Michael J Chow Auber Annual Fall Conference October 14 th 2019 The Minimum Wage in the United States Some History FDR and the Fair Labor Standards Act Fair Labor Standards Act of 1938 FLSA ID: 793489
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Slide1
Economic Effects of Enacting the Raise the Wage Act on Small Businesses and the U.S. Economy
Michael J. Chow
Auber Annual Fall Conference
October 14
th
, 2019
Slide2The Minimum Wage in the United States: Some History
Slide3FDR and the Fair Labor Standards Act
Fair Labor Standards Act of 1938 (FLSA)
Banned oppressive child labor
Established a minimum wage of $0.25/hour
Set a maximum work week of 44 hours/week
Signed into law despite a history of judicial opposition to wage-hour and child-labor lawsHammer v. Dagenhart (child labor)Adkins v. Children’s Hospital (women’s min wage)Formal federal mandate
Slide4Private Sector Support: Henry Ford and Efficiency Wages
Informal support from industry leaders to raise
wages independent of any government mandate.
Henry Ford and efficiency wages
Rationale: workers ought to be more productive
if paid more and firms would encounter labor shortages less frequently.Good for workers and for business.
Pre-dates the FLSA by 2+ decades
Ford introduced the “five-dollar day” in 1914
Slide5Current State of U.S. Minimum Wage Laws
Federal minimum wage provisions are contained in the FLSA.Federal minimum currently set to $7.25 per hour effective July 24, 2009.States can (and frequently do) have their own minimum wage laws.Municipalities are increasingly establishing their own minimum wages.
Slide6Current State of U.S. Minimum Wage Laws
State laws may mandate a minimum wage that exceeds the federal minimum wage.Employers must comply with both federal and state minimum wage laws.
Slide7Current U.S. Minimum Wage Laws
Slide8Evolution of American Public Opinion on the
Minimum Wage in Recent Years
Slide9What Do Americans Think about Raising the Minimum Wage (2019)?
% who say they _____ raising the federal minimum wage to $15 an hour
Source: PEW Research Center
*Survey conduced April 29 through May 13, 2019. N = 10,170
Strongly Favor
41%
Somewhat Favor
26%
Somewhat Oppose
18%
Strongly Oppose
15%
Slide10What Do Americans Voters Think about Raising the Minimum Wage (2019)?
“The federal minimum wage should be…”
Source: Hill-
HarrixX
poll, January 2019
Raised to $15
55%
Raised but to an amount less than $15
27%
Stay the same
14%
Be reduced or eliminated
5%
Slide11What Do Americans Think about Raising the Minimum Wage (2016)?“Would you favor or oppose raising the minimum wage to $15 an hour?”
Source: YouGov/Huffington Post, April 8-10, 2016. N = 1,000.
Favor
48%
Oppose
38%
Not Sure
13%
Slide12What Do Americans Think about Raising the Minimum Wage (2016)?
“Some people say raising the minimum wage will help workers by giving them more income. Others say it will hurt workers because businesses will hire fewer people. What do you think?…”
Source: YouGov/Huffington Post, April 8-10, 2016. N = 1,000.
It will help workers
53%
It will hurt workers
34%
Not sure
13%
Slide13What Do Americans Think about Raising the Minimum Wage? (2016)
“Would you favor or oppose raising the minimum wage to…?”$10.10/hr (Harkin/Miller/Obama):
$12.00/
hr
(Clinton):
$15.00/hr (Sanders): Source: YouGov poll, April 8-10, 2016
Favor
Oppose
Not sure
66%
26%
8%
Favor
Oppose
Not sure
59%
33%
9%
Favor
Oppose
Not sure
48%
38%
13%
Slide14What Do Americans Think about Raising the Minimum Wage? (2014)“Some people say raising the minimum wage will help workers by giving them more income. Others say it will hurt workers because businesses will hire fewer people. What do you think?”
Source: YouGov poll, September 4-8, 2014. N = 999
It will help workers
39%
It will hurt workers
44%
Not sure
18%
Slide15What Do Americans Think about Raising the Minimum Wage? (2015)
38% of respondents had close friends or family who currently worked for the minimum wage.74% had worked for the minimum wage before“Would you favor or oppose raising the minimum wage to…?”
Source: YouGov poll, July 23-27, 2015
Favor
Oppose
Not sure
$9 an hour
47%
39%
14%
$10.10 an hour
54%
35%
12%
$15 an hour
48%
42%
11%
$20 an hour
24%
59%
17%
Slide16What Do Americans Think about Raising the Minimum Wage? (2015)“What effect do you think raising the minimum wage to $15 an hour would have on
unemployment?”
