Saturday, August 23, 2014

What the US would look like with no minimum wage

Fast food worker protests have brought the minimum wage debate to the fore of the national conversation. Getty Images

It's been a big few months for the minimum wage. Protests of low-wage workers from big-name businesses like McDonald's and Walmart late last year thrust the issue into the spotlight. Obama has gone on the road with his push for a sizable federal minimum wage hike, from $7.25 to $10.10. And this week, the Maryland legislature passed a law upping the state's minimum wage to $10.10.

In any minimum wage fight, there tend to be two main camps: one that says the current minimum wage should go up, and the other that says they should remain as-is. Minimum wage hikes are frequently on the political agenda in part because they poll well; a January Quinnipiac poll found 71 percent of Americans, including 52 percent of Republicans, in favor of raising the minimum wage. For the same reason, even the staunchest conservative politicians basically never try to lower this wage floor.

But examining the issue through the other lens of the telescope answers the more basic question of why we even have the policy. So it's worth asking: what if the United States had no minimum wage at all?

A class of vulnerable workers

Though it's a nearly impossible question to answer, there are a few useful starting points, so it's good to start with a basic premise: at least some new, ultra-low-wage jobs would appear. The question is whom would this affect? And who would have those jobs?

It's hard to know exactly how many people would lose wages. At first glance, it would appear to be relatively few. Around 3.3 million workers worked at or below the federal minimum wage in 2013, or around 4.3 percent of all 75.9 million hourly workers. Pull in all other workers, and those hourly minimum wage workers make up only around 2.6 percent of the workforce.

Screen_shot_2014-04-09_at_9

That said, this figure is an underestimate of the total number of people working below any minimum wage: 21 states and Washington, DC, have wage floors above $7.25. There are also likely some non-hourly workers earning the equivalent of minimum wage or below. However, it's safe to say that a relatively small share of the population is earning at or below this level.

But if the minimum wage disappeared tomorrow, one point of view says many of today's low-wage workers would simply keep earning what they're earning. Because employers almost never slash paychecks, says one economist, the jobless would primarily see the effects in new, low-wage jobs.

"I THINK YOU WOULD SEE JOBS CREATED WHERE YOU WOULD SEE THE POSTED WAGE IS THREE, FOUR, FIVE BUCKS AN HOUR. ... AND I FEEL LIKE PEOPLE WOULD TAKE THOSE JOBS."

"I think you would see jobs created where you would see the posted wage is 3, 4, 5 bucks an hour," says Michael Strain, a former Census Bureau economist and a resident scholar at the right-leaning American Enterprise Institute. "And I feel like people would take those jobs."

That's not necessarily bad, he thinks; many low-skill people and teenagers would take those jobs and quickly graduate to better positions. The question of new jobs, of course, is how many employers have work that would necessitate these new, low-wage positions.

Not that everyone else agrees with Strain. As Jared Bernstein, senior fellow of the left-leaning Center on Budget and Policy Priorities argued in a 2013 debate, abolishing the minimum wage "would figuratively take the wage floor out from millions of low-wage workers," leaving them vulnerable to even harder lives on lower pay.

The lower down the pay scale a worker resides, he said, the less likely that worker will see the benefits of economic growth. Stretching the pay scale as low as it could possibly go will mean low-wage workers are even more cut off from their higher-earning fellow citizens.

The threat of more poverty … and government support

Removing that wage floor could mean a new group of people slipping into poverty, or at the very least taking jobs that don't lift them out of poverty. Currently, the federal wage of $7.25 yields a full-time worker just over $15,000 per year. That's just above the poverty threshold for a single adult but slips further and further below it as you add children.

That could mean the poor will rely more on their fellow taxpayers to get by. To the extent that wages for workers dropped, we would see an increased reliance on government support like food stamps. To the extent that the currently jobless took new ultra-low-wage jobs, spending on some government programs could fall while other initiatives like the Earned Income Tax Credit (EITC) might grow more expensive.

A 2013 study from the University of California at Berkeley found that more than half the families of non-managerial fast-food workers, who tend to work for low wages, used government programs that target the poor, like food stamps. Meanwhile, only 25 percent of other workers did. Allowing businesses to cut wages might improve their bottom lines, while making taxpayers increasingly responsible for their poor countrymen.

But wait — wages and inflation are closely related. Higher wages can lead to higher inflation, so wouldn't lower wages mean lower prices?

Maybe, but only a little. For one thing, there's only that small share of people at the bottom of the spectrum currently getting the minimum wage. In addition, the evidence points to minimal effects, says one economist.

"You would probably get a small price decline ... but it wouldn't be profound," says Heidi Shierholz, an economist at the left-leaning Economic Policy Institute. She points to studies that show minor increases in inflation when there are wage hikes. "The evidence of price increases [due to incremental minimum wage hikes] is that it's really minimal, so I don't think it would be a big factor."

A struggle for rural Americans

Don Grimes, a senior research associate at the University of Michigan's Institute for Research on Labor, Employment, and the Economy notes that wages and prices generally might behave differently in different areas. If the minimum wage were to disappear tomorrow, wages (and some prices) in parts of the country with low costs of living would be affected far more than others. Grimes says rural Americans, in particular, would likely see cuts.

"If you get rid of the minimum wage in New York, it's probably not going to result in a significant wage drop for many people," he says, as more wealth and a higher cost of living lead to naturally higher wages in a place like New York City than in, say, rural South Dakota, where he believes the minimum wage floor on wages is more meaningful."If you got rid of the minimum wage in rural america you'd probably see some significant wage cuts."

