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Policy Wonk: Debunking myths about a higher minimum wage

Opinion

Policy Wonk: Debunking myths about a higher minimum wage

There is a growing sentiment in Maine and the nation that it’s time to raise the minimum wage – some would say it's “high time.”

Current minimums – $7.25 at the federal level, $7.50 in Maine – were established in 2009. Neither rate is adjusted for inflation.

It follows, that the aggregate income of part- and full-time employees paid at these rates is low (below the poverty level for multi-person families) and that the purchasing power of this income erodes over time.

At the national level, President Obama has called for raising the federal minimum wage (in three stages) to $10.10 by 2016; his proposal has been blocked by Republican Congressional resistance. There is little chance this resistance will end any time soon.

In Maine, a more modest proposal to raise the minimum wage to $9 an hour by 2015 and thereafter to tie the rate to the inflation rate was passed by the Legislature, but vetoed by Gov. Paul LePage. Nearly unanimous Republican opposition to the legislation sustained the governor’s veto.

Notwithstanding these setbacks, momentum to raise the minimum wage, centered in the states and a growing number of municipalities, is building. It is fueled by the president’s unrelenting focus on his $10.10 minimum wage plan; by a growing public sense that current minimums are unfair, and by increasing evidence that refutes Republican/corporate opposition to raising the minimum wage.

Dire warnings of job loss and the collapse of small business are simply untrue.

The linchpin of opposition arguments to raising the minimum wage has a superficial appeal: Basic supply-and-demand principles hold that if you raise the price of something, less will be purchased. So if the minimum wage rises, fewer minimum-wage workers will be hired.

But economists know that there are exceptions to this generalization. The demand for some goods is inelastic. If the price goes up, we don’t buy less; if it goes down, we don’t buy more.

For example, the quantity of road salt a municipality purchases to deal with next winter's snow and ice will not increase if the price goes down (or decrease if the price goes up). The quantity purchased is dictated by the severity of the winter, not the price of the salt.

Similarly, the number of minimum-wage workers needed to efficiently run a small business is driven by the particular needs of that enterprise. If the wage is reduced by a dollar or two, most such businesses will not hire more workers than they need. Correspondingly, if the wage is increased by a dollar or two, there is little or no incentive to compromise the efficient operation of the business by laying off minimum-wage workers.

In short, the inelastic character of this type of employment suggests that raising (or lowering) the minimum wage has little effect on minimum-wage employment, or overall employment levels. Other factors are far more important, e.g., the overall health of the economy, variations in seasonal employment needs, the long-term trend towards greater mechanization (substituting equipment for labor), and variations in minimum-wage worker skill levels needed by employers.

Whether one looks back at the last six months, several years, or 20 years, the data bear out these realities.

In June, the Department of Labor data noted that the 13 states that boosted their minimum wage on Jan. 1 (all of which have a minimum wage higher than the federal minimum) “... added jobs at a faster pace than those (states) that did not.”

Exactly the opposite result was predicted by opponents of higher minimum wages.

At the same time average unemployment in these 13 states (6.1 percent) was identical to the national unemployment figure.

In short, raising the minimum wage, and having a higher state minimum wage than the federal minimum, does not adversely affect total employment.

A recent study done by the Center for American Progress (a Washington think tank) looked back at more than two decades of minimum wage increases. The study concluded: “The evidence is clear: Raising the minimum wage does not have the harmful effects that critics claim."

Finally, though the minimum wage is certainly not the only factor driving per-capita income in each state, it is worth noting that in the 22 states that have raised their minimum wage above the federal level, per-capita income averages $43,500. In the 28 states applying the lower federal rate, per-capita income averages only $40,600.

Clearly, raising the minimum wage has not crashed the economy of those states that have done so. On the contrary, raising the federal, state or local minimum wages – tying these increases to inflation – will improve the lives of millions of part- and full-time workers. It will reduce the number of people on welfare; overall consumer demand will be increased (a benefit to the whole economy), and wealth disparities will be reduced.

In sum, raising minimum wage makes economic sense. Some consumers will pay a bit more. Some of the well-off and super-rich will earn a bit less. The harm to these individuals is slight. The benefit to the country, and especially to low-income workers, is considerable. We should do it now.