Source: YouGov poll, July 23-27, 2015
Increase
43%
No effect
21%
Decrease
18%
Not sure
18%
Slide17Minimum Wage Pledges in the Current Political Climate
(as of 10/11/19)
Candidate
Fifth Debate Qualified
Federal $15/hr Wage
Michael Bennet
No
Against
Joe Biden
Yes
Supports
Cory Booker
Yes
Supports
Steve Bullock
No
Supports
Pete Buttigieg
Yes
Supports
Julian Castro
No, Donors Only
Supports
Bill de Blasio
Dropped Out
Supports
John Delaney
No
Supports
Tulsi
Gabbard
No, Donors Only
Supports
Kirsten Gillibrand
Dropped Out
Supports
Kamala Harris
Yes
Supports
John Hickenlooper
Dropped Out
Supports
Jay Inslee
Dropped Out
Supports
Amy Klobuchar
No, Donors Only
Supports
Seth Moulton
Dropped Out
Supports
Beto O'Rourke
No, Donors Only
SupportsTim RyanNoSupportsBernie SandersYesSupportsJoe SestakNoSupportsTom SteyerYesSupportsElizabeth WarrenYesSupportsMarianne WilliamsonNoSupportsAndrew YangNo, Donors OnlyAgainst
*Michael Bennet supports a $12/
hr
min wage
**Andrew Yang advocates for leaving min wage up to
the states; supports a UBI of $1,000/month
Slide18Questions on Theory:Are Firms Behaving Irrationally?
Firms are profit maximizing. If the benefits of increasing wages exceed the costs, i.e., if any productivity gains from increasing wages exceeds the higher cost of labor to firms (↑
↑
), then firms would do this.
Efficiency wage theory, attract better workers, …
Can imagine under certain theoretical conditions, ↑
↑
always, yielding ↑
∞.
Clearly, reality does not bear this out.
Slide19Questions on Theory:Are Firms Behaving Rationally But Contributing to Market Failure?
Similarly, assume firms are profit maximizing. If the benefits of increasing wages exceed the costs, i.e., if there are welfare gains from increasing wages (due to greater consumption by workers, which leads to more sales and profits), then firms would do this.
Higher profits
hire more workers raise wages higher profits …
Ignores inflationary effects. Prices are not long run sticky.
Slide20The Raise the Wage Act of 2019
Slide21Raise the Wage Act of 2019
Staggered increase in the federal minimum wage from $7.25/
hr
to $15.00/
hr
over 6-year period spanning 2019 to 2024After 2024, federal minimum wage increases according to broader wage inflation (indexed to median hourly wage of all employees)Eliminates the federal tipped wage according to another wage schedule of staggered increases until the tipped wage equals the federal minimum wage
Slide22Raise the Wage Act of 2019: Wage Schedules
2019
2020
2021
2022
2023
2024
2025 and beyond
$8.55/
hr
$9.85/
hr
$11.15/
hr
$12.45/
hr
$13.75/
hr
$15.00/
hr
f($15/
hr
, wage inf)
*All minimum wage increases take place on July 1
st
of respective years.
**Assume nominal wage inflation of 2.4% per year (annualized rate of increase of hourly median wage from 2001 to 2017)
Tipped wages
increase from the current level of $2.13/hour to $3.60/hour in 2019 and, for each succeeding year,
by the lesser of either $1.50/hour or the difference between the tipped wage and the federal minimum wage.
Assuming wage inflation does not spiral beyond a certain rate, tipped wages catch up to the minimum wage and
are de facto eliminated.
FICA taxes
also increase for employers: 7.65% of wages (6.2 p.p. for OASDI; 1.45 p.p. for Medicare
)
Minimum Wage Schedule
Slide23Business Size Insight Module(Proprietary Version of REMI Model)
Allows for disaggregation of select results by firm size
13 Regions: CA, FL, IL, MD, MI, MN, NJ, NY, OH, PA, TX, WA, “Rest of U.S.”
Modeled all 50 states. Yields direct inputs to CA,…,WA.
For “Rest of U.S.”, summed up costs for remaining 38 states and applied to residual region.
Slide24Example Wage Differentials Due to Minimum Wage Increase
Assumed Fed Min Wage Schedule
Alabama
Washington
Status Quo Effective Min Wage
Assumed Effective Min Wage
New Hourly Employer Cost per Min Wage Worker
Status Quo Effective Min Wage
Assumed Effective Min Wage
New Hourly Employer Cost per Min Wage Worker
2019
$7.90/
hr
$7.25/
hr
$7.90/
hr
$0.65/
hr
$12.00/
hr
$12.00/
hr
$0.00/
hr
2020
$9.20
$7.25
$9.20
$1.95
$13.50
$13.50
$0.00
2021
$10.50
$7.25
$10.50
$3.25
$13.72
$13.72
$0.00
2022
$11.80
$7.25
$11.80
$4.55
$13.95
$13.95
$0.00
2023
$13.10
$7.25
$13.10
$5.85$14.18$14.18$0.002024$14.38$7.25$14.38$7.13$14.42$14.71$0.292025$15.18$7.25$15.18$7.93$14.66$15.18$0.522026$15.54$7.25$15.54$8.29$14.90$15.54$0.642027$15.92$7.25$15.92$8.67$15.15$15.92$0.772028$16.30$7.25$16.30$9.05$15.40$16.30$0.90*Effective minimum wage in any year t is the average of the minimum wage at the end ofyear t-1 and the minimum wage at the end of year t, due to the wage increases occurring on July 1st
Slide25Example Wage Differentials Due to Tipped Wage Increase
(New Jersey)
Status Quo Tipped Wage Schedule
Assumed Tipped Wage Schedule
New Hourly Cost per Tipped Employee
2019
$2.13/
hr
$2.87/
hr
$0.74/
hr
2020
$2.13
$4.35
$2.22
2021
$2.13
$5.85
$3.72
2022
$2.13
$7.35
$5.22
2023
$2.13
$8.85
$6.72
2024
$2.13
$10.35
$8.22
2025
$2.13
$11.85
$9.72
2026
$2.13
$13.35
$11.22
2027
$2.13
$14.85
$12.72
2028
$2.13
$16.05
$13.92
2029
$2.13
$16.69
$14.56
Slide26Modeling Additional Labor Costs
Multiply wage differentials by number of minimum wage workers (or sub minimum wage workers), by region
Consideration of spillover effects to prevent wage compression.
