President Obama has announced sweeping reform ideas in the past few weeks on his crusade to require that every hourly worker earn at least $10.10 per hour. But what does this really mean for the average American? How will this impact the economy?
“Small businesses currently hire workers for less than $10.10 per hour, [and] an increase in the minimum wage to that level will increase labor costs and reduce profits,” said Dave Wishart, professor of economics. “Some firms might lay off workers as a result. So, the workers that stay employed gain at the expense of workers who are laid off. Another possibility is that firms will try to squeeze more output from workers — that is, take steps to increase their productivity.”
Whishart explained an example that he encountered saying, “ I had a student whose father owned several McDonald’s franchises. When the minimum wage was increased a few years ago, his father’s approach to the problem was not to lay anyone off, but he was much stricter about them showing up on time, monitoring work effort, and he was quick to fire unproductive workers for cause.”
Even with the current minimum wage set at $7.25, some hourly workers still do not earn that. Wishart says, according to Bureau of Labor Statistics, in 2012, there were 3.6 million hourly paid workers in the United States with wages at or below the federal minimum wage of $7.25 per hour. These workers made up 4.7 percent of the 75.3 million workers age 16 and over who were paid at hourly rates.
“it’s important to understand that each state has the opportunity to set the minimum wage above the federal standard,” said Robert Baker, professor of political science. “Ohio is one of those states, as you may know, that has a higher rate. Several of these states (12-13 of them, but not Ohio) with higher rates have statutory/constitutional stipulations that link the state rate to the federal rate. Some of this statutory language requires that if the federal rate goes up, the state rate must go up higher. For example, in CT, the rate goes to .5 percent above the federal rate, in DC the rate is automatically $1.00 above the federal rate, and MA has a requirement that it’s rate must be automatically 10 Cents above the fed rate. A few other states have automatic adjustments each year based on the inflation; Ohio does this.”
Wishart says that the results for average americans will be mixed.
“Workers who see a wage increase will likely spend it all and give a modest boost to total spending in the economy, which could increase the demand for labor overall in the economy,” said Wishart. “That would be a positive result. On the other hand, a higher minimum wage will cause some workers to lose their jobs, increasing the unemployment rate and reducing demand for goods and services, depressing employment overall. Which effect will dominate is a very difficult question to answer empirically.”
Baker said, “…scholarly research suggests that one fairly agreed upon effect of an increase in the rate is what is referred to as the ‘ripple effect’ which means that low-wage workers making slightly above the minimum wage will also tend to see inflation pressures on their wages, and typically will see increases in their wages. One typical threshold that I’ve seen a few times would be anyone within 150 percent of the rate would likely see an increase.”
“Personally, I am ambivalent about the minimum wage as long as it stays low enough to not impact employment of low-skilled workers,” said Wishart. “However, if the minimum wage goes from $7.25 to $10.10 per hour, it may begin to erode employment. That would be a terrible effect. Most people who earn the minimum wage don’t stay in those jobs for a career. They move up the employment ladder. However, the most important factor determining employment in a higher-paying job is for the worker to have an employment history. Getting the first job is most important. At a time when unemployment is still high, raising the minimum wage seems to me like a bad idea.”
The concept of a living wage has been thrown around in a lot of political jargon, but what does it actually mean? Baker explains, “A couple of MIT professors, for some time now, have provided a living wage calculator for all states, and most counties, and many larger communities across the country. Interestingly, with only a few exceptions, [for example] California, the proposed $10.10 per hour rate is actually higher than a projected “living wage” for most areas in the country. So, I wonder where the $10.10 came from for one thing, but generally I support policy that lifts wages above these living wage thresholds…for instance, you’ll note for Springfield, Ohio a living wage, for a single person, although you can calculate for different sized households, is $7.97 per hour. Interestingly, this is just about what the state minimum is.”
(Post note the website for MIT checker is http://livingwage.mit.edu)