $7.25 in 2009 is equal to $8.81 in 2021, and in terms of purchasing power, the $1.60 minimum wage in 1968 would be worth about $12.27 in 2021. According to the liberal Economic Policy Institute's (EPI) Family Budget Calculator, in all areas across the United States today, a single adult without children needs at least $31,200 — what a full-time worker making $15 an hour earns annually — to achieve a modest but adequate standard of living. 

The act also seeks to phase out the $2.31 subminimum wage for tipped workers — a figure that has not been lifted by Congress in 30 years. According to the National Employment Law Project, there are currently 1.3 million tipped workers throughout the country who are paid as little as $2.13 per hour and another 1.8 million who receive wages above $2.13 but still less than their state’s regular minimum wage. Having a lower minimum wage for tipped jobs results in significantly higher poverty rates for tipped workers. In states that use the federal $2.13 tipped minimum wage, the poverty rate among servers and bartenders is 13.3 percent — 5.6 percentage points higher than the 7.7 percent poverty rate among servers and bartenders in one-fair-wage states. According to the EPI’s analysis of the Current Population Survey from 2017–2019, eliminating the lower tipped minimum wage has not harmed growth in the restaurant industry or tipped jobs. In fact, from 2011 to 2019, one-fair-wage states had stronger restaurant growth than states that had a lower tipped minimum wage — both in the number of full-service restaurants (17.5 percent versus 11.1 percent) and in full-service restaurant employment (23.8 percent versus 18.7 percent).

One of the arguments against raising the federal minimum wage is that there are relatively few workers earning minimum wage in the United States and that they are mainly part-time teens and college students making pocket money through a side job. It’s true — according to the U.S. Bureau of Labor Statistics, in 2019, of the 82.3 million American workers who were paid by the hour, under 0.005 percent of workers (or 392,000 people) earned the $7.25 minimum wage, and 1.9 percent of workers (1.2 million people) were paid below the minimum wage. And, although workers under age 25 in 2020 represented just under one-fifth of hourly paid workers, they made up 48 percent of those paid the federal minimum wage or less. Among employed teenagers (ages 16 to 19) paid by the hour, about 5 percent earned the minimum wage or less, compared to 1 percent of workers age 25 and older. However, it is “profoundly wrong” to characterize the minimum wage increase to $15 per hour as only benefitting teenagers, says Heidi Shierholz, a senior economist and director of policy at the EPI. This is because there are many full-time, adult employees paid by the hour who are still earning less than $15 per hour — a majority of whom are aged 25-54. Over half are women and over a quarter have children. 

The Congressional Budget Office notes that raising the federal minimum wage to $15 per hour would increase wages for 17 million U.S. workers. And, according to the EPI, essential and front-line workers, including substitute teachers, nursing assistants, and health aides, make up a majority (60 percent) of those who would benefit from a $15 minimum wage. 10 million workers in health care, education, construction, and manufacturing would see a raise. 

Oxfam’s Politics of Poverty asserts that boosting consumer purchasing power would have positive ripple effects on the entire economy, with the roughly $120 billion in increased wages being spent on necessities such as rent, food, and clothes. In turn, demand for local businesses and services rises, strengthening local economies and offsetting any cost increase for businesses. A recent national poll indicates that while 46 percent of small business owners identified themselves as a Republican and only 35 percent as a Democrat, 65 percent of small business owners agree that “increasing the minimum wage will help the economy” by sparking consumer demand, indicating some level of bipartisan support. 

So, what’s the point of contention? There 's no doubt that companies across the world have been dramatically impacted by COVID-19, and that’s especially true of small businesses in the United States. About 53 percent of businesses with fewer than 50 employees surveyed reported that the pandemic has had a moderate to severe impact on their business, according to the CBIZ Main Street Index. “A federal, nationwide mandate to raise the minimum wage to $15 per hour will put us right back to where we were months ago — American jobs destroyed, small businesses forced to close their doors and life savings gone to waste. I can’t think of anything more devastating at a time when our small businesses are barely getting back on their feet,” Representative Elizabeth Ann Van Duyne (R-TX) told CNBC.

