February 15, 2021 BARRON’S 31
Raising the Floor
American states and cities began raising minimum wages at a
7%yearlyaverageratein2014,liftingtheeffectivenational
minimum wage 75% above the federal minimum.
Source: Ernie Tedeschi
$12
10
8
6
4
2
1995 2000 ’05 ’10 ’15 ’20
Effective national minimum
including state and local laws
Federal statutory minimum
Dollars per hour
THE ECONOMY
After accounting for state and local minimum-
wage laws,the current effective minimum wage
is almost $13 an hour, according to one estimate.
U.S. Minimum Wages
Have Already Jumped,
With Minimal Costs
M
ore than a
quarter of
American
workers—
or roughly
40 million
people—had
jobs that paid less than $15 an hour
before the pandemic. That number
could drop to roughly zero by 2025
if the Raise the Wage Act of 2021
passes in the Senate.
The proposal would more than
double the federal minimum over the
next few years, after which the new
minimum would rise at the same rate
as the national median wage. While
some may fear that the law would
force many businesses to go under or
push millions out of work—a worry
fueled in part by a recent Congressio-
nal Budget Office report—the likelier
outcomes are modestly higher prices
and a notable improvement in living
standards for tens of millions of low-
wage workers and their families.
The first thing to know about
America’s minimum wage is that the
$7.25 an hour federal minimum is sim-
ply too low to do much. Even in Mis-
sissippi, Louisiana, and Alabama—
which have the country’s lowest wage
—more than 90% of workers were
paid more than $8.50 an hour in 2019,
the latest year for which we have com-
prehensive data. And even in the big-
gest low-paid occupations within
those states, such as fast food and
retail, more than 90% of workers
were paid substantially more than
the federal legal minimum.
Recognizing that the federal mini-
mum wage is too low to have a mean-
ingful impact, most states—and many
cities and counties—have imposed
their own minimum wages on top of
the national baseline, as well as sched-
uled increases and automatic inflation
adjustments. After accounting for these
state and local laws, Ernie Tedeschi of
Evercore ISI estimates that the current
effective minimum wage is already
almost $13 an hour—up from less than
$8 an hour as recently as 2014.
Moreover, this effective minimum
will continue to rise even without the
Raise the Wage Act. Even if Congress
does nothing, about 40% of Americans
will end up living in places with a min-
imum wage of at least $15 an hour in a
few years, including everyone in Cali-
fornia, Connecticut, Washington, D.C.,
Florida, Illinois, Massachusetts, Mary-
land, and New Jersey, as well as every-
one in Greater New York City, most of
the Seattle metro area, Denver, Minne-
apolis-St. Paul, and Portland, Ore.
Laura Nicolae, David Mericle, and
Alec Phillips of Goldman Sachs re-
cently estimated that the proposed
schedule to increase the federal mini-
mum wage would therefore have
almost no effect on the country as a
whole until 2024—and even after that,
the impact would be enough only
to sustain the pace of wage growth
expected in 2021-23 under existing
state and local laws.
This means that the proposed fed-
eral wage increases are set to be less
dramatic than what has already oc-
curred since 2014. It also means that
many Americans have already experi-
enced what it’s like to live through a
sharp increase in the minimum wage.
The good news—forinvestors, consum-
ers, and workers alike—is that these
experiences imply that a higher wage
floor would have substantial benefits
for tens of millions of low-paid workers
with few costs for everyone else.
There are two basic explanations
for this benign outcome.
First, economists have found that
higher minimum wages often generate
offsetting benefits for employers in the
form of lower employee turnover and
fewer vacancies, which in turn make it
easier for businesses to boost sales to
meet demand. “An employer may want
100 workers but only has 90 because
they don’t pay enough—and because
they don’t want to raise wages for their
existing workers,” explains Arindrajit
Dube, who advised the Conservative
United Kingdom government on its
minimum-wage policy and who
teaches at the University of Massachu-
setts, Amherst. In these circumstances,
statutory wage increases should be
understood as a fix for uncompetitive
or “oligopsonistic” labor markets.
This is especially true in job markets
where employers have a lot of power to
set wages, whether it’s because employ-
ers use noncompete agreements and
other tactics to suppress worker pay,
because the economy as a whole is
weak, or because there aren’t many
employers to fight over workers—think
of company towns or rural areas. That
last point helps explain why Anna
Godøy and Michael Reich of the Uni-
versity of California, Berkeley, found
that high minimum wages had no neg-
ative impact on employment or hours
worked even in the poorest counties
within states such as California, New
York, Massachusetts, and Washington.
The second reason that large
changes in the minimum wage haven’t
had meaningfully adverse conse-
quences is simply that low-wage labor
costs account for only a small share of
the prices paid by consumers for goods
and services. At Walmart, for example,
“operating, selling, general, and admin-
istrative expenses” are worth only
about a fifth of net sales. Like most
large retailers, the biggest expense, by
far, is the cost of goods sold. For fast-
food franchisees, labor is only one cost
among many, including rent, ingredi-
ents, franchise fees, and depreciation
charges on equipment. Farmworker
wages account for only about a ninth
of the price of produce at the typical
grocery store, according to Phil Martin
of the University of California, Davis.
This means that low-wage employ-
ers can easily pass the cost of higher
wages on to consumers, who probably
won’t even notice the difference. That’s
what happened in Hungary after a dra-
matic increase in the minimum wage
in the early 2000s: middle- and high-
income Hungarians paid somewhat
higher prices to guarantee substantially
higher wages and living standards for
people at the bottom of society, with no
adverse effects on employment in the
services sector. For states such as Mis-
sissippi, Louisiana, and Alabama,
which are about as poor compared
with California and New York as
Hungary is with Germany or France,
the implication is that a big federal
minimum-wage bump would have
minimal costs but substantial benefits.
The macro impact of higher low-
end wages and slightly higher prices
would probably be small, since the
poor, by definition, constitute a tiny
share of national income. But the evi-
dence so far suggests that it would be
positive, with lower consumer debt,
more spending on goods and services,
and higher auto ownership. That
would be good for everyone.B
By Matthew C.
Klein