What the Minimum Wage Debate Gets Wrong
August 3, 2017
Aug 3, 2017
10 Min read time
Critics of raising the minimum wage claim that it decreases employment, but they are missing the larger point.
In January 2016, Seattle raised its minimum wage from $11 to $13 per hour, the highest in the country. Progressives hailed the increase, seeing it as evidence that a proposed national $15 per hour minimum wage, once pure fantasy, had finally become a realistic possibility. Such a hike, it is generally assumed, would help combat economic inequality and impact a wide swath of the workforce—as a result of the long decline in median real hourly wages, more than 40 percent of American workers currently earn less than $15 per hour.
But a recent study of Seattle’s workers has challenged the presumed benefits of a higher minimum wage. By analyzing individual workers’ wages and hours over time, the study estimated that the city’s decision to increase the minimum wage cost the average low-wage employee $125 per month. The Washington Post called the study “bad news for liberals,” and the results quickly rekindled long-running debates about the wisdom of minimum wage increases.
If minimum wage hikes lead businesses to eliminate jobs, should progressives still support them?
The Seattle study, after all, seems to confirm neoclassical economic theory, which predicts that raising the minimum wage leads to job losses, particularly among workers with little education and few skills. Past empirical studies have traditionally found minimal employment losses—and sometimes even gains—after wage hikes in local markets, making the Seattle study something of an outlier. It is important to note that the Seattle study has not been peer reviewed yet, and some scholars have questioned its methodology. Nevertheless, it still raises a thorny question: if minimum wage hikes lead businesses to eliminate jobs, should progressives still support them?
The short answer is: absolutely. Even if they reduce employment levels, such laws help reduce class and status divisions within the labor market that can be toxic in a democracy. Indeed, some job losses may a good thing, since many minimum wage jobs are not worth saving.
To explain why, it is helpful to summarize the broader debate on the effects of minimum wage laws. The impact of a wage hike on employment is determined by what economists call the “elasticity of demand” for labor, that is, how responsive the demand for labor is to the change in wage rates. Does a 20 percent increase in the minimum wage lead to a 20 percent drop in demand? Past studies, including one of the Seattle wage hike by researchers at Berkeley, have found demand elasticity for labor in the low-wage sector to be minimal or even negative, meaning that minimum wage increases led to a proportionally smaller decline in demand, or even an increase in demand. That last possibility isn’t as strange as it might initially sound. Within local markets, higher wages may lead to increased consumption, sparking higher demand for goods and higher demand for labor.
That being said, a federal $15 per hour minimum wage would be well outside the range of typical minimum wages since the Fair Labor Standards Act was passed during the New Deal. In inflation-adjusted terms, the federal minimum peaked around $8.68/hour in 1968. As a result, even some economists who are generally favorable toward minimum wages have expressed concern over a move to $15/hour. Alan Krueger, for example, has written that such an increase would “put us in uncharted waters, and risk undesirable and unintended consequences.”
Despite reducing employment levels, minimum wage laws help reduce class divisions.
The Seattle study seems to confirm Krueger’s fears. The headline numbers are indeed bad: its authors write that the recent hike “reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by about 3 percent,” lowering take-home pay for the average low-wage employee. Essentially, the low-wage job market contracted significantly after Seattle raised the minimum wage to $13 per hour. The researchers’ data set, moreover, was more granular than those used in past studies. The State of Washington gave them access to individual workers’ wages and hours, as reported to the state unemployment insurance agency. That may make its findings more convincing than past studies.
But many economists have cautioned against drawing conclusions just yet. First, as noted above, the study has not faced peer review. Second, it is an outlier: its estimated employment losses were, as the Economist puts it, “freakishly large.” The study found that employers reduced hours by a factor of three times the wage rate increase, which seems odd. Third, the data set had a critical limitation: companies with more than one location often reported their data for all job sites together, making it impossible to determine workers’ location. As a result, the study did not use data from most large employers, who constitute about 40 percent of low-wage employment in Seattle and include nearly all the mega-firms in the low-wage economy: Walmart, McDonald’s, Hilton, Amazon, et cetera. This could have skewed the results if, for example, large firms are better able to absorb a wage increase than smaller ones. Finally, Seattle’s booming job market may have already been driving wages well above the new minimum. In other words, part of the decline in low-wage employment could be a result of formerly low-wage employees moving into higher wage positions.
Given such concerns, we may not get a good picture of the effects on the ground for some time. The dust-up is nevertheless typical of debates surrounding minimum wage laws: they tend to focus on employment effects, with critics characterizing them as substantial, and defenders insisting they are minimal. The defenders have generally had the data on their side, but let’s assume for now that the Seattle data continues its trend into the future. This might happen, for example, if Amazon sparks a substantial closure of retailers in Seattle. Or if the economy isn’t growing fast enough to replace the jobs lost, so that workers with few skills—who are disproportionately women, people of color, and people with disabilities—are left permanently unemployed or underemployed. Or if it simply isn’t profitable to employ workers without many formal skills at $15 per hour. Or if employers respond to a higher minimum by implementing more labor-saving technology, such as the self-serve kiosks McDonald’s has been rolling out.
If this turns out to be the case, what should progressives do?
