Is a $15 Minimum Wage Too High?
As the proposed federal minimum wage goes up and up, economists support it less and less. In January 2014, seven Nobel laureates and eight ex-presidents of the American Economic Association signed a letter backing a federal minimum wage of $10.10 an hour by 2016, up from $7.25. They said it would “provide a much-needed boost” to low-income workers while causing “little or no” job loss. Fifteen dollars an hour is another story. None of those luminaries signed the letter in July that endorsed a Senate bill introduced by presidential candidate Bernie Sanders (D-Vt.) to raise the federal minimum to $15 an hour by 2020.
Regional economic differences are one reason a lot of economists are nervous about jumping to $15: A wage floor that’s right for New York or San Francisco could be too high for Brownsville, Texas; Gadsden, Ala.; or Ponce, Puerto Rico. In such places, $15 an hour “may have large negative employment effects,” Ronald Ehrenberg, a Cornell University labor economist, wrote in an e-mail. He was one of about 600 economists who signed the $10.10 letter last year. He says he wasn’t approached to sign the $15 letter but would have said no if asked.
A $15 minimum is just 67 percent of the median wage in high-cost Alaska, so it would have a modest effect if implemented today, lifting pay of people at the bottom but not affecting the middle rungs of the income ladder. In Puerto Rico, though, $15 is 155 percent of the median wage. If the federal minimum were raised to $15 today (rather than in 2020, as Sanders proposes), it would be 55 percent higher than the midpoint of what all Puerto Ricans earn. That would cause severe stress in a financially struggling territory already squeezed by the $7.25 minimum. Even within a single state, it’s hard to come up with a minimum that works everywhere. In California, the median wage varies from more than $28 an hour in Silicon Valley (technically San Benito and Santa Clara counties) to less than $14 in Visalia-Porterville, a farm town 190 miles away by car.
Those who argue for a high federal floor say that $15 won’t cost many jobs even in low-wage parts of the country because minimum-wage workers are productive enough to justify much higher pay. The letter signed by more than 200 economists supporting Sanders’s $15 an hour says the federal minimum would be $26 an hour if it had risen with labor productivity since 1968.
But new research by economist Robert Lawrence of Harvard challenges the notion that workers’ pay has failed to keep up with gains in productivity—i.e., their output per hour of work. Lawrence says the conventional comparison understates workers’ pay and overstates their output—the value of goods or services they create. On the pay side, he includes benefits, and he figures in the pay of all workers, not just production and nonsupervisory ones. On the output side, he subtracts depreciation—the wear and tear on plants and equipment that must be replaced someday—to capture workers’ net rather than gross output. And he calculates that the value of goods and services that workers produce hasn’t risen as rapidly as the value of goods and services they consume, causing their buying power to stagnate. Lawrence doesn’t dispute the growing inequality in pay, but says the $26-an-hour argument “ignores all those other factors that explain that gap.”
Some high-profile economists do support $15 an hour. Jared Bernstein, a former chief economic adviser to Vice President Joe Biden, wrote a July 31 blog post noting that employers would have five years to prepare for the new floor in Sanders’s bill. Bernstein, a senior fellow at the Center on Budget and Policy Priorities, said whatever job losses there are would be outweighed by pay gains for the majority of low-income people who kept their jobs. “Millions of people rationally support large increases because they expect to gain from them,” he wrote. Robert Pollin, the University of Massachusetts Amherst economist who circulated the $15 letter for the Sanders campaign, quickly collected the 200 signatures from friends and followers of the Political Economy Research Institute, the liberal think tank that he co-directs. He says he doesn’t know how many of the big names who signed the $10.10 letter might have signed his because he didn’t have time to reach out to them.
There’s no question among economists that the minimum wage represents a trade-off. On one hand, it does lift incomes. On the other, the higher it is, the more marginal workers will be priced out of the market. Those include teenagers seeking their first paid jobs, the poorly educated or handicapped, and people living in areas with chronically low productivity—perhaps because of inadequate investment in the machinery and software that workers need to boost output.
The question, then, is where is the sweet spot? Katharine Abraham, President Bill Clinton’s commissioner of the Bureau of Labor Statistics and later an economic adviser to President Obama, signed the $10.10 letter, but, like Cornell’s Ehrenberg, says she would have said no to the $15 letter. “We have no experience with an increase in the national minimum of that size and I am concerned about what a $15 minimum nationwide would do to employment,” she wrote in an e-mail.
Both Abraham and Ehrenberg argue that the federal minimum should be on the low side, with cities where productivity and living costs are high setting higher minimums as they see fit. Los Angeles, San Francisco, and Seattle are scheduled to go to $15 an hour in the next several years, while Chicago and Kansas City, Mo., are raising their minimums to $13. In July a New York state board recommended a $15 floor for fast-food chains by the end of 2018 in New York City and July 2021 in the rest of the state. High-wage SeaTac, Wash., raised the local floor to $15 in 2014. That squeezed profits at the upscale Cedarbrook Lodge, which nonetheless went ahead with a 63-room expansion.
A good rule is to set the minimum at half the local median wage, says Arindrajit Dube, a University of Massachusetts at Amherst economist and a leading researcher on minimum wages’ impact on jobs. That is “in line with the international average and with the U.S. average during the 1960s and 1970s,” he wrote in a paper for the Hamilton Project, a policy initiative of the Brookings Institution. The Dube standard would produce minimum wages above $11 an hour today in Alaska and Massachusetts and above $10 in Connecticut and New York, but slightly below the current federal floor of $7.25 in Arkansas and Mississippi—and under $5 in Puerto Rico.
The bottom line: Many economists who support a federal minimum wage of $10.10 an hour are uneasy about a minimum of $15.