Does raising the minimum wage help or hurt?

$5.15

That was the minimum wage in the state of Missouri when I got my first paycheck as a student worker in August 2000. I did not need the money since I had a scholarship, but it felt awesome to make real money with my part-time on-campus job. Almost 17 years hence, I still remember that feeling.

Outside the context of a kid working a side job in college, the minimum wage has powerful implications.

Many people believe that jobs paying the minimum wage or slightly more are not just for college students. Research from Oxfam America in 2016 says otherwise (See FIGURE 1)

FIGURE 1: LOW WAGE WORKERS IN AMERICA

The findings from Oxfam include:

• 73% of workers earning under $15 per hour nationwide are older than 25.
• Overall, 58 million workers (44%) earn under $15 an hour; 42 million earn under $12 an hour.
• Over 125 million people, including over 31.5 million children, live in households with at least one worker earning under $15 an hour.

Far from using them as launching pads for higher pay, millions stay in these jobs for their working lives.

• The median age of about 1.4 million home care workers in the US is 45; nearly half graduated high school and have had some college education; the majority work full-time.
• With a median wage of $10.25 an hour, 54% live near poverty. This is one of the fastest-growing occupations in the US, projected to rise by 26% over the next decade.

It was against this backdrop, amid the larger conversation around income inequality, and frustrated by gridlock at the federal level, that several cities around the U.S. started raising their minimum wages.

Now, we are starting to see some outcomes that allow us to ask if raising minimum wages help or hurt their intended beneficiaries.

In 2014, Seattle passed a law to to raise the minimum wage over several years from $9 to $15. The first phase of this increase raised the minimum wage from $9 to $11 for large employers while the second phase raised it from $11 to $13 for large employers.

According to researchers at the University of Washington the increase during the first phase led to some lost jobs and hours but those were more or less offset by the increased income.

The second phase, that raised the wage to $13, created more troubling outcomes (NOTE: not everyone agrees with this study):

• Employment declined for low-wage workers, and those who kept their jobs faced a drop in hours.
• The negative impact of lost jobs and hours more than offset the benefits of higher wages; on average, low-wage workers earned $125 per month less because of the higher wage.

This explains why the minimum wage is so tricky.

Many factors determine what wage the market can support.

In pure economic terms, the closer a rising minimum wage gets to the median wage in a particular location, the more harmful its effects (See FIGURE 2)

FIGURE 2: MINIMUM WAGE IN RELATION TO MEDIAN WAGE

FIGURE 2 shows that a high minimum wage was beneficial in cities like San Francisco and San Jose since these cities have a high median wage, which means that minimum-wage jobs are different from jobs that pay the median wage. Even after the minimum wage rises, it is still substantially lower than the median wage.

Comparatively, cities like Fresno and Merced have a low median wage, so minimum increases tend to make employers question whether they should be paying a worker close to the median wage for a minimum-wage job. In such locations, a higher minimum wage hurts more than it helps.

This brings us to the second factor: the sheer number of Americans that depend on low-wage jobs.

Some economists have surmised that employers might cut back on hiring once the minimum wage rises past a specific amount, which would affect a far broader swath of workers than the part-time fast-food and retail employees who are typically thought of as dominating the ranks of minimum-wage earners. 

In Seattle for example, the second minimum wage increase affected the wages of a much bigger chunk of the population. This suggests that way too many Americans are in jobs that pay just more than the minimum wage, and any increase in their wage will affect their employability given their perceived value to their employer.

Another factor is the peculiarities of the location.

• Higher-end restaurants in bigger cities with established clienteles can better absorb minimum wage hikes since their customers are less likely to cut back if entrees get pricier.
• Businesses in cities with tourist attractions often find it easier to pass along higher costs to customers, as tourists tend to be less price-sensitive than locals. This could be another reason why San Francisco can absorb a higher minimum wage, but Fresno cannot.
• San Francisco and San Jose, both high-wage cities that have benefited from the tech boom, are likely to weather an increase.
• Cities with high real estate prices are better able to withstand minimum wage increases than cities with low prices. In the former, wages represent a smaller fraction of a business’s overall cost and therefore have a smaller effect on profits. In the latter case, with Fresno being a prime example, real estate is cheap and wages are the biggest cost for the typical business. For Fresno, minimum wage hikes hit harder as a result.

While this topic generates a lot of political and moral debate, Arindrajit Dube, an associate professor of economics at University of Massachusetts in Amherst asks for patience as these changes play out.

He advises that the somewhat long ramp-up period for these wage hikes in Seattle will provide data to learn from this experiment and offer opportunities for course corrections.

On this front, the following trends make for sobering reading:

• Because of automation, cashier jobs are expected to grow 2% by 2024, significantly slower than the 7% job growth overall, according to the Bureau of Labor Statistics.
• Half the work done by cashiers can be automated by current technology, according to a recent McKinsey Global Institute report.
• Two-thirds of the time on tasks done by grocery store workers can be automated, the McKinsey report said.
• A Forrester report estimated that 25% of the tasks salespeople do would be automated this year, and 58% by 2020.
• Robots have started flipping burgers.
• In countries with high minimum wages, like Australia, employers have started hiring younger workers aggressively since they can be paid less than the minimum wage, indicating a global aversion to high wages for jobs deemed to be low-skilled.

At a moral and professional level, I struggle with this concept. I was raised in a society where labor was cheap and plentiful, and not always respected. I admire and believe in the American ethos that a full-time job should mean freedom from poverty and a stepping stone towards something bigger and better.

Then, I work in an industry where ingenuity requires that we automate our own jobs so we can solve the next big challenge. This creates a domino effect in our larger ecosystem that leaves in the cold others whose skills and jobs are not as transferable as those in the hi-tech industry that employs me.

One way forward would be to tie the wage to location and industry, while also building the skills of the workforce to reduce the dependency of so many of our fellow Americans jobs that are, with each passing day, less rewarding and getting fewer in number.