The Congressional Budget Office said recently that a $15 minimum wage would cause the loss of 1.4 million jobs. The CBO is wrong. Actually, the opposite is true: raising minimum wages gradually will increase employment and will expand the economy.
Raising minimum wages will have a significant impact on income inequality in the United States. Let’s go into the real world for a moment. If you give a McDonald’s franchise owner an extra dollar, he might save it. But if you give a McDonald’s worker an extra dollar, they’re almost certainly going to spend it, like the next time they go to buy food or gasoline. Since the US is fueled by consumer spending, we’re all better off when money gets used to purchase clothing or food rather than it getting stuffed in a bank account or invested in the stock market.
Raising wages for low and moderate-income workers is one of the most effective strategies for boosting demand. Unlike higher earners who can afford to save some of their income, working families spend higher wages on necessities at local businesses, re-circulating them back through the economy. According to the Federal Reserve Bank of Chicago, every $1 per hour in wage increase for a minimum wage worker results in $3,500 in new consumer spending by his or her household over the following year.
The largest percentage increase in the minimum wage occurred in 1950, when the wage jumped by 87.5%, from $0.40 to $0.75. According to the Bureau of Labor Statistics, the unemployment rate in the United States decreased from 1949 to 1950 from 5.9% to 5.3%. At the same time the US economy grew by more than 9%. The increase in minimum wages was a substantial factor in the economic growth in the United States that year.
During summers in the 1960s I worked for the minimum wage while attending college. In 1968 the minimum wage was $1.60 per hour. In 2021 dollars that $1.60 minimum wage translates to a minimum wage of $12. But the current minimum wage now is $7.25, a far cry from $12.
A recent study by the Los Angeles AFL-CIO found that the stimulus effects the added income that workers would receive from a $15 minimum wage would generate an estimated $9.2 billion in annual sales in Los Angeles County. These increased sales would in turn create an estimated 64,700 new jobs in the county to meet the increased demand for goods and services. Los Angeles passed into law a higher minimum wage that phased in starting in 2016 at $10 and rose to $15 by 2020.
The Economic Policy Institute estimated that the modest increase in the federal minimum wage in July 2009 (from $6.55 per hour to $7.25) generated $5.5 billion in consumer spending across the economy. Economic Policy Institute, “Fix It and Forget It: Index the Minimum Wage to Growth in Average Wages,” Briefing Paper #251, Dec. 17, 2009.
In 1938, at the depths of the Great Depression, the first federal minimum wage was enacted. Its twin goals were maintaining a wage floor to keep workers out of poverty, and stimulating the consumer spending necessary for economic recovery. President Franklin Roosevelt called for its enactment as “an essential part of economic recovery,” explaining that by increasing the purchasing power of those workers “who have the least of it today, the purchasing power of the Nation as a whole–can be still further increased, other happy results will flow from such an increase.”
In 1994, Princeton economists David Card and Alan Krueger examined employment at fast food restaurants on the New Jersey-Pennsylvania border after New Jersey raised its minimum wage while Pennsylvania did not.David and Alan B. Krueger. 1994. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” American Economic Review. Vol. 84, No. 4. (September), pp. 772-793. The authors found that there was no evidence that New Jersey’s minimum wage increase led to job losses. In fact, they found that employment increased at fast food restaurants in New Jersey following the increase. This study upended conventional assumptions and led to 20 years of research as other economists tested their findings. The result has been that most research confirmed the Princeton findings.
In 2006 five Nobel Laureates joined hundreds of other economists in called for raising the minimum wage, finding that a higher minimum wage “can significantly improve the lives of low-income workers and their families, without the adverse effects that critics have claimed.”
Most significantly, raising wages reduces costly employee turnover and increases productivity. When the minimum wage goes up, employers can reap these benefits of paying higher wages without being placed at a competitive disadvantage, since all companies in their field are required to do the same.
Research has documented how raising wages reduces turnover because workers who are paid more stay with their current employer longer. For example, a study of the effect of a wage increase for workers at the San Francisco airport found that annual turnover among security screeners plunged from 95% to 19% when their hourly wage rose from $6.45 to $10 per hour under a living wage policy. Michael Reich, Peter Hall, and Ken Jacobs, Living Wages and Economic Performance: The San Francisco Airport Model (Berkeley, Calif.: Institute of Industrial Relations at the University of California, Berkeley, 2003).
The Harvard Business Review estimated that in skilled and semi-skilled jobs, employee replacement costs are typically 1.5 to 2.5 times the employee’s annual salary. The University of California researchers who authored the San Francisco Airport study projected that the re-staffing costs for replacing a low-wage worker at the airport averaged $4,275 per hire.
Because of the benefit of raising minimum wages, many businesses across the country support raising the minimum wage — and often pay their workers above the minimum wage — recognizing the benefits that come with compensating employees well. This includes major national employers in low-wage industries, such as retail and home care.
Costco, one of the nation’s leading and very profitable mass retailers, is a case in point. Costco pays its employees an average of $17.48 an hour. Hourly pay at Costco ranges from an average of $12.20 to $26.68 an hour. Numerous studies have found that Costco’s high-wage approach has paid off by reducing staff turnover and increasing employee productivity. The Harvard Business Review found that Costco’s turnover is “unusually low” — 17% overall, and just 6% after one year’s employment, compared with Walmart’s 44% rate. Analysis by Business Week found that as a result of Costco’s compensation practices, its employees were much more motivated and productive, significantly outselling their Sam’s Club counterparts, and more than offsetting Costco’s higher wages. As Costco’s CEO explained, “Paying your employees is not only the right thing to do but it makes for good business.”
The Congressional Budget Office should know better. Raising minimum wages in a phased-in manner will not cause job losses. On the contrary it will increase employment, increase economic activity and reduce income inequality. It’s also the right thing to do.
Joel D. Joseph is a lawyer, an economist and founder of the Made in the USA Foundation, a non-profit organization dedicated to promoting American-made products. Email joeldjoseph@ gmail.com. Phone 310 MADE-USA.
From The Progressive Populist, March 15, 2021
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