Minimum wage increase: A different perspective on jobs lost

Minimum wage increase: A different perspective on jobs lost

Washington : DC : USA | Feb 19, 2014 at 11:24 AM PST
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Should We Raise the Minimum Wage?

The Congressional Budget Office issued a report Tuesday on the impact of raising the minimum wage and its effect on poverty and jobs.

President Barack Obama and House Democrats are supporting a raise from the current $7.25 hourly minimum wage to $10.10. The raise has the broad support of the American people with reports indicating as many as 70 percent favor the increase.

According to the nonpartisan CBO analysis, the raise in the federal minimum wage could help lift 900,000 workers out of poverty, but at a cost of as many as 500,000 jobs.

Raising the hourly minimum wage from $7.25 to $9 would bring 300,000 workers out of poverty and cost 100,000 new jobs, the CBO said.

The jobs lost in each category sets in motion a dynamic causing employers to reduce the workforce to compensate for paying higher wages, according to the CBO report. This is the statistic Republicans are using to stonewall any raise in the minimum wage, instead of focusing on elevating people out of poverty.

Billionaires like the Koch brothers are pumping millions of dollars into the Republican Party to influence Congress to continue the call for major cuts in programs while suppressing calls to raise the minimum wage for working families. They want to cut nutrition programs, education, and health care, to name a few, in addition to waging war on raising the minimum wage.

The impact of raising the minimum wage is one of the most controversial topics in labor economics, with arguments on both sides about whether jobs are lost and employer reactions to the increase. The CBO projections of jobs lost are true, but there are other considerations on how employers will adjust. One of the most compelling arguments confronts the single-minded prediction that employers will automatically reduce the work force, when there are other options.

Instead of laying off minimum wage earners, “Employers might also shift the composition toward higher skilled workers, cut pay to more highly paid workers, take action to increase worker productivity (from reorganizing production to increasing training), increase prices to consumers, or simply accept a smaller profit margin, ” according to John Schmitt at the Center for Economic Policy Research in the report Why Does the Minimum Wage Have No Discernible Effect on Employment” February 2013.

Schmitt is not alone in these conclusions and referred to similar historical studies. David Card and Alan Krueger’s 1994 book “Myth and Measurement: The New Economics of the Minimum Wage” reached a similar conclusion using a variety of methods and data sets. Restaurant and retail workers, as well as teenagers, were included in the study. The researchers found, The weight of the evidence suggests that it is very unlikely that the minimum wage has a large, negative employment effect."

In a review by Princeton University of Card and Krueger’s book, the researchers’ findings were credited:

“The authors critically reexamine the previous literature on the minimum wage and find that it, too, lacks support for the claim that a higher minimum wage cuts jobs. Finally, the effects of the minimum wage on family earnings, poverty outcomes, and the stock market valuation of low-wage employers are documented. Overall, this book calls into question the standard model of the labor market that has dominated economists' thinking on the minimum wage. In addition, it will shift the terms of the debate on the minimum wage in Washington and in state legislatures throughout the country.”

Would you work for $3 an hour?

Bernie Sanders, the independent senator from Vermont, wrote on his website that instead of supporting an increase in the federal minimum wage, some Republicans want to end the concept of the minimum wage completely. How? Workers in high unemployment areas could be forced to work for $3 or $4 an hour.

This would have to be non-union businesses and industry because unions would never agree to such a humiliating and demoralizing pay scale, which is another reason Republicans are consistently against unionization.

The mere thought of taking advantage of people who are desperate for work is repugnant, and passing a federal wage increase to $10.10 an hour would ensure this never happens—legally that is.

The US government has had a minimum wage since 1938, and it has been raised close to 30 times. When adjusted for inflation, it peaked in 1968. In terms of purchasing power, this is highest the minimum wage has ever reached. If converted using the Bureau of Labor Statistics inflation calculator, it equals $10.55 an hour in 2012 dollars.

Simply stated, the minimum wage in 1968 had the same purchasing power as $10.55 an hour did in 2012. Many people would be aghast at suggesting $10.55 an hour, but consider this. The unemployment rate in 1968 was 3.6 percent and the fair minimum wage at the time, in terms of purchasing power, did not dissuade people from finding work or apparently hiring practices by employers.

The choices made by employers on how to adjust for an increase in wages are not limited to reducing the workforce. Composition of work force, changes in productivity and shifts in profit margin are just a few, so clearly reducing the work force is not the only employer solution.


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The impact of raising the minimum wage is one of the most controversial topics in labor economics, with arguments on both sides about whether jobs are lost and employer reactions to the increase.
Dava Castillo is based in Clearlake, California, United States of America, and is an Anchor on Allvoices.
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