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Working paper series
What’s the right minimum wage?
Reframing the debate from ‘no job loss’
to a ‘minimum living wage’
David R. Howell
Kea Fiedler
Stephanie Luce
June 2016
Working paper URL
© 2016 by David R. Howell, Kea Fiedler, and Stephanie Luce. All rights reserved. Short sections of text, not to exceed two
paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
June7,2016
What’stheRightMinimumWage?
ReframingtheDebatefrom‘NoJobLoss’toa‘MinimumLivingWage’1
DavidR.Howell,KeaFiedlerandStephanieLuce2
Nosocietycansurelybeflourishingandhappy,ofwhichthefargreaterpartof
themembersarepoorandmiserable.Itisbutequity,besides,thatthosewho
feed,cloathandlodgethewholebodyofpeople,shouldhavesuchashareof
theproduceoftheirownlabourastobethemselvestolerablywellfed,
cloathedandlodged….Thewagesoflabouraretheencouragementof
industry,whichlikeeveryotherhumanquality,improvesinproportiontothe
encouragementitreceives.
AdamSmith,17763
ItisanationalevilthatanyclassofHerMajesty’ssubjectsshouldreceiveless
thanalivingwageinreturnfortheirutmostexertions…whereyouhavewhat
wecallsweatedtrades,youhavenoorganisation,noparityofbargaining,the
goodemployerisundercutbythebad…wheretheseconditionsprevailyou
havenotaconditionofprogress,butaconditionofprogressivedegeneration.
WinstonChurchill,19064
“It seems to me to be equally plain that no business which depends for
existence on paying less than living wages to its workers has any right to
continue in this country…. By living wages, I mean more than a bare
subsistence level — I mean the wages of a decent living.”
FranklinD.Roosevelt,19335
1WewishtothankMarkLevinsonforinvaluable,comments,adviceandoverallsupport.Wearealso
extremelygratefultoDavidCooper,BobKuttner,LarryMishel,EdPaisley,BobPollin,JasonRochford,
JohnSchmitt,LydiaTugendrajch,andJeannetteWicks-Limfortheircontributions,andforthe
feedbackfromtheparticipantsoftheSEIUforum“MakingtheProgressiveEconomicCasefora$15
Wage”(WashingtonDC,May5,2016).Ofcoursewetakefullresponsibilityfortheviewsandallthe
mistakes.ThispaperisanoffshootofHowell’sDecentJobsProject,generouslyfundedbythe
WashingtonCenterforEquitableGrowthandtheRussellSageFoundation.
2DavidHowellisProfessorofEconomicsandPublicPolicyatTheNewSchool.KeaFiedlerisa
doctoralcandidateinthePublicandUrbanPolicyProgramatTheNewSchool.StephanieLuceis
ProfessorofLaborStudiesattheMurphyInstitute,CityUniversityofNewYork.
3AdamSmith(1937),pp.68,79,81.
4QuotedbyAnthonyB.Atkinson(2015),p.148.
5StatementontheNationalRecoveryAct.http://docs.fdrlibrary.marist.edu/odnirast.html
Abstract
TheAmericandebateovertheproperlevelofthestatutoryminimumwagehasalways
reflectedthetensionbetweenthetwingoalsofensuringdecentliving-wagejobswith
maximumjobopportunity.Themoralandefficiencyargumentsforawagefloorthatcan
keepaworkerabovemeresubsistencehavealonghistory,datingbackatleasttoAdam
Smith.TheU.S.federalminimumwagewasestablishedbythe1938FairLaborStandards
Acttoensurea“minimumstandardoflivingnecessaryforhealth,efficiency,andgeneral
wellbeingofworkers”andtodoso“withoutsubstantiallycurtailingemployment.”In
recentyears,thebestevidencehasshownthatmoderateincreasesfromverylowwage
floorshavenodiscernibleeffectsonemployment,whichhasstrengthenedthecasefor
substantialincreasesintheminimumwage.
Buttheverystrengthofthisnewevidence—researchdesignsthateffectivelyidentify
employmenteffectsatthelevelofindividualestablishments—hascontributedtothe
adoptionofanarrowNo-Job-Loss(NJL)criterion:thatthe“right”wageflooristheone
thatpreviousresearchhasdemonstratedwillposelittleornoriskoffuturejobloss,
anywhere.Theeconomist’sParetoCriterion—agoodpolicyisonethatdoesnoimmediate
harmtoanyone—hasreplacedtheearliermuchbroaderconcernwithaggregate
employmenteffects,andmoregenerally,withoverallnetbenefitstoworkingfamilies.
Theexplicitmoralandefficiencyframingofthecaseforalivingwagebyearlier
generationsofeconomists,advocates,andpolicymakershastakenabackseatto
statisticaljoustingoverwhichwagefloorwillposenoriskofjobloss(orharm)to
anyone.
