Minimum wage earners aren’t just teens in need of pocket change

There are few topics in the world of policy that have generated as much argument and investigation over time as minimum wages.

One reason may be because the federal minimum wage has been around for decades, since 1938. But the main reason seems to be that the very notion of the government setting a minimum price for labor cuts straight to the heart of a political and ideological divide as to how markets should work versus how they actually work, a divide that hasn’t changed much in 80 years.

{mosads}The simple and, what we might call, pure view of markets is that mandating prices just causes distortions that ultimately lead to lots of problems. In this case, minimum wages lead to fewer jobs for poor people. Those who don’t like the pure view argue that at least this does something to help poor workers and that any loss of jobs will be small.  

So this debate between two groups turns into a political fight every time the minimum wage gets raised to offset increases in inflation, which is why it gets increased in Democratic administrations and stays fixed in Republican administrations.

Twenty-nine states and a slew of cities have minimum wages above the federal minimum, so in those locations, which tend to be Democratic strongholds, a federal minimum wage increase would have little effect.

The biggest impact would be to rural and Republican states, which is another reason for political strife, because a cynic would say this is a Democratic effort to raise wages only on Republican districts.

But even in those states, a minimum wage hike wouldn’t hit every low-wage worker due to the myriad of exemptions to minimum wage coverage: restaurant workers receiving tips, trainees, agricultural workers, etc. There are slightly more people in the U.S. working for wages below the federal minimum than those working at the minimum wage.

There is no doubt, though, that it would raise the wages for many jobs.

One of the complaints made about minimum wages in earlier periods was that many of those receiving the benefits were just high school kids working part-time jobs for pocket money. What was the policy benefit of raising their wages?

That has been less true since the Great Recession: Only one-in-five workers earning minimum wage are teenagers now, and about the same percentage of people are married. About 60 percent of workers earning minimum wage or less are working part-time, but that doesn’t mean they don’t have to work. Many want but can’t find full-time work.

Most of the others are constrained by child care, health problem, or school schedules from working more. If we think about those individuals who would see a benefit from an increase, the average worker is older, less likely to be working for discretionary income and more likely to be supporting a family.

It’s also true that raising the minimum wage creates pressure to raise wages for jobs above those. If you are paying landscapers $7.25 an hour and their supervisor $10.25 per hour, it is going to be very difficult to keep any supervisors once they are paid no more than those they supervise.  

How about the costs of the increase, i.e., how many jobs will be lost? The accumulating research evidence has not been kind to the pure view of the labor market as it suggests that the effects of prior increases on job loss have been quite modest.

Where unskilled labor is a large part of the product or service we are buying, say for landscaping, a 42-percent increase in the cost of using a landscaper in Texas will have a noticeable effect on demand and on those jobs. That’s the pure market stalking horse.

For most low-wage jobs, such as the hospitality industry, however, low-wage labor is a very small proportion of the price of a hotel room or a restaurant meal, so an increase in those wages is unlikely to have much of an effect on prices, on demand and on subsequent employment.

There is another reason why this may be one of the easier times to raise minimum wages and that is the stubbornness that wages have shown to rising even as the stock market booms and employers complain about not finding low-wage workers.

In part, this is the extraordinary pressure that low-wage employers face to keep their prices, costs and wages down even when they can’t get the workers they need at the wages they are paying. No one wants to be the first competitor to raise their wages and their prices. An increased minimum wage takes wages out of competition because all low-wage employers are in the same boat.

The purist might say, “We should fix entitlements and so forth so that more people would be willing to work even at a lower market wage and create better programs for supporting their standard of living.” But the pragmatists respond, “Let us know when all that is fixed, and in the meantime, this is the best we can do.” 

Peter Cappelli is the George W. Taylor professor of management at The Wharton School of Business of the University of Pennsylvania.