Can raising the minimum wage sometimes hurt the workers?
Raising the minimum wage is supposed to benefit the workers, particularly those who are making less than the minimum and are struggling to make a decent living. The demand to raise the minimum wage from time to time comes from unions, political parties, and policy analysts. In the USA, the support for raising the minimum wage has been building. One of the promises candidate Joe Biden made was to increase the minimum hourly wage to USD 15. After being sworn in, Biden has spoken out in favour of legislation to raise the minimum wage within the first 100 days of his administration. It is expected that a higher minimum wage, as Biden proposes, would lift some workers out of poverty, and raise the wages of millions more. Unfortunately, there is also the possibility that during this crisis, raising the minimum wage may also hurt the job prospects for youth, low-skilled, and women workers.
Resistance to raising minimum wages comes typically from two sources, employers and economists/policymakers. And they are a strong band. Employers see any increase in the minimum wage as an attack on their profit margin. In this view, it is a zero-sum game. What workers get is taken from the pocket of the owners/managers.
In the current debate on raising the minimum wage, some advocacy groups point out that it is against the interest of labour to raise wages in a slack market condition or under-employment conditions. When the price of labour goes up, employers can resort to using less labour and more capital per unit. A related mechanism emphasised by some economists is wage compression, i.e., along with some redistribution from profits to wage, there is a "...possibility that employers may compensate for higher wage costs at the bottom by cutting wages of workers who are nearer to the top."
The Raise the Wage Act, introduced on January 26, 2021 by some Democrats in the Congress, would gradually raise the federal minimum wage from USD 7.25 an hour to USD 15 an hour by June 2025, and then index it to rise at the same rate as median hourly wages.
It now appears that Biden is backing down. On February 16, he conceded that he is open to negotiation on his proposal for a USD 15 minimum wage, a centrepiece of his USD 1.9 trillion coronavirus relief bill. First, he suggested that he could be open to a longer phase-in than the current plan of five years in the Democratic Party legislation. In addition, he indicated that a lower number, for example, USD 12 or USD 13, could be beneficial while having less impact on business owners.
During the Covid-19 economic downturn, workers have suffered a decline in income, an erosion of their savings, and other injustices that the economic system inflicts on the working class. In the coming years, as national economies bounce back and economic policies are recalibrated in light of the lessons learnt, policymakers everywhere, particularly in the USA, are working furiously on their "To Do" list.
Like his predecessors, President Biden has his own "To Do" list. It is a list of policy goals or tasks one would need to complete, or things that one would want to do. Most typically, they're organised in order of priority. President Biden won the White House by pledging to respond to the pandemic with many liberal policy proposals, and raising the minimum wage across all sectors, which was one of his most popular proposals. But only if wishes were horses.
For those not familiar with this expression, let me elaborate. "If wishes were horses, beggars would ride" is a proverb and nursery rhyme, first recorded about 1628 in a collection of Scottish proverbs, which suggests if wishing could make things happen, then even the most destitute people would have everything they wanted. Similarly, the minimum wage legislation that Biden and others on the liberal wing of the Democratic Party promised, is facing resistance from not only the Republicans, but also the conservative Democrats.
Undoubtedly, the minimum wage has always been a hot button issue in the USA. Students taking their first undergraduate economics course in college learn that if the wage level is pushed above the competitive equilibrium rate, demand for labour will be less than supply. This gives rise to excess supply or unemployment. In the USA, some parts of the country are already experiencing unemployment in excess of 10 percent and there is concern that raising the hourly minimum wage from USD 7.25 to USD 9.5, while benefitting some workers, will hurt many others. Two groups stand out. Those with minimum skills who can't find a job and others who are currently employed in low-skilled jobs but are facing the risk of job cuts.
The question that my readers might ask, "How can raising the minimum wage face such resistance? Isn't the right to a minimum income enshrined in the American ethos?" The short answer is, it all depends. The country as a whole lost more jobs than in the Great Recession, with employment reduced by 10 million jobs, 6.5 percent off the February 2020 level. In economic terms, some states in the US have suffered more during the pandemic than others. Twenty-seven states have lost more than 5 percent of their jobs. New York, Hawaii, and Michigan have seen a sharp rise in unemployment, growing poverty, and lack of jobs. If the federal government now passes a minimum wage legislation, the job prospects for many who are not highly educated might be dimmed.
A renowned columnist for The Boston Globe newspaper wrote an op-ed titled, "The cruelty of a higher minimum wage". And the columnist, Jeff Jacoby, was not using the word "cruelty" sarcastically! Jacoby argues that while it is hard to live on USD 15 an hour, it is "infinitely harder, however, to live on USD 0 an hour. And that is what many of the least-skilled, most precarious workers in America will be making if the hourly minimum wage climbs by more than 100 percent."
The nonpartisan Congressional Budget Office's recent report shows that the minimum wage hike to USD 15 an hour by 2025 would result in 1.4 million unemployed. Past economic studies on the impact of minimum wage legislation on jobs have been inconclusive. When the first minimum wage law, The Fair Labour Standards Act of 1938 (FLSA) was passed, it was reported that the effect was mostly felt by unskilled African-American workers, and the Labour Department reported that between thirty thousand and fifty thousand workers lost their jobs within two weeks of FLSA.
While many big retailers such as Walmart, Costco, and Target support a higher minimum wage and have consistently raised wage in some states to USD 15 an hour, there is pushback from their smaller competitors. Increasingly, many small businesses and the restaurant industry are voicing their opposition to raising the minimum wage now when demand for some products and stores has declined. In some parts of the country, competitive wages are lower than the national average.
Interestingly, some analysts in the media have questioned the motive behind the push to raise the minimum wages now. The big corporations have benefited during the pandemic and are now doing well. E-commerce leader Amazon boosted the starting pay for its warehouse workers to USD 15 an hour last year. Others have done the same. At the end of the tunnel, there will be a shakeout and the increased cost of labour will enable the big corporations to squeeze out the SMEs, it is alleged.
Dr Abdullah Shibli is an economist and has been working in higher education and information technology for 35 years in the USA and Bangladesh. He is also Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA.