Here's a claim I'd like to make: the minimum wage should be raised.
Here are a few facts. First: corporate profits as a percentage of gross domestic product (GDP), as a percentage of this country's economic activity, are larger than ever in U.S. history. CNN noted at the end of 2012 that "just four years after the worst shock to the economy since the Great Depression, U.S. corporate profits are stronger than ever," bringing third quarter after-tax profits in 2012 "to their greatest percentage of GDP in history." Which coincides with a second point: wages as a percentage of the United States' GDP are lower than they've ever been. This means that companies are paying employees less than they ever have as a share of national income. Third: unemployment in this country is still higher now than before the recession, not including that many who would prefer to be working full-time are working part-time instead, and that many have given up trying to find a job altogether. And fourth: on average, 25 percent of workers in any sector receive some form of public assistance which is in effect a transfer of public money to subsidize the wages companies do not pay. In fact, according to UC Berkeley's Labor Center, more than half of front-line fast food workers are on at least one public assistance program at a cost of $7 billion a year, and the figure is higher if you include subsidies to their children and families.
An effective response would be to raise the minimum wage, if only because big companies can afford it and workers need it. A raise in the minimum wage does not provide an all-encompassing solution to these problems, but it would nonetheless represent a very tangible benefit to millions of working class people in this country, spurring consumption for recovery and helping people pay off debt.
I know that many see a contradiction between raising the minimum wage and increasing employment. But contrary to the ideations of economic orthodoxy, the U.S. Department of Labor clearly shows that increases in the minimum wage since 1935 have not affected GDP; real GDP per capita has increased even when the minimum wage has been increased. The past two decades of research have shown that an increase in the minimum wage leads to at most negligible job loss, partly because roughly two thirds of low-wage workers are employed by large companies with over 100 employees, not small businesses, who can afford a wage raise.
Earlier this year, John Schmitt of the Center for Economic and Policy Research summarized this as follows: "The employment effect of the minimum wage is one of the most studied topics in all of economics.
The weight of that evidence points to little or no employment response to modest increases in the minimum wage.
The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners (wage compression) and small price increases. Given the relatively small cost to employers of modest increases in the minimum wage, these adjustment mechanisms appear to be more than sufficient to avoid employment losses, even for employers with a large share of low-wage workers."
In a 2013 survey by the University of Chicago's business school, leading economists agreed by almost four to one that the benefits of raising the minimum wage outweigh the costs. Otherwise, for you economics majors, if you've gotten past EC 5 you should have disabused yourselves by now of the mythology of perfectly competitive markets. According to economic textbooks, a raise in the wage is a raise in the costs of production - thus the argument that raising the minimum wage (raising the price of labor) results in a lower quantity of labor demanded (greater unemployment). But besides speaking of the lives of people as "labor," simplified models miss a great deal, most significantly the turnover and "churning" at the lower end of the job-market because workers leave frequently attempting to get a better job. Consequently, according to economist ArindrajitDube, "to the extent that the minimum wage makes the lowest paid jobs better, it tends to reduce turnover and reduce vacancies. So an increase in the minimum wage may not kill jobs but kill vacancies in a low-end labor market. This is consistent with the more realistic models of the labor market. Our new work shows this for the U.S., but there is evidence from other countries as well. So minimum-wage laws may make jobs more stable while raising wages." As an example, Reich, Hall and Jacobs found in their study that raising the wage of security screeners at the San Francisco Airport reduced annual turnover from 95 percent to 19 percent.
On the other hand, the most cogent argument against raising the minimum wage might be its effects on small businesses. This is a valid concern. It makes sense then that the National Federation of Independent Businesses has criticized raising the minimum wage. But according to their own survey, only about 3-5 percent of small businesses listed labor costs as their most important problem; since the recession, between 20 percent and 35 percent have listed poor sales as their most important concern. It would appear then that small businesses would benefit more from increased sales than low labor costs. Meanwhile, the Federal Reserve Bank of Chicago has found that for every $1 increase in the minimum wage, minimum wage households increase spending by roughly $800 a year. Instead, opponents of raising the minimum wage have advocated extending the Earned Income Tax Credit (EITC), a federal tax credit for low-income households. While helpful, putting the EITC in opposition to a raise in the wage is a false choice: both are powerful tools for counteracting poverty. A minimum wage raise however has the direct advantage of addressing inequality as well.
So ultimately, it's not that there aren't costs to raising the minimum wage but that the benefits outweigh them. If you would argue that the competition engendered by globalization and that gains in productivity must necessarily consign American workers to poverty wages, then you've made up your mind. But also acknowledge that the U.S. is slowly crawling out of a bad recession and unemployment remains high while corporate profits are counter-intuitively larger than ever. The U.S. is currently in a liquidity trap: it can no longer stimulate the economy by lowering interest rates when interest rates are almost zero. Conversely, inflation is also almost zero meaning that a raise in the minimum wage would not have inflationary effects. Raising the minimum wage is then economically sensible, an effective measure for economic recovery and most importantly, provides a better standard of living for those who working but still struggling. It is in this spirit that Tufts Labor Coalition, Tufts Democrats and United for Immigrant Justice are holding a rally this Saturday in Davis Square in support of and to help gather signatures to raise the minimum wage in Massachusetts.
Gabriel Rojkind is a junior majoring in political science. He can be reached at Gabriel.Rojkind@tufts.edu.