Wethinkthedebateovertheproperlevelofthestatutoryminimumwageshouldbe
reframedfromaNJLtoaMinimumLivingWage(MLW)standard:thelowestwageafulltimeworkerneedsforaminimallydecentstandardofliving.Thispaperillustratesand
critiquestherecentNJLframing,aswellastheusefulnessofonemetricthathasbeen
heavilyrelieduponforidentifyingtheNJLthreshold—theratioofthewagefloortothe
averagewage(theKaitzindex).Wearguethattheproperframingofthedebateisnot
overthestatisticalriskofthelossofsomepoverty-wage,high-turnoverjobs,butrather
overthewagefloorthatestablishesaminimallydecentstandardoflivingfromfull-time
workforallworkers,alongwithcomplementarypoliciesthatwouldensurethatanycosts
ofjoblosswouldbemorethanfullyremedied.
1
Myownviewisthatexplicitgoalsareimportant,andthatchanging
thediscourseisastepontheroadtoachievingtheambition.
AnthonyB.Atkinson,20156
1.Introduction
Thedebateoverlowpayanditslowerboundaryhaslongrestedonmoraland
economicefficiencyarguments.Attherootofthedebateisthehistoricalexperience
thatunregulatedlabormarketsinvariablyfailtogeneratewagessufficientto
maintainaproductiveworkforce,toensurethereproductionofthatworkforce
(adequatechildrearing),andtoprovideaminimallydecentqualityoflifeaccording
toprevailingstandards.Individuallybargainedwagesforless-skilledworkersare
set,asAdamSmithputit,bythe“demandforlabour,andthepriceofthenecessaries
andconveniencesoflife”(Smith1937,p.85).Butthenormalconditioninlow-skill
labormarketsisasurpluspoolofworkers(todayasin1776)which,intheabsence
ofregulation,drivesthewagedownbelowefficientandmorallyacceptablelevels.In
lightofthis“hunger-discipline,”eventheAmericanneoclassicaleconomistJ.B.Clark
calledforminimumwagelegislationasearlyas1913(Clark1913).Labormarket
failurealsoexplainstheopeningwordsofthe1938FairLaborStandardsAct(FLSA
1938),whichcallsforpaythatensuresa“minimumstandardoflivingnecessaryfor
health,efficiency,andgeneralwellbeingofworkers”(FLSA1938,article202).7.And
finally,ithelpsexplaintheriseofthelivingwagemovementinthepost-1980United
StatesandUnitedKingdom,alongwiththecurrent“Fightfor$15.”
Afterexperiencingsubstantialwagegainsduringtheshared-growthdecadesofthe
post-warGoldenAge(1947-73),Americanworkershaveincreasinglyconfronted
labormarketscharacterizedbyprecariousjobsthatpaytoolittletoprovideafulltimeworkerwithaminimallydecentstandardofliving.Itiswell-establishedthat
America’sproductivitygrowthsincethelate1970shasbeenalmostentirely
unsharedwiththevastmajorityofworkers.In2014,theaveragehourlywagesat
the10th,20thand30thpercentileswerejust$8.62,$10.08and$12.09respectively,
whichisnearlyexactlywhattheyearnedininflation-adjustedtermsalmostfour
decadesagoin1979.Eventhemedianwage(the50thpercentile)increasedbyjust
6Atkinson(2015),p.140.
7TheFLSAthengoesontostatethatthestandardsshouldbeimplemented“"withoutsubstantially
curtailingemploymentorearningpower."(Article202(b)).MostoftheNJLpositionarguesforno
jobslostanywhere,foranyone,whereastheFLSAtextcanbeinterpretedtorefertonetemployment
effects.
2
85centsbetween1979and1999($16.02to$16.87),andjust3centsmoresince
1999,reaching$16.90in2014(EPI2015).8
Oneofthemosteffectivetoolsforensuringthatemployerspayawagesufficientto
keepalltheirfull-timeworkersabovepoverty-levelincomesisthestatutory
minimumwage.Anappropriatelydesignedlegalwagefloornotonlycanlift
householdswithafull-timeworkeroutofpovertybutalsoincreasetheincentiveto
work,reduceswageandincomeinequality,andlessentheneedformeans-tested
socialassistanceforworkingpoorfamilies.ButthishasnotbeenthepathoftheU.S.
federalminimumwage,whichhascollapsedinvaluefrom$9.54in1968to$8.00in
1979toamere$7.25today(Cooperetal.2015,Table1).
