Effects Of A $17 Minimum Wage

What does the historical data, mathematical data, and economic data tell us about minimum wage increases?

The federal minimum wage was last raised in 2009 to $7.25 an hour. There is a new push to raise it to $17 an hour, which is around what it would be if it had kept up with inflation since its peak in 1968. If minimum wage had kept up with the production gains of workers, it would be closer to $30 an hour.

There isn’t a single state in America where a full time job paying the federal minimum wage covers the cost of living. In fact, in most states, two full time minimum wage jobs still wouldn’t cover the cost of living. This isn’t surprising since the current buying power of the minimum wage is at one of the lowest points since the 1950s.

So what will happen if we raise the federal minimum wage?

The first step is to look at who would be directly affected by a federal minimum wage increase. Since states and cities can set their own, higher, minimum wages, not every area would be impacted the same. 

• Washington D.C. already has a minimum wage of $17 an hour

• The cities of Emeryville, Seattle, Mountain View, Sunnyvale, and SeaTac are all at $17 an hour or higher, and Palo Alto is close at $16.45

• All of those cities are in California and Washington which both have state minimum wages over $15.

• Other states between $13 to $15 are: Arizona, Colorado, Connecticut, Illinois, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, and Vermont

Already we can see that a large portion of America would either not be impacted by the proposed $17 an hour, or would only be slightly impacted.

The states that are currently using the $7.25 minimum wage are: 

• Alabama, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, New Hampshire, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Wisconsin, and Wyoming.

Any state not listed in any of the bullet points above has a minimum wage above the federal minimum and below $13.

• Within all states, most workers already make above the minimum wage.

• Nationwide only ~1.5 million workers make the federal minimum wage or below, and 44% of those workers are under the age of 25.

• 20 million Americans make less than $15 an hour and an additional 20 million make less than $17 an hour.

• Indirectly, tens of millions of additional Americans would also receive raises because when the minimum wage increases, middle class wages typically increase some as well.

• All of those increased wages would decrease poverty by at least 20%.

One of the claims by detractors of a minimum wage increase is that it will lead to job losses as companies cut back on employees to protect their profits. Fortunately, we have lots of data on this as the federal minimum wage has increased multiple times in the past and state minimum wages have increased regularly, including to levels similar to what is being proposed.

Numerous studies of this data have shown either that there is no net job loss at all, or there is a very minimal job loss. On the surface this is easy to understand as the same amount of work still needs to get done. 

There are other factors at play as well, such as the fact that for the lowest paid workers, increases in the minimum wage have been shown to increase productivity, with as low as a $1 increase in minimum wage increasing productivity by over 20%. Meaning companies benefit from more productive workers as a result of paying them more.

Another factor is that workers are only a fraction of the total cost for a business, and in low wage jobs that is typically a small fraction of the total cost.

This is why the fear that increasing minimum wages would cause high inflation is not true and has been proven to not be true through past minimum wage hikes. 78% of the time that the federal minimum wage increased since 1980, inflation actually decreased.

If you take a business such as a McDonald’s or Walmart, the business has the costs of:

• Building/rent/electricity/water/cooling/heat

• Products/ingredients

• Taxes

• Franchise Fees

• Advertising

• Payroll

• Services, such as internet or business software

Raising the minimum wage is only going to directly affect Payroll. Depending on where the products/ingredients are manufactured and for how much, there could be an indirect increase in that category. All of the other categories are unaffected, which is why we don’t see inflation happen with minimum wage increases.

Even if every dollar of every worker who directly got a pay boost by the minimum wage increase went fully to increased prices, that would still only be a one time inflation increase of ~0.5%. Rarely is a federal minimum wage increase instantaneous. Typically wage increases phases in over several years at which point that inflation increase could be as low as 0.1% per year. But again, that won’t happen because all of those increased wages won’t directly go to increased costs.

The only way to make the claim that increasing the minimum wage causes inflation is to discount historical data, mathematical data, and economic data.

There is one small negative effect that has been seen with minimum wage increases. Some companies attempt to offset the cost by hiring more workers and reducing worker hours.

The reason for this is that at 20 hours or more a week, companies are required to pay into certain benefits such as social security and unemployment insurance. At 30 hours or more a week, the company is required to cover health insurance if they have at least 50 employees.

In an effort to recoup some of the costs with wage increases, the companies offset that cost by lowering employees hours below the thresholds needed to require the company to pay for those additional benefits.

Some states and cities have already solved this with Fair Workweek laws which force employers to give employees predictable schedules and require companies to offer additional hours to current part time workers before hiring additional workers. 

One final argument for raising the minimum wage is that 70% of able bodied people on federal assistance programs, such as SNAP and TANF, work jobs. The reason those workers are on federal assistance is those jobs simply don’t pay enough to cover their needs.

All of the data shows that raising the minimum wage is good for reducing poverty, reducing reliance on aid programs, helping people live better lives, and stimulating the economy. While the arguments against raising the minimum wage simply don’t hold water or are minor in comparison to the overall gains.

It is time for a proper federal minimum wage that automatically rises with inflation to ensure it stays at a proper level long into the future.