Target $10

Target $10

Even the U.S. Chamber of Commerce thinks the federal minimum wage should be raised.

The federal minimum wage has been stuck at $7.25 per hour since the final increase of a 2007 law went into effect in July of 2009. That last round of hikes jumped the minimum hourly rate from $5.15 over a two-year period.

The Democrat controlled U.S. House of Representatives passed a bill in July that would gradually raise the minimum wage to $15 by 2025. Unsurprisingly, the Republican led U.S. Senate declined to take up the legislation.

The fight over minimum wages is an ongoing battle at the state and local level as well. In recent years, fifteen U.S. states have enacted laws that will step up wage floors to $11 or higher by early in the next decade. Six higher median wage states — California, Connecticut, Illinois, Massachusetts, Maryland, and New Jersey will see the minimum wage reach $15 by 2025 or earlier.

What position should socially responsible investors take on the minimum wage increases enacted and those proposed? Should corporations be pushed to lend support to wage hikes at the federal or state levels? Should corporate lobbying in opposition be punished?

History is a guide, but only to a point

It comes down to how much, where, and when increases take place.

There is a general consensus that minimum wage increases enacted in recent decades have had little or no negative effect on total employment. Cengiz et al. (2019) examined the effect of 138 state-level minimum wage changes from 1979 to 2016 on employment levels in wage buckets around the minimum. No discernible effect on overall employment at the low end of the wage distribution is found, but average wages increased about 7% — including a spillover effect that lifts the wages of those earning up to $3 per hour more than the minimum. A negative employment effect is found for manufacturing, but the sector accounts for less than 3% of U.S. minimum wage workers.

However, Meer and West (2016) argue it is job growth over many years, not immediate employment that may be impacted by minimum wage increases. The big challenge in evaluating minimum wage employment effects is the need to conjure a counterfactual world — what would employment have been absent the law change. Given the dynamics of an economy, the potential for measurement error can’t be ignored. 

Nevertheless, recent history suggests a safety zone for minimum wage increases. The Cengiz study demonstrates employment stability for cases in which the new minimum wage is 59% of the state’s median wage or less. And in addition to higher incomes for low wage earners, Godoy and Reich (2019) identify benefits for business such as reduced employee turnover costs, improved worker productivity, and general economic stimulus — mitigating the negative effect of higher labor costs. Consumers will absorb some of that, though socializing higher minimum wages has a relatively modest impact. Allegretto and Reich (2016) estimate that a 25% hike in San Jose boosted restaurant menu prices by less than 2%.

Some new state minimum wage laws may prove too aggressive

Several newer state wage laws take us into less less tread upon ground. Thirteen states will likely see the new minimum wage exceed 60% of the median wage for at least a few years unless real median wages grow again (they’ve been stalled out for a generation). Most concerning may be laws that step up wages to a headline figure — $12, $13.50, or $15 per hour —  and codify additional increases to ensure the new minimum wage keeps pace with inflation. Of the 15 states with enacted wage floors of $11 or higher, four states will likely see their minimum wage to state median wage ratios permanently fixed between 65% and 70% of the median level — Arizona, California, Maine, and Oregon. Four other states (Arkansas, Illinois, New Jersey, and New Mexico) will probably push into this territory at least temporarily.

Projected Minimum Wage as a % of State Median Wage

Sources: National Conference of State Legislatures, U.S. Bureau of Labor Statistics, and author estimate for 2% annual rate of inflation.

Socially conscious investors may have legitimate concerns that the most aggressive state minimum wage policies will harm employment, but to date this worry should be limited to a handful of states (OK, maybe two handfuls).

The “Fight for $15” at the federal level is risky

The push for a federal minimum wage of $15 is another matter entirely. Such an aggressive attempt to redistribute income using wages may have negative national employment consequences. The House bill to raise the minimum wage to $15 by 2025 is the equivalent of about $13 today. That’s a higher minimum wage than at any point in U.S. history on an inflation-adjusted basis.

The real minimum wage ranged from approximately $9 to $12 from the late 1950s until the early 1980s. From the mid 1960s until the early 1980s, the median ratio of the minimum wage and average U.S. hourly earnings was 45% — it peaked at 54% when the federal minimum wage reached its inflation-adjusted apex in early 1968 and was back below 50% a little more than a year later.

A minimum wage of $13 today equates to 55% of average U.S. hourly earnings. And wage compression between the bottom and middle of the pay scale would likely be stickier than in previous generations. Inflation is much lower today than it was in the late 1960s and 1970s, while average real hourly earnings have been stagnant over the past four decades.

History of US federal minimum wage increases.svg
Source: U.S. Bureau of Labor Statistics, St. Louis Federal Reserve.

Since a $15 minimum wage by the middle of the next decade would take us into new territory, uncertainty with respect to employment levels would clearly be higher.

The states most at risk for employment losses are those where the cost of living and average wages are below the national averages. The typical U.S. state would see its minimum wage to median wage ratio jump to more than 70% and eight states — Alabama, Arkansas, Louisiana, Mississippi, New Mexico, South Carolina, South Dakota, and West Virginia — would likely see their minimum wage to median wage ratio exceed 80%.

The federal minimum wage should be a least common denominator, not a reflection of adequate wages in high cost locales. The U.S. Chamber of Commerce backs a minimum wage increase “to around $10 an hour” and acknowledges that it “would result in few, if any, job losses.” A federal minimum wage of $10 would provide a lift to lower wage employees in 32 states without hurting employment. Many companies have already started paying their employees more than this — Walmart starts its workers at $11 per hour. 

Socially responsible investors should push company managements to lobby for sensible minimum wage legislation at the federal level. Forget $15 for now. Start at $10 per hour and provide for automatic future increases to avoid large fluctuations in the real minimum wage. The minimum wage isn’t the only tool that can be used to address income inequality. Used incorrectly, it may do more harm than good.

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