InresponsetoCongressionalinaction,manystatesandlocalitieshavelegislated
increasesinthestatutoryminimumwage.CaliforniaandNewYorkpassedlarge
increasesintheirstatewideminimumwageratesinearly2016.California’swage
willberaisedinincrementsfromthecurrent$10perhouruntilitreaches$15by
2022.9TheNewYorkratewillreach$15bytheendof2018foremployersinNew
YorkCitywith11ormoreemployees(WoffordandTobia2016).10Even“red”
(stronglyRepublican)stateshaverecentlypassedlargeminimumwageincreases.11
Eightcities,includingSeattle,SanFrancisco,andLosAngeles,arescheduledtoraise
themunicipalminimumwagetoaround$15overthenextseveralyears.12
Furthermore,inarecentpoll,two-thirdsofthemayorssurveyedsaidtheywould
endorsea$15minimumwage(ibid.).
Theonlyrealcontroversyintoday’sminimumwagedebate,evenamong
economists,isoverhowbigtheincreaseshouldbe.Thispaperarguesthatthereisa
needtoreframethedebateovertheappropriatetargetforthefederalstatutory
minimumwage.Areviewofthehistoricaldebatesuggeststwocontending
perspectives.Asking“Howmuchistoomuch?”,onesidesupportsahigherwage
8EPI(2015)showssimilarstagnation.
9Smallcompanies(25orfeweremployees)willhaveuntil2023toreachthe$15threshold.
10Anadditional25citiesandcountieshavesetorraisedtheirmunicipalminimumwagesince2002,
butnotallofthemhaveseta$15-per-hourwage.Forexample,Chicagosetaminimumwagethatwill
reach$13perhourby2019.http://laborcenter.berkeley.edu/minimum-wage-living-wageresources/inventory-of-us-city-and-county-minimum-wage-ordinances/
11AsDavidCardandAlanKrueger(2015,p.xiii)note,“Furthermore,thefactthatcitizensinfour
“red”states—Alaska,Arkansas,NebraskaandSouthDakota—votedoverwhelminglyin2014toraise
theirstates’minimumwagestoashighas$9.75anhouristestamenttothewidespreadbipartisan
appealoftheminimumwageamongvoters.”
12Anadditional25citiesandcountieshavesetorraisedtheirmunicipalminimumwagesince2002,
butnotallhaveseta$15-per-hourwage.Forexample,Chicagosetaminimumwagethatwillreach
$13perhourby2019.http://laborcenter.berkeley.edu/minimum-wage-living-wageresources/inventory-of-us-city-and-county-minimum-wage-ordinances/
3
flooraslongasthe‘causenoharm’constraintismet.Inthisview,theproperwage
issetbytheNoJobLoss(NJL)criterion:thehighestwagethatwidelyaccepted
researchhasalreadydemonstratedwillposelittleornojobloss.Ontheotherside,the
questionis“Howlittleistoolittle?”Thewagefloorisnotsetonthenegative
groundsofavoidingriskoftheunintendedconsequencesofjobloss,butratheron
thepositivegroundsofensuringthatfull-timeworkcansupportaminimally
acceptablestandardofliving.Inthisview,theproperstandardistheMinimum
LivingWage(MLW):thelowestwageafull-timeworkerneedstoprovideaminimally
decentstandardofliving.Thisdividecanbevividlyseeninthecurrentpresidential
election,withHillaryClintonunwillingtosupportafederalwagefloorabove$12on
aquiteexplicit“No-Job-Loss”standard,whileBernieSandershasadvocateda$15
wageonstandard-of-livinggrounds.
Inadditiontothisdescriptionofthefundamentaltensioninthedebate,thispaper
arguesthatbecauserecentstate-of-the-artempiricalevidencehasconvincedmost
economiststhatsubstantialhikesinthewagefloorarepossiblewithoutdiscernible
employmenteffects,thetermsofthedebatehaveconverged,withliving-wage
advocatesoftenmakingtheircaseonNJLgrounds:amuchhigherwagefloorcanbe
achievedwithoutanyjoblossandthetechnicaldebateisnowoverwheretheNJL
thresholdis.Indeed,giventhegrowingacceptanceamongeconomiststhatthereare
manychannelsthroughwhichwageincreasescanbeaccommodatedbeyondthe
employmentcutsrequiredbythesimple,downward-sloping-demandmodelof
economics101,advocateshavemadethecaseforsubstantialhikesinthewagefloor
ontheconventionalParetocriterionofnoharmtoanyone,onthegroundsthatthe
higherwagecoststhatfollowfromtheadoptionofamuchhigherminimumwage
canbeentirelyaccommodatedbyhigherproductivity,lowerturnovercosts,and
highersalesfromincreasedconsumerspending.