We should change the subject. As Noah Zatz has observed, progressives and conservatives alike seem to view minimum wage laws as a means of providing additional resources to the working poor. But by that metric, they’re arguably inferior to policies like wage subsidies or the Earned Income Tax Credit, which can be targeted to individuals based on their needs, or even an universal basic income, which could indirectly set a high wage floor. Moreover, if one accepts the basic neoclassical model of supply and demand—or the initial Seattle findings—liberal labor markets combined with transfers looks pretty good. Let wages be set at market prices, so that all who need jobs can find them, then top up our take-home pay as necessary given our circumstances. That approach has even proven attractive to left-liberals such as Anne L. Alstott, as well as John Rawls, who argued in A Theory of Justice that addressing individual needs through the tax system would generally “be more effective than trying to regulate income by minimum wage standards, and the like.”
The subject of social justice is wider than distribution.
But as the late Iris Young put it, “the subject of social justice is wider than distribution.” A just state will not simply guarantee equal rights and a fair distribution of material resources, but will also combat pernicious forms of “private” power that lead to oppression and rigid status hierarchies. Young is far from alone. Elizabeth Anderson has argued that an egalitarian politics must ensure “equal citizen[ship] in a democratic state,” Martin O’Neill has argued that it must eliminate “stigmatizing differences in status,” and Nick Bromell has defended the “democratic value of dignity.” For now, call this an ideal of “equal economic citizenship.”
As I’ve argued in past work, minimum wage laws and other basic employment regulations help ensure equal economic citizenship in a few ways. First, they signal that one’s work is respected and valued, contributing to workers’ dignity. George Bernard Shaw captured this well when he quipped that “when domestic servants are treated as human beings it is not worthwhile to keep them.” There is, of course, a dark side to focusing on workers’ dignity. Our country has always reserved the most “dignified” jobs for white men and hasn’t treated the domestic labor of women and people of color as “work” in its public discourse, or as “employment” under the law. And we’ve kept welfare benefits to a bare minimum, undermining recipients’ dignity. But the path to a better politics of work and welfare isn’t through “leveling down,” that is, making all jobs mediocre. Rather, it is through “leveling up”: instituting policies that value and reward other types of work.
Second, minimum wage laws help align power and responsibility in the labor market by forcing firms and wealthy individuals to share profits with workers. The Congressional Budget Office estimated in 2014 that most costs from a proposed minimum wage increase would be borne by wealthier individuals, not workers, because companies respond to increases by lowering or freezing executive salaries, or by accepting lower profits, and therefore lower returns to finance. While tax-and-transfer policies can have a similar net effect on distribution, they do not target the worker-firm relationship directly. Instead, all transfers are filtered through the state, an alien institution.
The solution is to build an economy in which market work is not the only path to economic citizenship.
And what if firms respond to minimum wage hikes by automating menial tasks? I don’t think that changes the basic analysis. As I noted in a previous essay, I am skeptical that automation is going to end work as we know it. Many low-wage jobs require substantial fine motor skills, situational judgment, and emotional intelligence, none of which are about to get automated. Nevertheless, there is significant capital substitution in the low-wage market today, as tablets automate the ordering process in fast food, robots replace some human labor in warehouses, and AI-based apps replace human taxi dispatchers. The workers displaced won’t exactly flourish unless they can find other jobs or another source of income.
The solution is to build an economy in which market work is not the only path to economic citizenship. As feminist and critical race scholars have long emphasized, it is simply wrong to conflate the “economic” sphere with the sphere of market exchange and to conflate “work” with legal “employment.” Work, as Karl Polanyi put it, is “a human activity that goes with life itself,” and it includes unpaid care, volunteer work, and even productive hobbies. Private labor markets have the virtue of allocating workers to tasks based on their skills and social demand for particular goods and services, but they would cease to function without unpaid care work on the one hand, and a robust public sector on the other. And even if automation does spark significant private sector job losses, we’ll still need to work to manage the production of essential goods and to educate and care for one another.
In this light, the typical debate around minimum wages gets things backward. We should not be asking if minimum wage laws contract labor markets and condemn them if they do. Rather, we should be asking how to build a more equitable society and considering how minimum wage laws fit into that project. Ultimately, we need reforms on a few fronts. First, we need worker empowerment measures, such as a high wage floor, a shorter workweek, and rejuvenated collective bargaining. Second, we need dramatically expanded public services, including universal health care, subsidized elder care and childcare, an ambitious human capital strategy to ensure a highly skilled and mobile workforce, and unconditional transfers such as child allowances and—if possible—a basic income. Finally, we need a revised tax structure that helps compress income and wealth inequalities and ensures that the benefits of technological development are equitably shared. These reforms would encourage a “high road” production strategy of high-wage work, high-quality production, and perhaps higher prices, all while making it easier for people to move in and out of the labor force.
While this is not the dominant agenda around work today, I am hopeful that a more inclusive egalitarian politics is already emerging. Tens of millions from across the political spectrum have mobilized to defend and expand Obamacare, while groups on the left including the Movement for Black Lives and a resurgent Democratic Socialists of America have called for a suite of policies much like those outlined here. These movements and proposals point toward the economy and society we need: one where work is better and fairer, but where it is no longer the sole path to full economic citizenship.
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August 03, 2017
10 Min read time