By Tom Cushing
Will Rogers and Mark Twain meet the minimum wageUploaded: Mar 30, 2016
Item: California plans to raise its minimum wage in stages, reaching $15/hour statewide by 2022.
It’s not clear who first offered up the following adage: “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” That saying is variously attributed to Mark Twain and Will Rogers, and does them both credit as the kind of homespun, timeless wisdom for which they’re justly famous.
What Is clear is that it applies to what many folks know about the minimum wage, where our preconceptions can run away and hide from the actual facts. I want to address a few of those mythologies.
First, here’s some relatively non-controversial background. The law has always treated employment as a contract – an exchange of time and effort, usually for currency. ‘Freedom of contract’ is a fundamental doctrine that still covers most workplace situations. That said, both the rise of the labor movement, and various worker protections built-in since the early 1900s have recognized that there’s an imbalance in bargaining power, with the employer holding most of it vis-a-vis individual employees.
Early state attempts to impose a minimum wage focused on particularly vulnerable workers, like children, and women of the day. Federal initiatives were stymied by restrictive interpretations of the interstate commerce that the feds had power to regulate. It took the New Deal era, and a more expansive view of commerce by Supremes (who’d been chastened by FDR’s court-packing scheme) to get the Fair Labor Standards Act (FLSA) covering the minimum wage, overtime and child labor passed and approved. Even so, numerous exemptions, including domestic and ag workers were necessary to secure certain votes needed for passage (read: southern Congressmen, for reasons that are probably obvious).
The federal wage acts as a floor -- states and locales are free to pass their own higher minimums that apply generally within their borders, and a few states have no minimum at all for that small slice of commerce still beyond the federal reach. 29 states have raised their minimums since the federal wage went to $7.25 in 2009.
And now for the more controversial stuff.
Myth 1 – the $7.25 wage is the best it’s ever been.
It’s true that the first FLSA min wage was a remarkable 25 cents/hour (about $4.50 in today’s dollars). It reached its maximum buying power in the 1960s, however, at about $11/hour in today’s value. Since it has never been indexed for inflation, its value starts to erode as soon as it’s passed – that $7.25 enacted in 2009 is worth about $6.56 today. Doesn’t that make you just pine for the ‘60s, all over again? Me, too. BTW, have you gotten a raise in the past seven years?
Myth 2 – the minimum wage has always been a “starter” wage for unskilled teens to get their feet wet in the market (and then decide to stay in school).
In fact, less than a quarter of min wage earners are teens, another 25% are 20-24 and fully half of all such workers are older than 25. Some starter wage.
Further, FLSA was never intended to focus on new workers. Rather, in the Depression era when many folks would literally work for food, it established the labor market’s minimum contractual decencies, and was intended to prime the pump by injecting purchasing power into the economy (all of which would be spent on other goods and services).
Myth 3 – the minimum wage is earned mostly by men.
Nope – about 36% of min wage employees are male, and nearly 2/3 are women (same source).
Myth 4 – despite the original widespread exclusion of minorities from FLSA by exemptions (since changed), it’s mostly ‘those other people’ who earn it today.
In fact, the numbers break down like this: Caucasian 56%, Hispanic 20%, African-American 18%, Asian 4%.
Myth 5 – minimum wage legislation encourages automation, and throws out-of-work the very people it purports to help.
There’s actually very little evidence that this fear is realized, although it’s a hardy perennial argument (especially among folks whose earnings are far from the minimum rate). It suits the “unintended consequences of misguided government intervention” trope that’s popular in some circles.
This myth does find some support in those half-remembered intersecting supply-and-demand curves from Econ 101. If the price of labor goes up, the chart says that the quantity of it goes down. Except that the world is thankfully a lot more complicated than your introductory text implied. A comprehensive ‘study of studies’ compiled by the Center for Economic Policy Research in 2013 examined the topic Why Does the Minimum Wage Have No Discernable Effect on Employment?.
The study concludes that the labor price change is small, and inconsequential in the context of overall costs; that it is partially absorbed in higher prices charged; that it results in less turn-over (a substantial hidden cost, avoided); that it increases demand for other stuff from the folks who get a raise, and that it does cause some so-called ‘wage compression’ as higher-skilled compensation is negatively affected. Thus, in the real world beyond 101, the overall job-loss effect is negligible.
Further min wage jobs tend to be clustered in sectors like fast food, retail and janitorial; there’s an irreducible limit to mechanization of those functions – at least until the robots finally do take over and flip our burgers, too.
Myth 6 – raising the minimum wage drives businesses out of (here, where it goes up) to (there, where it hasn’t).
If we were talking about jobs in large aggregations like factories, new facilities might be slightly incented to locate elsewhere over the course of time (even if there’s risk of an increase anywhere). And there is some evidence that job growth is higher in low wage states, for many reasons. But as above, big businesses rarely pay their workers at anything like the minimum wage. Thus, it is hard to isolate this factor as a driver of ‘business climate’ job migration. We just haven’t yet seen a wholesale migration of jobs out of the CA cities (LA, SF, Oakland) that have jumped-the-gun on hikes, for example. It does help fuel the arguments of the ‘hostile business environment’ mavens, generally.
So, what can we predict if California moves to a $15 rate over the next six years?
We’ll deal with this question next time; it needs its own thousand words. As a preview, clearly the impact of a min wage hike changes as it grows, and eventually you reach a level where myth slides in the direction of reality. So, $12 wouldn’t do much, but $25 (cue the defibrillator) would impact more than 1/3 of the labor force. Is $15 one hike over the line?
Pace also matters – phase-in over a decade is different from doing it tomorrow. And finally, the impact will vary by sector and geography -- what’s good for the coast may not be good for the valley, and what about charity non-profits?
Stay tuned, and fire away, mythologists!