Thispaperoffersacriticalperspectiveonthisconvergenceintheminimumwage
discoursetoanNJLframing.Thenextsectionprovidesahistoricalaccountofthe
changesintherelativevalueoftheU.S.federalminimumwage,withcomparisonsto
thepovertyline,abasicneeds-basedbudget,themedianwage,andnational
productivitygrowth.InSection3,weillustratetheimportanceoftheNJLcriterionin
thedebate,andcritiqueit.OurcritiquedistinguishesbetweentwoNJLapproaches:
thebackward-lookingNJLapproach,inwhichweareconstrainedtonavigateinthe
“chartedwaters”ofstatisticalevidenceofemploymenteffectsfromwagefloorsset
inotherlocationsatsomeearlierpointintime;andtheforward-looking(or“innearreal-time”)NJLapproach,inwhichincreasesintheminimumwageareimplemented
intherelevantlocationandimmediatelymonitoredforemploymenteffects,which
4
isbroadlyspeakingthetakenbytheUnitedKingdominthefirstyearsoftheir
NationalMinimumWage(1999-2005).
InSection4,wecontendthattheheavilyreliedupon“Kaitzindex”—theratioofthe
minimumwagetoanaverageormedianwage—isapoorguideforidentifyingthe
NJLwagethreshold.Whileagoodmeasureoftherelativevalueoftheminimum
wage,thereisnotheoreticalorempiricalreasontobelieveaparticularKaitzratio
canbeareliableindicatorofjobloss.Neitherthefactorsthatsteeremployer
decisionsonthehiringandretentionofworkersatverylowwagesnorthelabor
supplydecisionsofminimumwageworkershavemuchtodowiththemedianwage
ofaparticulargeographicallydefinedlabormarket(thenation,stateor
metropolitanarea).Othercountries,suchasAustralia,theUnitedKingdom,and
France,couldpushupthewagefloorbecausetheywereunconstrainedbya
backward-lookingNJLrule,whetherfixedtoaparticularwage(e.g.,$10.10)orbya
particularpercentageofthemedianwage(e.g.,50percent).EvidenceforFranceis
presentedthatsuggestsconvergencewiththeUnitedStatesoverthepasttwo
decadesinemploymentperformanceforlow-skillworkers,despiteaveryhighand
risingFrenchminimumwageandanextremelylowandfallingU.S.federalminimum
wage.
InSection5,wesuggestthattheU.S.federalwagefloorshouldbesetbyreferenceto
astandardoflivingrule—thelowestwagethatafull-timeworkerneedsfora
minimallydecentlivingstandard,basedonbasic-needsbudgets.Beyondthis,we
makenospecificproposal,whichwouldbefarbeyondthescopeofthispaper.But
wedosuggestthatonepossiblemodelwouldbetosetthefederalMLWforasingle
individualinalow-modestcost-of-livingregionandcomplementitwithuniversal
per-childallowances.Aquasi-governmentalbody,liketheLowPayCommissionin
theUnitedKingdom,couldbechargedwithstatisticalanalysis,settingtheMLW,
monitoringemploymenteffects,andrecommendingcompensatoryresponsesfor
anyjoblossesthatoccur.Moregenerally,agoodruleonmattersofsocialpolicyisto
returntothetaskoutlinedbyFranklinD.Roosevelt.
Ourproblemistoworkoutinpracticethoselaborstandards
whichwillpermitthemaximumbutprudentemploymentofour
humanresourcestobringwithinthereachoftheaverageman
andwomanamaximumofgoodsandofservicesconducivetothe
fulfillmentofthepromiseofAmericanlife(PresidentRoosevelt,
1937).
5
2.TheHistoricalContext:FromLoftyGoalstoaPovertyWage
Whilethequestionoftheproperlevelsofsupportforthepoorspansmany
centuries,13themoderndebateoversettingalegalwagefloorappearsinboththe
UnitedKingdomandtheUnitedStatesinthelate19thandearly20thcentury,
justifiedonmoralandefficiencygroundsinthefaceofappallinglaborexploitation
(Webb,1912;Clark,1913;Douglas,1925).Thesamemoralconvictionmotivatedthe
enactmentoftheFairLaborStandardsAct(FSLA)of1938,whichestablishedthe
U.S.federalminimumwage.AdvocatingforpassageoftheFLSA,PresidentRoosevelt
(1937)stressedtheimportanceoffairnessinthelabormarket:“Ournationsorichly
endowedwithnaturalresourcesandwithacapableandindustrialpopulation,
shouldbeabletodevisewaysandmeansofinsuringtoallourable-bodedworking
menandwomenafairday’spayforafairday’swork.”Roosevelt’s“fairday’spay”
wasdefinedasthelowestwage“necessaryforhealth,efficiency,andgeneralwellbeingofworkers,”whichtodayiswhatisusuallymeantbya“livingwage.”
