Some numbers have the power to capture the public attention and become symbols of fears, reality or aspirations. So 13 terrifies us; 1% reminds us of economic inequality; and $15 is the battle cry for the minimum wage in America. This post is about that last number. In fact, it’s more than a number. It’s about real lives.
First, I got curious as to what the minimum wage is in other economically advanced countries. I found that in 2020 the minimum wage in the UK, Germany, France, Holland, Belgium and Ireland was over 1500 euros compared to just over 1000 in the US. That’s a considerable discrepancy, so I had to look at the other side of the equation, unemployment. From 2017 to 2019 (prior to the pandemic) average annual unemployment was around 4% in Holland, 3.5% in Germany, and 4% in the UK, that is, about the same as the 4% rate of the US. Spain and Italy with a lower minimum wage than those countries had unemployment rates over 10%. Denmark, Finland and Sweden do not have a minimum wage and yet their unemployment rate of about 6% was higher than in countries with a minimum wage.
Though simplistic, these data tell me that the often-heard argument of a direct relationship between minimum wage and unemployment rate is not a slam dunk. Numerous economic studies also fail to come to a uniform conclusion regarding the link between minimum wage and employment. Now that we have thrown cold water on this debate-killing argument, let’s proceed with the rest of the story.
The term minimum wage usually means an administratively set minimum price for labor. The federally set minimum wage has stood at $7.25/hr since 2009. Its purchasing power today is clearly below that level. When we consider that tax rates are adjusted for inflation to avoid higher taxation for high incomes and Social Security benefits rise with inflation, it becomes harder to argue against a minimum wage adjustment to protect its purchasing power. So, that’s one point to keep in mind. And here is another one. The Congressional Budget Office estimates that raising the minimum wage to $15/hr will cost workers 1.4 million jobs. This translates to a $10.15 million* of hourly income loss for workers. But there are 27 million workers that make less than $15/hr and, hence, even a one-dollar raise of their wage translates to a $27 million hourly gain, much greater than the loss. In a society that fetishizes aggregate income growth regardless of its distribution, the contemplated rise of the minimum wage sounds like a big winner.
To critics, an administratively set minimum wage violates the law of demand and supply for labor. But the labor market is full of distortions. How do we explain, for example, barriers to entry into some professions (doctors, dentists and lawyers come to mind) that boost their wages by suppressing supply? Or administrative requirements for an expert’s opinion (engineers, architects) even for small and mundane projects that help increase demand for such services and, hence, wages. Not only these arrangements violate competition; they aim at elevating lifestyles from middle-class to upper-middle class or even to upper-class status. Compare that with policies that try to pull millions of workers out of poverty to bear subsistence. Which policies win the moral argument?
And what about the formation of horizontal (same industry) conglomerates, which by the laws of oligopoly produce at a lower level than under perfect competition and, hence, have less demand for labor, which in turn suppresses wages. Let’s also ask this question. If the current minimum wage is above what firms can afford, why then the slice of profits in our national income pie keeps getting bigger than the slice of wages? Somewhere in our economy labor must be losing ground and the most likely suspect is the low end of the labor market.
There is another definition of minimum wage that can set us on a more promising road. That’s the wage that allows a worker to meet basic needs in shelter, food, clothing, recreation. It’s what a living wage is meant to be. This definition is often undermined by attempts to associate the minimum wage with teenagers or college students who just try to supplement their parental allowance, or with those who need only some part-time work that is weakly consequential to their overall wellbeing. The truth though is that in the US the minimum wage is the only income source to millions of people struggling to have a decent living. The reality is at the current minimum wage of $7.25/hr an American family of two lives in poverty.
Viewed from this perspective, the minimum wage is very meaningful because it helps sustain the physical and mental health of the lowest paid workers as well as their participation in the labor force. It also humanizes labor because it shifts the focus from jobs to employees. As many economists argue jobs are a statistic but employees are the ones who bear the brunt of disruptions in the labor market. The humane and socially responsible approach then is to decouple the living conditions of a worker from the lowest wage that equates demand and supply. And this is all the more so in a country of extreme wealth for few.
So, we now come to the crux of the problem. To have jobs we need to have demand from firms at a wage they can afford. To fairly compensate labor the minimum wage ought to be a living wage. The only force that can bridge the gap (when such a gap exists) is comprehensive public policy. There are several alternatives. To ensure a poverty-free minimum wage the government could set a living minimum wage and then reduce the total labor cost, at least for smaller firms, through lower charges for programs, like Social Security and Medicare in the US. Alternatively, the government should provide direct supplemental payments to workers that support a poverty-free living. We already have such supplemental assistance programs but poverty still persists for millions of Americans.
The main point is that the debate about the minimum wage ought not to be about jobs lost or gained but about working lives and what it takes to keep them out of poverty and with dignity. This approach then suggests that tackling the minimum wage calls for more comprehensive policies that support the demand for labor but also recognize the value of labor and protect the lowest paid workers from the vagaries of the labor market.
* If 1.4 million workers lose their minimum wage of $7.25/hr they suffer a total hourly loss of $10.15 million. Even if they lose more than $7.15/hr (because they are paid more than the minimum wage) it is still highly unlikely for the lost income to overtake the total gain the 27 million workers will enjoy from a higher minimum wage.
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