"On the other hand, in a lot of these rural communities lots of people make very low wages, cost of living is very low, and if you got rid of the minimum wage in rural america you'd probably see some significant wage cuts," he adds. "I can see a lot of places in rural areas instead of paying $7.25 they'd pay $5 an hour."

And while a lower cost of living might make a $5 per hour slightly more livable than it would be in New York, it would make an already uncomfortably low wage even lower, exacerbating the problem of rural poverty. Nearly 18 percent of rural Americans live in poverty, compared to 14.5 percent of urban residents, according to the USDA.

Moreover, rural economies don't exist in isolation. The minimum wage worker in Nebraska buying a book on Amazon pays the same as the worker in high-cost Brooklyn.

More importantly than any Amazon purchase, more poverty in rural areas or poorer cities, like Detroit, would mean less geographic mobility. If accumulating wealth, whether via saving or a house, suddenly became even harder in a rural area, Grimes explains, those people could less easily move from rural Nebraska to San Francisco, or anywhere else with much higher costs of living.

That lowers economic growth potential as well; if people can't move to where they might be of most use, the economy suffers.

Slightly more inequality

Though it would seem that removing the wage floor would vastly increase inequality, that's not necessarily the case. Allowing people to earn lower wages would increase inequality, as it allowed more people to move further down the ladder, says Shierholz. But that increase wouldn't be vast, she says.

"Mostly it's about lifting up the bottom so the bottom doesn't fall so far away from the middle, from the typical worker," she says. The highest earners getting richer, she adds, have been the major contributors to the US's recent spike in inequality.

But removing the wage floor could also make the gender wage gap even wider. Women make up nearly two-thirds of workers who work at or below the minimum wage. Making it legal to hire the lowest-wage workers for even less could bring those low-wage women's pay even lower.

An uncertain labor market

Of course, there is also the question of jobs. This has been the key focus of the minimum wage debate in recent months, and that is also a question on which economists find it impossible to agree.

Perhaps the best illustration of economic deadlock on this topic is a 2013 survey from the University of Chicago. That survey found that economists with a variety of views were almost evenly split on whether a $9 minimum wage "would make it noticeably harder" for low-skill workers to find a job. 34 percent agreed it would, and 32 percent disagreed, while nearly a quarter, 24 percent, were uncertain.

A 2013 SURVEY FOUND TOP ECONOMISTS DEADLOCKED OVER WHETHER THE MINIMUM WAGE AFFECTS EMPLOYMENT.

One pool of studies shows that minimum wages don't affect the job market much. In a 2013 review of these studies, the left-leaning Center for Economic Policy Research found "little or no employment response to modest increases in the minimum wage." That can happen for any number of reasons: companies might raise prices in response, employers might cut back on spending in other areas, or workers — stimulated by the new pay — might work harder.

Then again, to anyone who has taken economics 101, that doesn't seem like it should be the case. A price floor of any kind, whether on guns or butter or workers, should create a surplus, as the floor prevents the market from reaching its true, lower equilibrium price. Likewise, getting rid of the minimum wage should mean more people get to work, getting rid of the "surplus" of unemployed workers.

And some studies do reflect that basic supply/demand economics. Most notably, a February Congressional Budget Office report found that increasing the minimum wage to $10.10 would reduce employment by 500,000 jobs.

One person who thinks abolishing the minimum wage would likely create some sort of positive employment effect is Glenn Hubbard, Dean of the Columbia Business School. However, he says that's not as important as the law's intended effect: boost the fortunes of low-wage Americans. And he thinks there is a better way of doing that.

"Reasonable people can and do disagree on the job effects" of changes to the minimum wage, Hubbard says. "Here's where reasonable people can't disagree. it's not the best way of raising incomes of low-income people." Instead of debating the minimum wage to death, he believes in expanding the earned-income tax credit, which benefits low-wage Americans, as a means of combating poverty.

There are those economists who believe a higher minimum wage would create jobs. A 2013 study from the Economic Policy Institute found that raising the minimum wage to $10.10 would create 85,000 new jobs over a two-year phase-in. Those new jobs would result from new wages spurring new spending, an effect that would be heightened, the authors write, at a time when consumer demand is currently depressed. By extension, then, killing the minimum wage altogether could be a more profound drag on job growth.

But getting caught up in the details of who would feel the effects and how much is missing the point. The minimum wage may not be the best way to fight poverty, and abolishing it might not affect the lives of many middle-and-upper-class Americans at all. But it also says something about our country's philosophy about work.

"I think of the minimum wage as a basic labor standard," says Shierholz. "There's this idea that we want to reward work. That work should pay."

One place to look for insights into what America might look like without a minimum wage would be Germany, which just passed its first-ever wage floor. Of course, the German labor market is very different from the American one in any number of ways — much stronger labor unions who set de facto minimum wages for many industries is probably the most relevant one — but perfect comparisons are rarely available. Even if the minimum wage does discourage hiring, we can see from Germany that the absence of one doesn't guarantee a health labor market. German unemployment soared above 11 percent during the economic crisis, but has fallen quite rapidly since then to 5.1 percent. And youth unemployment in Germany is much lower than in the United States.

Now that Germany is adopting a more America-style wage floor, one key question is whether it will be saddled with an America-style level of joblessness for young people. If so, Strain's view that ditching the minimum wage will create jobs would gain substantial credibility. If not, the political push for a wage hike in the United States will only grow stronger.

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