ThedebateoverwhatbecametheFairLaborStandardsAct(1938)focusedonthe
constitutionalrightofthefederalgovernmenttointerveneinprivatevoluntary
contractsandlocalstateeconomicaffairs,ontheconsequencesforregional
competitivenessintheAmericansouth,aswellasoveraboutjobloss.Afteralong
politicalstruggle,thecompromisewasanationwideminimumwagesetatjust25
cents(RooseveltandPerkins’goalwas40cents).Thisamountwasequivalentto
about$4.24in2016inflation-adjusteddollarsandcoveredonlyaboutone-fifthof
theworkforce(Grossman1978).Thefinalminimumwagepolicycontainedno
formulatosetthefuturewagefloorsandnomechanismtoindexittoinflation.
Accordingly,anyfutureincreaseswouldrequireanActofCongress.
Thesubsequenthistoryisoneoffluctuationsaroundaverylowwagefloor.Atthe
sametime,theshareoftheworkforcecoveredbythefederalminimumdidincrease
dramaticallyin1961andafterwardswhenthelawwasamendedtocovernew
categoriesofworkers,includingthoseemployedprimarilyinretail,local
construction,transit,andgasstations.14Thefederalminimumwagepeakedat$9.54
13OntheexperienceintheWesternworld,seeforexample,KarlPolanyi([1944]2001)andPeter
Lindert(2004).
14Anumberofgroupsofworkersareexemptedfromthefederalminimumwage.First,persons
undertheageof20maybepaidanhourlywageof$4.25forthefirst90calendardaysof
employment.Second,employersmaypaytippedworkersaminimumof$2.13anhouraslongasthe
hourlywageplustipequalsatleasttheminimumwage.This$2.13tippedminimumwagehasnot
beenincreasedsince1991.(Somestateshaveincreasedthetippedwagelevel,and7stateshave
eliminatedthetipcreditaltogether.)Iftheweeklytotaloftipsplusthebasewageislessthena
6
in1968(in2014inflation-adjusteddollars).UnderPresidentReagan’sleadership,
theU.S.Congressfailedtoincreasethenominalminimumwagetooffsetinflation,
andtherealvalueoftheminimumwagefelltoameager$6.18in1989(Cooper
2016).
Figure1showsrealannualearningsforafull-timefull-yearworker(40hours,52
weeks)earningtheminimumwagefrom1964to2014alongwithpovertylinesfor
one-,two-,andthree-personfamilies.Whilethefederalminimumwageprovideda
familywithafull-timeworkerawagebetweenthepovertylinesofatwo-andthreepersonfamilyuntilaround1982,ithassincefallentolevelsbetweenthesingle-and
two-personpovertylines.Full-time,full-yearworkin2014wouldgenerategross
payofonly$15,080,puttingafamilyoftwobelowthepovertyline.15
Figure2offersanotherperspectiveontherelativevalueofthefederalwagefloor.
Therehavebeenanumberofeffortsinrecentyearstoestimateabasicsubsistence
wageforworkersindifferentfamilytypes(e.g.singleadult,singleadultwithone
child,twoadultswithtwochildren).16Mostfindthatthewageneededtopaythe
basiccostsofliving—housing,food,transportation,utilities,taxes,healthcare,
savings,clothing,andpersonalitems—requiresafull-timejobatawagethatis,as
Figure2suggests,atleast$14forasingleperson,andsubstantiallymoreforasingle
adultwithonedependentchildinlowcost-of-livingareas.Weshowthecurrent
minimumwageonthisfigure,whichisabouthalfofthenecessarywagetosupporta
singlepersoninsevenoftheninecities,43percentofwhatisnecessaryin
Baltimoreandjustone-thirdofthenecessarywageinWashingtonDC.
Theadequacyoftheminimumwagecanalsobecomparedtothetypicalpayofall
workersusingtheKaitzindex,definedastheratiooftheminimumwagetoan
average(meanormedian)wage.AsFigure3shows,bythismeasure,theminimum
wagepeakedat55percentin1968andhasdroppedprecipitouslysince,ranging
from31-to-39percentsincethemid-1980s.
week’ssalaryattheminimumwage,employersarelegallyobligatedtomakeupthedifference,but
therehasbeenlittleenforcement.Investigating9,000restaurants,theU.S.DepartmentofLabor
foundthatin85percentofthecases,restaurantsdidnotadequatelycompensatetheiremployeesfor
tipincomesthatfellshortoftherequired$7.25(Cooper2016).
15Foreligibleworkers(mainlywomenwithyoungchildren),asmuchasabout$2,500couldalsobe
receivedfromtheEarnedIncomeTaxCredit.Ourconcernhereisnotwithtotalfamilyincome,but
withtheadequacyofearningsfromwork.
