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Does a National $15 Minimum Wage Make Sense?

Democrats are divided over a new bill that would raise the federal minimum wage to $15 per hour

January 16, 2019 — Senator Bernie Sanders speaks during an event to introduce the Raise the Wage act in Washington, DC. Photo: Chip Somodevilla/Getty

A sharp — and familiar — divide has emerged in the Democratic party over a key policy position: the minimum wage.

According to the Washington Post, a “sizable majority” of House Democrats support the Raise the Wage Act, which would increase the federal minimum wage to $15 by 2024. A smaller group of centrists, many from rural areas, instead support legislation introduced by Alabama Representative Terri Sewell: the Paying Hourly Americans Stronger Earnings (PHASE) Act. This bill would establish five different minimum wage tiers across the country, with the local minimum wage calculated based on regional cost of living.

While few Republicans support even modest increases in the minimum wage, Democrats are mostly united in their belief that the federal minimum wage is due for an increase. It was last raised back in 2009, to $7.25. In fact, the real value of the minimum wage, when adjusted for inflation, has fallen dramatically since its peak in the 1960s: Single, full-time minimum wage workers now earn barely enough to put them above the federal poverty line.

The intraparty disagreement concerns the magnitude of the increase. Basic economic theory holds that increasing the minimum wage will result in a decrease in jobs for minimum-wage workers. Faced with higher labor costs, employers may ask existing workers to take on more tasks; in some industries, employers may even turn to automation. Democratic opponents of the Raise the Wage Act worry that raising the minimum wage so drastically and so suddenly will be economically devastating for low-wage, rural areas. Advocates of a $15 national wage disagree, saying that big rural employers — like Walmart and McDonald’s — can afford to pay workers more and that rural Americans deserve a living wage, too. Sewell’s proposal, they argue, would consign parts of the country to permanent poverty and offers many people very little in terms of wage increase.

So who’s right? That depends on just how healthy you think the economy of rural America is.

Last month, researchers David Cooper and Heidi Shierholz of the Economic Policy Institute (EPI), a liberal think tank, published an analysis comparing the Raise the Wage Act to a tiered, regional minimum wage proposal. They concluded that 15.6 million fewer workers would receive a raise under a regional, tiered plan than under the Raise the Wage Act. A third of those workers are women of color.

The EPI analysis makes an important — and possibly contentious — assumption: It assumes that current employment levels remain stable, meaning that everyone who has a job under the current minimum wage would still have a job under a $15-per-hour national minimum wage. Shierholz says this assumption is grounded in recent research on the minimum wage.

While the evidence on minimum wage increases is a bit mixed, a growing body of research does seem to suggest that some of the more dire predictions surrounding small minimum wage increases and massive job loss have so far not turned out to be true, at least in the short-run.

“There’s extensive literature on the effect of minimum wage increases” says Shierholz. “And that literature shows that the minimum wage increases that we have seen have increased the wages of low-wage workers without causing a significant effect on the overall employment level.”

While the evidence on minimum wage increases is a bit mixed, a growing body of research does seem to suggest that some of the more dire predictions surrounding small minimum wage increases and massive job loss have so far not turned out to be true, at least in the short-run.

“If it’s a really modest increase, the short-term effects are pretty small,” says Harry Holzer, an economist and professor of public policy at Georgetown University who served as chief economist at the Department of Labor under President Clinton. “Maybe a 1% loss of employment for a 10% increase in the minimum wage, as a ratio of the median.”

Holzer adds that the effects might be even smaller than that. In a report published in 2014, the Congressional Budget Office calculated that increasing the minimum wage from $7.25 per hour to about $10.10 per hour over three years, as President Barack Obama had proposed at the time, would result in the loss of 500,000 jobs (or 0.3%).

The existing body of research reflecting only minimal employment effects, however, carries two huge caveats. For one thing, much of this research has focused only the short-term effects of minimum wage increases. “The models the literature was using were misspecified if the minimum wage took some time to be reflected in employment levels,” says Jonathan Meer, an economics professor at Texas A&M University who, in 2016, demonstrated that the negative effects of the minimum wage emerge over longer time frames than the field had recognized. “They were just going to give you a smaller number than reality. When we looked for changes in job growth over time, we found that the minimum wage has significant effects on unemployment.”

But there’s a second, bigger problem with the existing literature on minimum wage increases: It has little to say about the effects of the kind of dramatic shock that a $15 minimum wage would represent in distressed and rural economies. Many economists, even those who support moderate minimum wage increases, believe that a $15-per-hour minimum could indeed devastate the local economy in some regions.

“Fifteen dollars is not much lower than the median wages in places like Kentucky, Mississippi, Alabama, Louisiana,” says Holzer. “For rural places, that’s just massive, having 50% of the people get a big bump up like that.”

Holzer and Meer also both point out that the employment effects of minimum wage increases are likely to be nonlinear, meaning they’ll worsen dramatically once the minimum rises above a certain level.

“You could imagine a place that’s either thinking about relocating or automating — and at $8 or $9 per hour, it’s not worth the effort or the cost,” Holzer says. “But with each extra dollar the minimum wage goes up, it starts to make more sense.”

In a working paper with Jeffrey Clemens and Lisa B. Kahn, Meer found that employers respond to minimum wage increases by reducing fringe benefits, such as health insurance or free meals. But at a certain point, employers will run out of fringe benefits to reduce.

“You can charge for parking, for employees’ meals during mealtime if it’s a restaurant, you can reduce other aspects of compensation — all to claw back some of that increase in labor — right up until you can’t,” Meer says. “And once you can’t, then you have to start changing your production function, or you’ll go out of business.”

There are some parts of the country that may be able to bear a $15 minimum wage with minimal job disruptions. There may even be some employers in rural areas that can bear a $15 minimum wage. Unfortunately for Democrats representing rural areas, telling that to small business owners isn’t likely a winning strategy.

Journalist covering economics for @Medium. Words for @nytimes @Slate @NYMag. @Freakonomics alum. Email: dwyer.gunn@gmail.com

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