While proponents of the wage increase say that raising the federal minimum to $15 per hour will benefit workers and small businesses, opponents believe otherwise. A Minnesota-based pizza chain, Punch Pizza, which was acknowledged in former President Barack Obama’s 2014 state of the union for paying its employees above minimum wage, currently pays an average of $13 per hour for starting wages. According to co-owner John Puckett during a Congressional hearing, established employees earn an average of $15 per hour, plus an additional $5 in tips. Punch Pizza lost over $1 million in revenue last year, with a loss that has extended through the winter. “We expect to lose that until we’re able to safely reopen our dining rooms,” Puckett says. “While paying employees more than the minimum wage is a priority, it means the company is giving up profit margins in the short-term since labor costs for Punch Pizza are about 40 percent of sales.”

According to a 2012 review by Mark Wilson, a former deputy assistant secretary of the U.S. Department of Labor, there is evidence to suggest that minimum wage increases don’t reduce poverty. In the previous federal minimum wage increase from $5.15 to $7.25, only 15 percent of the workers who were expected to gain from it lived in poor households. In the current proposal to raise the minimum wage to $9.50, only 11 percent of workers who would gain live in poor households. Since 1995, eight studies have examined the effects of minimum wage increases on income and poverty, and seven found that past minimum wage hikes had no effects on ameliorating poverty. These studies generally find that while some low-skilled workers living in poor families who remain employed do see their incomes rise, other low-skilled workers lose their jobs or have their work hours substantially reduced, which causes income losses and increased poverty. 

In 2010, Joseph Sabia, Professor of Economics and Director of the Center for Health Economics & Policy Studies at San Diego State University, and Richard Burkhauser, Professor Emeritus of Policy Analysis at Cornell University, estimated: “Nearly 1.3 million jobs will be lost if the federal minimum wage is increased to $9.50 per hour.” More recently, a Congressional Budget Office report found that a federal minimum wage increase to $15 would displace 1.4 million American workers, with half falling out of the labor force completely by 2025. 

Evidence of job losses have also been found since the earliest imposition of the minimum wage. The U.S. Department of Labor's own assessment of the first $0.25 minimum wage in 1938 found that it resulted in job losses for 30,000 to 50,000 workers, or 10 to 13 percent of the 300,000 covered workers who previously earned below the new wage floor. Similarly, minimum wage increases imposed in American Samoa resulted in economic effects so adverse that Obama signed to freeze it until 2015 despite his strong support for the 2013 Minimum Wage Fairness Act that sought to increase the U.S. federal minimum wage for employees to $10.10 per hour. In 2018, under public pressure from activists, Amazon committed to raising its minimum wage to $15. According to an Amazon blog post, American workers noted that they “simply [couldn’t] wait” for the higher pay. However, according to new research from economists at the University of California, Berkeley and Brandeis University, the 10 percent increase in the base wage at Amazon translated into a 1.7 percent loss in local jobs and a 0.4 percent loss in jobs for low-wage workers.

Additionally, a new study by the conservative Heritage Foundation indicates that although increasing the minimum wage would potentially create more spending power for low-income Americans, it would also raise the costs of child care by an average of 21 percent in the U.S., adding an extra expense of $3,728 per year for a family with two children. According to Rachel Grezler, a research fellow in economics, budget, and entitlements at the Heritage Foundation, “One of the biggest impacts [of the $15 minimum wage] is going to be child-care costs. For single mothers, it’s not an option whether or not to work, and yet [they would] be facing thousands of dollars more in child-care costs per year. That’s going to put these women in a bind.”

Sen. Joe Manchin (D-WV), a moderate Democrat, also opposes using reconciliation to pass the measure. He sees an $11 wage as more appropriate for West Virginia, where the state minimum wage has been set at $8.75 since 2016. Indeed, both the statutory and cost of living-adjusted minimum wages differ vastly across the nation. According to the Kahler Financial Group, a worker earning $15 in Mississippi has the same purchasing power as a worker earning $26.25 in Washington, D.C., whereas a worker earning $15 in Hawaii has the same purchasing power as a worker earning $13 in Washington, D.C. It is worth noting that workers in Democratic states generally have a markedly lower purchasing power than their Republican counterparts, providing a possible explanation for the overwhelming partisan vote on the issue.

Evidently, there is no easy solution to the minimum wage problem. The correct approach to ensuring American workers a living wage while preserving jobs and small businesses would be a more nuanced one, perhaps designed regionally rather than federally to cater to each state’s unique circumstances. The dialogue presents an apt example of the spider web theory — a change in one place may give rise to an unintended ripple effect. 


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