16ThisincludestheEconomicPolicyInstitute’sFamilyBudgetCalculator,theSelf-Sufficiency
StandarddevelopedbyDianaPearce,andtheMITLivingWageCalculatordevelopedbyAmy
Glasmeier.Alloftheseprovideestimatesoftheincomeneededtocoverbasiclivingcosts,byfamily
sizeandtypeaswellascityandstate.AlsoseeFredericksen(2015).
7
Stillanotherstandardbywhichtojudgetherelativevalueoftheminimumwageis
tosetitagainstproductivitygrowth.Figure4showsthataftermorethantwo
decadesoftrackingthenation’slaborproductivity,ayawninggapbegantoappear
betweenthegrowthintheeconomyandthechangeintheminimumwage.Inshort,
risingnationalwealthhasnotbeensharedwithlow-wageworkersviatheminimum
wagesincethelate1960s.
Thesefiguresdemonstratethatbyanyconventionalstandard,thefederalminimum
wagehasfallentoextremelylowlevels.Inresponsetothisdismalperformance,
throughoutthe1990sandintothe2000s,labor-communitycoalitionspressured
theircitycouncilstoadopt“livingwage”ordinances.Theseordinancesvaried,but
mostofthemappliedtofirmsreceivingcityservicecontractsandtheir
subcontractors.Somealsoappliedtofirmsreceivingeconomicdevelopment
assistance,andafewcovereddirectcityorcountyemployees.Mostordinances
defineda“livingwage”asthehourlywageneededtobringaworkerwithafamilyof
fourtothefederalpovertyline.Mostoftheseordinanceswereindexedtoriseevery
yearwiththecostofliving,andincludedadditionalprovisionsforhealthcare
coverageanddaysoffwork.Livingwageordinancespassedinover125citiesand
countiesnationwidebetween1994and2015(Luce2014).
Figure1:Full-TimeEarningsattheMinimumWageandPovertyThresholdsbyFamily
Type,1962—2014
$22,000.00
Annual&Minimum&
Wage&Earnings&(52&
weeks,&40
hours/week)&
$20,000.00
Poverty&line&for&family&of&
three,&$18,518
$18,000.00
Poverty&line&for&family&of&
two,&$15,934
$16,000.00
$14,000.00
$12,000.00
Poverty&line&for&single&
person,&$12,071&
$10,000.00
$8,000.00
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
Source:Author’sanalysisofEconomicPolicyInstitute(realminimumwage),andU.S.CensusBureau
(2014povertythresholds)data.
8
Figure2:TheMinimumWageandtheFull-timeHourlyWageRequiredforBasicNeedsBudgetbyFamilyTypeforSelectedCitiesin2016
39.35
$40.00
Current=Federal=Minimum=
Wage: $7.25
$36.00
$32.00
29.58
$28.00
$24.00
24.90
24.06
23.59
26.76
26.40
25.86
22.67
21.07
$20.00
$16.00
14.64
14.10
13.45
13.62
13.91
17.00
15.67
14.03
$12.00
$8.00
$4.00
$0.00
Bakersfield
Phoenix
Colorado=Spr
Houston
Minneapolis
Single= Adult
Chicago
Buffalo
Baltimore
Washington
With=1=Child
Source:Tungetal.(2015);ownfigure.
Figure3:RatiooftheMinimumWagetotheMedianWage(Kaitzindex),1960-2014
0.60
0.55
0.55
0.50
0.47
0.45
0.39
0.40
0.40
0.37
0.35
0.30
0.31
0.25
0.20
1960
1964
1968
1972
1976
1980
1984
Source:OECD.stat(dataextractedJanuary2016).
1988
1992
1996
2000
2004
2008
2012
9
Figure4:TheMinimumWageandProductivityGrowth,1950-2014(1968=1)
2
Total%economy% net%
productivity:%
Cummulative%Change
1.5
Real%Minimum%Wage:%
Cummulative%Change
1
0.5
0
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
Source:Author’sanalysisofEconomicPolicyInstitute’srealminimumwage(in2014dollars)and
totaleconomynetproductivitydata(realnetdomesticproductperhourworkedin2014chained
dollars).
3.Wage-settingandEmploymentEffects
Riskofjoblossfromincreasesintheminimumwageisaclassicexampleofwhat
Hirschman(1991)calledthe“perversitythesis”—atleastsomeoftheintended
beneficiariesareactuallyharmedbytheintervention.Butatleastsincetheworkof
CardandKrueger(1994),ithasbecomeincreasinglyclearthattherearefewifany
employmenteffectsthatcanbeattributedtomoderateincreasesinthestatutory
wagefloor.Afterbrieflyreviewingthisevidence,thissectionconsidershowfirms
setwagesandmakeemploymentdecisions,whichbothhelpsexplainthefailureof
simpleorthodoxpredictionsofjoblossandsetsthestageforourcritiqueoftheway
acommonindicatoroftherelativevalueoftheminimumwage(its“bite”)hasbeen
employedforsettingtheNo-Job-Loss(NJL)wagefloor.
a) Wage-employmenttradeoffs?
