Minimum wage is on a rise.
This piece is a summary of:
- context regarding the minimum wage debate
- its legal basis
- its impact on different groups of the U.S. population
- and an outlook for the coming months.
Case Study: Fast-Food Workers
Hard to digest: 96% of fast-food workers earn less than $15 per hour.
As a result organized efforts came into life to fight for a $15 minimum across low-earning professions.
Yet in order for this to take effect governments need to act.
Minimum Wage: Setting Floors on Many Levels
Minimum wage is a price floor below which (1) workers are not allowed to offer their labor and (2) below which employers are not allowed to employ a workforce.
In most simple terms it is used to secure a reasonable standard of living.
The underlying legal basis for minimum wage works on 3 levels:
#1: Federal Level (url)
The smallest common denominator is a federal minimum wage of $7.25, which has been increased from $6.55 in 2009.
The federal government sets price floors sporadically – mainly looking at developments of the CPI (consumer price index).
The main problem with an aggregated calculation is that extreme outliers (higher than average cost of living; etc.) are not accounted for.
#2: State Level (url)
To adjust for regional differences like price levels, rent prices, etc. state governments can set minimum wages that exceed the federal minimum.
A majority of U.S. states chose to ask for higher minimum wages from businesses.
Last week 14 states have increased their price floors to accommodate economical development.
Increases range from $0.25 in New York to $1.00 in Alaska, California, Massachusetts, and Nebraska.
The highest minimum wage across all states is set at $10 in California and Massachusetts.
Yet even within states there is a huge disparity between economic circumstances (e.g. CPI difference in urban areas in CA).
#3: Local Level (url)
To get a feeling for the real difference in ‘income vs. cost of living‘ across the cities you can play around the Living Wage Calculator.
Some local governments already choose to ask for more:
- Seattle, WA ($10.50 – $13.00) – Seattle is working towards a $15 price floor. Current legislation has different minimum levels based on (1) the size of the company and (2) its contribution towards medical benefits.
- San Francisco, CA ($12.25) – Currently at $12.25 the city of San Francisco will progressively increase its minimum wage floor until it will reach $15.00 on 07/01/2018.
- Los Angeles, CA ($9.00) – The city of Los Angeles passed an ordinance which will progressively require employers to pay a minimum of $15.00 by July 2020/2021 (depending on the size of the entity).
## Non-governmental Level ##
In addition there exist non-governmental layers of minimum wage setting:
- Unions – e.g. Seattle allowing Lyft/Uber drivers to unionize
- Company policy & industry practice – e.g. Danny Meyer restaurants paying their kitchen staff $15.25+
Low Income Is Unevenly Distributed
The National Employment Law Project has conducted a comprehensive research about the impact of low wages across the U.S. population.
Bottomline: It’s not only an economic but also a societal problem especially as it affects 42% of the U.S. workforce.
#1 Demographics Across Low-Income Workers Are Skewed
The figure below shows that (1) females, (2) African Americans, and (3) Latinos are overrepresented in workers making less than $15.
#2 Certain Professions Are More Exposed to Minimum Wage than Others
This is particularly alarming as 6 out of the 10 largest occupational groups with median wages below $15 are projected to add more jobs over the coming years.
The factors above are contributing to the shrinking of the U.S. middle class and the increased divide between wealthy and poor.
PRO: ‘Raise minimum wage to facilitate living’
Cost of living has skyrocketed in many U.S. cities but price floors for wages have not been adjusted.
Low-wage workers barely make a living and are becoming increasingly dependant on governmentally-funded welfare programs.
Increased minimum wages can counter this dysbalance.
CONTRA: ‘Minimum wage increases are only feasible up to a certain point and would cause more harm if used without caution.’
Alan Krueger – former chairman of President Obama’s Council of Economic Advisors – argues that the U.S. economy can sustain a gradual increase up to a federal minimum of $12.
At this level it would compare to today’s minimum wage level in the UK and would also have overall net benefits (less vacancies & lower turnover rates outweigh higher cost to employers) to the economy.
$15 goes beyond current experience levels and might carry the risk of too many business reducing their workforce due to cost-cutting pressures.
This would mainly impact the bottom of the workforce pyramid.
Bottomline & Outlook:
#1 The Presidential Campaign 2016 Will Revolve Around ‘Minimum Wage’
#2 We Will See More Governmental Regulation/Ordination
Besides the wage hikes around New Years Eve 2015/16 there are more planned increases.
Also expect to hear more discussion and subsequent regulation around federal price floors: $10.10 vs. $12 vs. $15
#3 2016 Will Show If the New Economics Work Across Different Sectors
This year is a large-scale experiment on how businesses will be able to cope with the mandated wage levels.
Our feeling is that the success for the private sector or the lack thereof will highly influence policy makers in the coming decision cycles.
Please share your thoughts on the topic.
Thanks, Team Perengo
Additional Resources & Links:
- NELP 2015 report summary: Growing Movement for $15 (url)
- CBO 2014 report summary: The Effects of a Minimum-Wage Increase on Employment and Family Income (url)
- EPI Fact sheet for 2009 minimum wage increase (url)
- MIT Living Wage Calculator: Los Angeles case study (url)
- PEW Trust: The Shrinking Middle Class (url)
- Fight for 15 (url)