Most Minimum Wage Earners Can’t Afford Necessities of Life

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Jeannette Wicks-Lim completed her Ph.D. in economics at the University of Massachusetts Amherst in 2005, and now specializes in labor economics with an emphasis on the low-wage labor market and has an overlapping interest in the political economy of race, and is now Assistant Research Professor at the Political Economy Research Institute (PERI). She is author of a paper produced at PERI entitled Creating Decent Jobs in the United States (.PDF), in which she concludes that “collective bargaining presents a powerful way to turn the tide on the declining workers’ pay and benefits we have seen for decades“, finds that “a union worker has a 20 percent greater chance of having a decent job than a similar non-union worker“, and shows that “that there is no strong evidence that higher unionization rates lead to higher unemployment rates“.

Her dissertation: Mandated wage floors and the wage structure: Analyzing the ripple effects of minimum and prevailing wage laws (.PDF), is a study of the overall impact of mandated wage floors on wages.

In her dissertation Wicks-Lim provides empirical estimates of the extent to which mandated wage floors cause wage changes beyond those required by law, either through wage effects that ripple across the wage distribution or spillover to workers that are not covered by mandated wage floors.

When asked in an interview published at PERI “Though living wage laws may increase pay for some workers, by raising costs for employers might these laws have perverse effects on other workers? From a policy perspective, how do you reconcile the income benefits from living wages with their disemployment effects?“, Wicks-Lim replied with:

I think it is important to first consider whether an employer will actually need to reduce his/her workforce. Whether an employer will actually need to reduce his/her workforce has a lot to do with whether the law increases the costs of doing business significantly or not. The increased costs to employers are typically quite small – on the order of two percent or less of their sales revenues. For employers in the restaurant and hotel industry who are more affected by these laws, increased costs are typically on the order of three to four percent of their sales revenue. So, the fact that most employers face modest cost increases raises the question of whether there are other ways that these costs may be offset-perhaps through increased productivity and lower turnover rates of their now better-paid employees, or perhaps through modest price increases or small reductions in their profit margins. In fact, past research has indicated that minimum wage laws, for example, have not had large disemployment effects, suggesting that employers may react differently to these types of laws from what standard economic theory predicts.

Even for those employers that face more substantial cost increases, it’s important to consider their possible range of responses and then evaluate whether there is still a way to avoid disemployment effects, and if not, see if there is a way to minimize them so that the income benefits more than offset those negative effects.

Here Jeannette talks with Real News Network’s Paul Jay and makes a proposal to combine minimum wage and earned income tax credit policies to guarantee a decent living wage for all.

Transcript:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay, coming to you today from Amherst, Massachusetts. We’re at the PERI institute. And we’re likely to see more austerity measures rather than more stimulus, given the shape of the new House. Yet, based on American government estimates, 14 to 15 percent of the American population is living in poverty. Much of this has to do, some say, with the minimum wage. Joining us now to discuss how we might raise the minimum wage and what the consequences of that might be is Jeannette Wicks-Lim. You’re an assistant research professor here. So what has your research shown you, first of all? What is the situation in terms of the numbers and what’s happening in terms of people working on minimum wage?

JEANNETTE WICKS-LIM, POLITICAL ECONOMY RESEARCH INSTITUTE: What we did in this research, this new research, with my co-author Jeff Thompson, is we actually tried to think about a way to raise the minimum wage and a combination with the earned income tax policy, a way to raise them up to a decent living standard. So we’re looking at two different policies.

JAY: Just break it down for a second. So over here is just a federally mandated higher minimum wage.

WICKS-LIM: Minimum wage. Right.

JAY: And over here, describe what this is over here.

WICKS-LIM: Right, the earned income tax credit. It’s a federal program that subsidizes the working poor’s income through the tax system. And so basically what it is, it takes a, you know, percentage of a worker’s income and says, we’re going to give you that amount. It’s specifically–40 percent is the most generous benefit. Forty percent of a worker’s income is given to them through the tax system.

JAY: And this is a program that’s already in place.

WICKS-LIM: Yes. This is a huge economic policy that was put into effect, actually, during the Clinton administration to, you know, quote-unquote, “make work pay”. The idea was to subsidize low-income households’ incomes to raise them to a more decent living standard, because, you know, there’s this assumption that their earnings by themselves are not going to–.

JAY: This is what some people have called workfare, is a way to get people off welfare and give some motivation to even take lower-paying jobs.