ThedebateovertheproperleveloftheminimumwagehaspittedtheMinimum
LivingWage(MLW)goalagainsttheeconomicinterestsofemployers,the
libertarianconcernoverthereachofthefederalgovernmentandtherightsofthe
states,and,mostimportantly,theriskofjobloss.Mainstreameconomists,especially
thosetrainedintheUnitedStates,haveplayedacentralroleinthisdebate,bringing
toitanothersetofinterests—thedefenseofthebasictenetsoforthodoxeconomic
doctrine,whichisseenaschallengedbythefailureoffindevidenceofdiscernible
10
employmenteffects.17Itishardtootherwiseexplainthemassiveoutpouringof
empiricalresearchontheminimumwage,thepublicationbias(towardshowing
negativeemploymenteffects)thathascharacterizedtheprofessionalliteratureuntil
recently,18andtheemotionalhostilityexpressedtowardfindingsthatchallenge
orthodoxpredictions.19
Initialevidenceontheemploymenteffectsofincreasesintheminimumwageshould
befoundinthechangesinaggregateemploymentforat-riskworkersaroundthe
timeofsudden,largeincreasesinthefederalminimumwage.Whilecrude,such
evidencewouldconfirmorthodoxpredictionsofemploymenteffectsifthe
“perversityeffect”isconsequential.Indeed,theFrenchminimumwageisfrequently
blamedforhighFrenchyouthunemployment(butseebelow).Soshouldweexpect
toobservelargeshort-runresponsesofverylargeincreasesintheU.S.minimum
wageon,atleast,teenageemploymentandunemploymentrates?
The1950soffersevidencethatlargeincreasesdonotnecessarilyleadtodecreases
inteenemployment.TheFLSAfailedtopegtheminimumwagetoacostofliving
indicator,soafterextendedperiodsofinflation,Congresshassometimesresponded
withlargehikesinthewagefloor.Althoughthismayhavehadtheeffectofonly
returningthewagetoitsformerinflation-adjustedvalue,itneverthelessconfronted
17Thecaseagainsttheminimumwageonemploymenteffectsisgroundedinsimpletextbookmodels
ofthelabordemandandtheory-driveneffortstoconfirmthesepredictionshavegeneratedamassive
empiricalliterature.Atleastuntilveryrecently,foralargeshareofmainstreameconomists,the
theoreticalstakescouldhardlybemoresignificant.AstheNobelprizewinningeconomistJames
Buchananhassaid,aninverserelationshipbetweenemployerdemandforlaborandthewageis“a
corepropositionofeconomics”anditsrejectionwouldbe“equivalenttoadenialthatthereiseven
minimalscientificcontentineconomics”(quotedbyCardandKrueger2015,Prefacetothe20th
AnniversaryEditionofMythandMeasurement).
18DoucouliagosandStanley(2009,p.406)findthat“Theminimumwageeffectsliteratureis
contaminatedbypublicationselectionbias,whichweestimatetobeslightlylargerthantheaverage
reportedminimumwageeffect.Oncethispublicationselectioniscorrected,littleornoevidenceofa
negativeassociationbetweenminimumwagesandemploymentremains.”
19TheresponsetoCardandKrueger’spapersandbookdemonstratingnoemploymenteffectswas
greetedwithprofessionalandpersonalhostility.InthesymposiumontheMythandMeasurementin
a1995IndustrialandLaborRelationsReviewsymposium(ILRR,July1995,vol.48no.4),FinisWelch
(1995,p.848)dismissedCardandKrueger’sresearchthatwaspublishedinarguablytheworld’stop
economicsjournal,TheAmericanEconomicReview,as“testimonytothevagariesofthereview
process.”Indeed,hedismissedtheentireresearchproject:“IquestionDavidCardandAlanKrueger's
modelsandhowtheydoempiricalresearch.AlthoughthenotorietysurroundingMythsuggests
importantconclusionsthatchallengeeconomists'fundamentalassumptions,Iamconvincedthatthe
book'slong-runimpactwillinsteadbetospur,bynegativeexample,amuch-neededconsiderationof
standardsweshouldinstituteforthecollection,analysis,andreleaseofprimarydata”(ibid.,p.842).
ItseemsevidentthatthepasttwodecadesofresearchhaveconfirmedthevalidityofCardand
Krueger’smethodsandresults.PrincetonUniversityPresshasre-issueda20thanniversaryeditionof
thebook,anditremainstheclassicreference—bypositiveexample—intheminimumwage
literature.
