Thursday, April 24, 2014
After last week's State of the Union address, we ran a couple of items (a news story from Jessica Hall, an interactive graphic from our online producers Julia McCue and Ted Andrick, and an editorial) about the proposal to increase the minimum wage and index it to inflation, such that future minimum wages would be able to retain a steady rate of purchasing power without acts of Congress.
The last minimum wage increase was signed by Republican George W. Bush and raised the wage from $5.15 to $7.25 in three steps between 2007 and 2009.
The stories generated some good comments from readers. I'd like to highlight a few here, and dig a bit deeper into their insights.
Some readers, like Jane Getchell Gildart and Jonathan McKane, took issue with the quote in Hall's story that "There's little proof to support [fears of harming businesses from a minimum wage increase], economists said. A major study in 1994 by labor economists David Card and Alan Krueger showed that a rise in New Jersey's minimum wage did not reduce employment levels in the fast-food industry."
They expressed skepticism at our citation of the Card and Kruger study — especially since Kruger now works in the President's Council of Economic Advisers.
Commenter Gildart suggested a 2008 study by Joseph Sabia that focused on the effects of the minimum wage on a small subset of earners, single mothers. If you read the article (here in PDF), you'll see that Sabia found that increases in their minimum wages did lead to reductions in employment, to the extent that the effects of the higher wages were more or less cancelled out.
However, Sabia also noted in the same paper that the strength of this cancelling effect is limited to single mothers; he cites other research that teenagers who got a 10% minimum wage increase only had their employment cut by 1% to 3%, such that they still ended up earning more in the long run. And teens are also a much larger segment of the minimum wage-earning workforce.
Other commenters raised concerns over inflationary pressures: if businesses pay higher wages, they might make up the difference by charging more, says commenter Gene McKeen.
Perhaps. But businesses have a range of choices to deal with a minimum wage increase. They might pass the entire cost on to consumers. Or they might (as the above-cited Sabia study found) reduce their employees' hours, which would have deflationary effects on consumer prices. Or they might invest in capital equipment and training such that their minimum wage workers are more productive and valuable on the job.
It's likely that businesses will do all three of these things in some combination, depending on their individual circumstances.
But even if every minimum wage worker in the State of Maine continued to work the same hours, at the same productivity levels, such that the entire cost of the wage increase got passed onto consumers, we're still only talking about $1.75 an hour more for all of 14,000 workers. Most of them are part-timers, but even if you assume that they're working 40 hour weeks, 50 weeks a year: $1.75 an hour x 40 hours x 50 weeks x 14,000 workers = $49 million a year in extra costs to businesses and new purchasing power for low-income earners.
That's a lot of money, but compared to Maine's total $51 billion annual gross state product, $49 million is less than one tenth of one percent — and that's not much of an inflationary influence. It's roughly equivalent to the additional annual costs we'd pay for a 6 cent rise in the price of gasoline (and you've probably noticed that gas prices have risen much faster than that in recent years).
Commenter Chris Powers responded to McKeen's concerns by citing Australia's example: "Australia has a $15 AUS minimum wage which translates to $15.53 USD. They have a unemployment rate of 5.4% right now."
Fox News's John Stossel brings up a fair counterpoint: among the teenaged workers who are most likely to earn the minimum wage, Australian unemployment stands at 16.5%, he writes (he links to this June 2012 report, which actually records a 15.9% unemployment rate for the 15-19 age cohort). Even so, that's still much lower than the unemployment rate for U.S. teens aged 16 to 19: 23.4% in January 2013's seasonally-adjusted numbers.
In surveying some of the other research on minimum wages' effects on state economies, one of the most elegant statistical studies that I found came from Dube, Lester, and Reich in 2010.
They compared employment rates in a large dataset of communities that adjacent to the borders of states with two differenct minimum wages (including the boundary of Maine, where the minimum wage is $7.50 an hour, and New Hampshire, where the minimum wage is $7.25 an hour). That data shows no statistically-significant difference in unemployment rates between adjacent cross-border communities with different minimum wage laws.
I'm hoping that this can become the first of a series of posts here on Commercial Confidential that highlight high-quality comments and reader discussions. Keep 'em coming!Tweet
Commercial Confidential tracks Maine's business leaders and economic indicators.
I'm an economics wonk and an online content producer for the Portland Press Herald.
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