WICKS-LIM: Right. Exactly. So during the Clinton administration, you know, there’s this huge welfare, you know, reform which basically, you know, wiped out the AFDC [Aid to Families with Dependent Children], which was the traditional welfare, you know, program, and replaced it with a much more restrictive program, which is called TANF [Temporary Assistance to Needy Families]. And once that was done, you know, the Clinton administration proposed this, well, we’re going to raise the minimum wage. So if you recall, in 1996, 1997, the minimum wage went up in two steps, and also did a huge expansion of the EITC program [earned income tax credit]. So the idea was, okay, we’re going to raise the wage floor, we’re going to raise the minimum rate that employers can legally pay their workers. But on top of that, we’re going to subsidize the income of working poor households, because we’re going to say, well, if you are working, we’re going to give you an income subsidy. And that way, combining those two programs, that would get these households to a more decent living standard. So in the research paper that we just completed, what we do is we look at these two programs and assess: do they actually get families up to a decent living standard? And we already knew going into this project that they don’t. And our idea was, well, let’s take seriously the notion that work is supposed to pay, that it’s supposed to support a decent living standard. What would that require, the policies? And could there be a reasonable proposal put on the table to actually do that? And so that is what we do.

JAY: Now, in your paper, there was a number–80 some-odd percent of people at minimum wage are not earning enough to actually pay for the necessities of life.

WICKS-LIM: Right. Right.

JAY: So that’s people who are benefiting from the programs that exist. It’s just not enough?

WICKS-LIM: We take a look at what’s the current policy situation. So right now the federal minimum wage is $7.25 an hour. Right? Now, if a person is working 2080 hours a year, which is full time year round, they would make on order of about $15,000. So, you know, think about, okay, was that $15,000 going to support a decent living standard?

JAY: I think most people can get that $15,000 a year, especially if you’ve got kids, is not a decent living standard.

WICKS-LIM: Right. But, you know, there is some small portion of low-income working households that might be AFDC-supported based on the current policy rate, minimum wage rate, and a combination of the earned income tax credit. And what we find is about 12 percent of working households, low-income working households, would actually be able to support some notion of a decent living standard. So that’s–you know, the flipside of that is is the vast majority of low-income working households, on the order of 90 percent, could not support a decent living standard, based on current policy.

JAY: So what’s the proposal look like?

WICKS-LIM: So we first come up with what would be a reasonable–an ambitious but reasonable increase in the minimum wage, and we come up with a 70 percent minimum wage increase, which gets us from a $7.25 federal minimum wage currently, up to $12.30 across the states. You know, states vary in their minimum wage rates. Some are higher, some are lower. So it’ll vary a bit, state to state. But generally speaking, for the vast majority of workers, you’d have the minimum wage floor rise from $7.25 to $12.30. And the other part of the proposal is to expand the EITC program, the federal EITC program. What we say is, well, we should increase the benefits on the order of 80 percent. Currently, the maximum benefit is about $5,000. So this’d raise that maximum benefit to about $9,000. And then we’d also expand out the income eligibility for the households.

JAY: So, roughly speaking, the people that were making in the area of $15,000 a year, what’s an annual income at the end of this blended program?

WICKS-LIM: Their earnings would go up to about $26,000. And then on top of that, they would get–again, depending on the household, they would get on the order of $9,000 in earned income tax credit. So that would get them to something on the order of about, you know, $35,000 in income.

JAY: So this is a massive jump of income, relatively speaking: for people that have been earning $15,000, they get into the low $30,000’s. So what’s the economic consequences of this? Obviously the first question is: how do you pay for all this?

WICKS-LIM: Of course, the most popular argument against minimum wage is that if you raise minimum wage, employers’ costs go up, they lay off their workers, or they cut back on their hours, and the workers you’re trying to help end up getting hurt in the long run. So we took this argument seriously. And we have, at PERI and other places, have done a multitude of studies to see, well, when the minimum wage goes up, what actually happens? And what we often find is that when the minimum wage goes up, that the cost increase that businesses actually experience is relatively modest compared to their capacity to cover these costs. And we quantify this. So, for example, something like the city-wide minimum wage increase in Santa Fe that was being considered in the early 2000s, they considered a minimum wage hike on the order of 65 percent. Now, that actually translated to a cost increase for restaurants in that area, you know, the types of businesses that’d most affected by this increase, on the order of 3 to 4 percent of their sales revenue. So, you know, if you want to think about it in very practical terms, restaurants would basically have to raise their prices by 3 or 4 percent in order to fully cover the costs of this minimum wage increase. So as a restaurant patron, you’d be seeing something like a $20 meal go up to $20.60. So the cost that’s associated with the minimum wage increase is very often modest compared to their–.

JAY: And then, in theory, there’s a lot more people can now go to restaurants and buy food, ’cause they’re not making $15,000, they’re making $30,000.

WICKS-LIM: We don’t take into account this idea that all of a sudden there’s this income being generated in the economy that produces more demand. I think a more persuasive way to look at that argument is that the minimum wage and the earned income tax policy–credit program, both those policies combined can help start making an institutional framework for a more equal income distribution. And in that sense, if you have income distributed more equally, you’d have a much more robust economy, and the consumer demand would be much more stable. You know, it’d be very healthy; it’d be very robust.