Research suggests spillover effects are not long delayed. We assume simultaneous spillover effects.
Slide27Modeling Additional Labor Costs
BLS OES 2017 data for hourly wage (all occupations):10
th
percentile: $9.60/
hr
25th percentile: $11.91/hrMedian: $18.12/hrWe assume spillover effects occur for wage earners earning up to the 15th percentile.
Slide28REMI Policy Variables
For producers: Increased “Wage Labor Cost” policy variable
For workers (consumers): Increased “Compensation Rate” variable, which provides for automatic feedback in increased consumption due to higher income
Lower income earners more likely bound by budget constraints. When constraints loosen, they are more apt to consume than save.
Slide29BSIM Results: Employment
Slide30BSIM Results: Employment
Firm Size
(# employees)
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
% of Total (2029)
1 to 4
-6,603
-21,135
-38,267
-56,339
-73,626
-90,383
-101,037
-106,325
-111,203
-115,573
-120,207
7.3%
5 to 9
-6,976
-22,223
-40,094
-58,936
-76,993
-94,533
-105,658
-111,082
-116,059
-120,466
-125,109
7.6%
10 to 19
-7,886
-25,096
-45,239
-66,485
-86,858
-106,665
-119,227
-125,312
-130,841
-135,710
-140,817
8.6%20 to 99-17,536-55,684-100,302-147,467-192,759-236,855-264,883-278,477-290,671-301,331-312,38919.1%100 to 499-12,625-39,968-72,027-106,181-139,188-171,563-192,493-203,020-212,388-220,509-228,67414.0%500+-38,465-121,338-218,626-323,159-424,728-525,202-591,320-625,896-656,817-683,355-709,07643.3%<20-21,466-68,454-123,600-181,760-237,477-291,581
-325,922
-342,719
-358,103
-371,749
-386,134
23.6%
<100
-39,002
-124,138
-223,902
-329,227
-430,236
-528,437
-590,805
-621,196
-648,774
-673,080
-698,522
42.7%
<500
-51,627
-164,106
-295,929
-435,408
-569,424
-700,000
-783,298
-824,216
-861,162
-893,589
-927,196
56.7%
All Firms
-90,092
-285,443
-514,555
-758,567
-994,152
-1,225,202
-1,374,618
-1,450,112
-1,517,979
-1,576,944
-1,636,272
100.0%
Slide31BSIM Results: Production
Slide32Other BSIM Results
Small businesses (employer firms with <500 employees) would be disproportionately impacted by the minimum wage increase.
57% of job losses
51% of cumulative real output lost
In 2029, there would be 615,000 fewer individuals participating in the labor force.
Also in 2029, disposable personal income would be more than $103 billion lower than the baseline forecast.
Slide33Benchmarking
Slide34CBO Analysis of Raise the Wage Act (July 2019)
Examined how increasing the federal minimum wage to $10, $12, or $15 per hour by 2025 would affect employment and family income
In an average week in 2025, the $15 option would:
Boost wages of 17 million workers who would otherwise earn less than $15/
hr
Boost wages of another 10 million workers otherwise earning slightly more than $15/hrBut at cost of 1.3 million other workers who would become jobless (median estimate)
Slide35The debate continues…
Slide36Dueling Views in Emeryville, CA
“I just didn’t see how I was going to survive it.”
--Marcos Quezada, owner of Patatas Neighborhood Kitchen who eliminated his dinner shift and laid off 6 of his 10 workers
“There is a tipping point. We may have the highest minimum wage, but I don’t think the people in Emeryville will feel like paying the highest prices in the country.”
--Erick Hansen, owner of
Moomie’s who is deciding whether to raise sandwich prices by as much as $1.50 or lay off 1 of his 3 employees“If I didn’t have it, I would have to cut back.”--Sheena Luu, barista at Polaris Café
“This will help me save more for college.”
--Maria
Anguiana
, waitress at Rudy’s Can’t Fail Cafe
Slide37Thank You!
Michael J. ChowLead Data Analyst/Economist
NFIB Research Center
Michael.Chow@NFIB.org
Contact Information