JAY: I mean, if you’re going to put stimulus dollars somewhere, why not–I guess the argument–put them here? They’re going to get spent more quickly, is the theory, than on tax cuts or something.

WICKS-LIM: Right. Right.

JAY: Well, how much does this cost? People are–in their heads, are just going to do the math that labor costs just went up maybe 70 percent.

WICKS-LIM: Exactly; that’s wrong. First, labor costs are only one portion of business costs, right? So it’s something on the order of, you know, 50 or 30 percent of business costs. So set that aside. So one–you know, it’s only a portion of a business’ costs goes to labor in total. Now, if you look at the percentage of workers within a business that would actually get a raise, there that portion would be–on the outside figure for restaurants, it’d be on the order of 50 percent of workers. So we say about 30 percent business costs go to labor costs. Fifty percent of their workforce is made up of workers who would be affected by a minimum-wage increase. So–and then the last component is that even those workers, the 50 percent of workers who are earning minimum wage or something around that–. There’s a spectrum of wages, right? There are people who are earning the very bottom, the minimum wage, and then there is people who are earning near but above that. So [inaudible] don’t get the full 70 percent minimum wage increase. So those three factors combined–.

JAY: ‘Cause a lot of people might already be making $8 or $9 or $10, so the increase is not that much to get to the $12.35. Okay. Now, about–the tax credit part is going to come out of the government. So how much is that going to cost?

WICKS-LIM: Our total expansion cost would be about $51 billion. That’s, you know, the total sum net of some other considerations. But in any case, the total cost increase would be $51 billion. Now, currently, the federal government spends about $51 billion in tax credits for the federal EITC program as it currently stands. So our expansion would basically double that. That would bring it up to about $51 billion. So, again, likely looked at with minimum wage. We want to say, well, is that reasonable? Is there some way that the US economy could absorb that kind of a cost increase? And so when we looked at the $51 billion price tag for the expansion of the EITC program, we looked [at] the federal budget, ’cause that’s where the money is coming from. What’s the capacity for the federal budget to pay for a $51 billion expansion? So when you look at $51 billion relative to the federal budget, you’re looking at something on the order of 1.8 percent of the federal budget. So you’re trying to figure out: can you shift around 1.8 percent of the federal budget to this program? So, yeah, of course this is something that’s a matter of political priority. For example, one thing that we could do is we could take, you know, what is currently the annual increase in the military budget, take one year of that increase, and that would fully pay for the $51 billion in–that would–that would be the cost of the expansion of EITC. Another example is if we made a modest tax, income tax, we created a modest income tax for households making more than $100,000 a year, that would be able to pay for this EITC expansion. And when I say “modest”, what I mean is, if we set a tax increase that was equal to their annual average growth, if we just took one year’s worth of that money and we put it towards the EITC program–.

JAY: Yeah, and let’s go through the entire budget. It’s pretty small. It’s a small amount of money. It’s more about the question right now of the political climate is, you know, pay down the debt, reduce the deficit, and not one more penny. But it becomes a question of priority,–

WICKS-LIM: It’s exactly a point of priority.

JAY: –whether getting people out of poverty matters, and number two, whether you actually have more purchasing power in the economy matters, or not. And clearly, if you’re going to have to be spending stimulus money anyway, it would make sense to put it into people’s hands that would spend it.

WICKS-LIM: You know, this isn’t specifically about a stimulus package, but this is about policies.

JAY: But doesn’t it amount [to] being that? I mean, doesn’t it amount to that?

WICKS-LIM: It’s–well, you could think of it two ways. You can either be shifting resources around in the budget or you could be, you know, spending more money, so adding more to the deficit. So, you know, you know, what we’re proposing is different ways that the federal budget could shift money around or increase taxes by a very modest amount for very–you know, for high-income households, and that way pay for these programs, not that, you know, we have to create this new spending program, but in–actually change our priorities.

JAY: Have you done any work on what is the ripple effect in terms of wages? And is there any inflationary effect as a result of that?

WICKS-LIM: This is something I’ve looked at for a long time. And basically what the ripple effect amounts to for the minimum wage is that it’s fairly limited. It does exist. When you raise the minimum wage, workers who earn above the minimum wage also get an increase. So–but still, you know, in all the cost estimates that we provide in the research, and, you know, when we tally up how it would affect businesses, we always take into account ripple-effect raises. If the minimum wage went up by 70 percent, we’re talking about about 4 percent. Okay?

JAY: We’re going to have a link to your paper underneath the video player. So if you click somewhere down here, you’ll find the whole paper. And we’re going to ask you–when people write in and start screaming, oh, she can’t be right about this, you’ll answer their questions.

WICKS-LIM: Yes.

JAY: Okay. So write in and scream, if you’re inclined to, and Jeannette will respond to you. Thanks very much for joining us.

WICKS-LIM: Yep.

JAY: And thank you for joining us on The Real News Network.