11
low-wagefirmswithasuddennominalwageshock.The1950soffertwoexamples.
OnJanuary25,1950,thewagefloorwasincreasedby87.5percent,from40centsto
75cents.Thisrepresentednotjustahugeincreaseinwagecostsforlow-wage
employers,butalsoasimilarlyhugeincreaseintherelativevalueoftheminimum
wage.Theratiooftheminimumwagetotheaveragehourlyearningsofnon-farm
privatesectorworkersincreasedfrom31.4percentinlate1949to56.2percentin
early1950(BLS1970,tables1.5and1.6).Whatwerethelow-wageemployment
effects?Teenageunemploymentratesactuallyfellfrom15.8percentinOctober
1949(threemonthsearlier)to15.2percentinFebruary1950(onemonthlater);
theseratesfellfurthertojust12percentinApril(threemonthslater);ayearlater,
inApril1951,theteenageunemploymentratewasdownto7.9percent.20Muchthe
samestorycanbetoldforthe33.3percentincreaseintheminimumwagethattook
placeonMarch1,1956.21Theseepisodessuggestthat,atleastinastrongeconomy,
verylargeincreasesintherealandrelativewagefloorcantakeplacewithout
observedeffectsonjobopportunitiesforthemostvulnerableworkers.
Oneofthefirstlargescaleeconometricstudiesofemploymenteffectswasreported
ina1970reportbytheU.S.BureauofLaborStatistics(BLS1970),ledbyHyman
Kaitz(forwhomtheKaitzindexisnamed).Althoughtherehavebeendramatic
improvementsinthequalityofthedataandminimumwage-employmentresearch
designs,thelessonsofcurrentstate-of-the-artevidence(seebelow)remainabout
thesameaswhatKaitzreportedbackin1970.
Whenallvariablesthathavealegitimateclaimtoconsiderationare
included,themeasuresofminimumwagenotinfrequentlyhavethe
wrongsignand/orarenotstatisticallysignificantatconventional
levels….Ingeneral,themostimportantfactorexplainingchangesin
teenageemploymentandunemploymenthasbeengeneralbusiness
conditionsasmeasuredbytheadultunemploymentrate….Although
hintsofadverseeffectsofminimumwagesshowupinavailabledata,no
20MonthlyteenunemploymentratescomefromLaborForceStatisticsfromtheCurrentPopulation
Survey(seriesLNS14000012).TheinductionofyoungmenforserviceintheKoreanWarislikelyto
explainsomeofthesedeclines,althoughthenumbersweresmalluntilmid-1950.Bytheendof1950,
220,000menweredrafted,andanother552,000weredraftedin1951
(https://www.sss.gov/About/History-And-Records/Induction-Statistics).
21SeeHymanB.Kaitz,“ExperienceofthePast:TheNationalMinimum,”ChapterIIof“Youth
UnemploymentandMinimumWages,”U.S.DepartmentofLabor,“YouthUnemploymentand
MinimumWages,”Bulletin1657,1970(p.11).Thewagefloorincreasedfrom75centsto$1.00in
March1956,whichincreasedtheratiooftheminimumwagetotheaveragehourlywagefrom43.4
percentto53.2percent.Officialmonthlyteenunemploymentratesfluctuatedsubstantiallyatthis
time,butthereisnoobviousupwardtrend:theMarchratewas11.5percent,aboutwhatitwasthe
monthbefore(11.4percent),anditwas10.9perentinApril.Whileithit12.2percentinJune,teen
unemploymentwasdownto9.8percentinSeptember.
12
firmstatementcanbemadeaboutthemagnitudeofsucheffects.(ibid.,p.
11)
Whileresearchpublishedthroughoutthe1980sreportedsomenegative
employmenteffectsforyoungworkers22morerecentandmuchmore
methodologicallysophisticatedstudieshaveshownthatminimumwagesdonot
necessarilycausejobloss.23Evenscholarswhoconcludethattheminimumwage
hasnegativeemploymenteffectsgenerallyagreethatthesearedetectableonlyfor
disadvantagedteenagers(Neumarketal.2014).24Thisfailuretofindrobust
evidenceofnegativeemploymenteffectsofwagefloorsatthenationallevelhas
beendominatedbystudiesoftheUnitedStates,butithasalsobeenunambiguously
confirmedbystudiesoftheexperienceintheUnitedKingdom,whichestablisheda
nationalminimumwagein1999andincreaseditsharplyinrealandrelativevalue
overthenextdecade(D’arcyandCorlett2015).
Moststudiesonlivingwageordinancesfindsimilarresults.25Thebenefitsofthe
higherwagearesignificantforworkersbutthecostsarerelativelysmallforthe
employer.Surveysreportthatemployersareabletorecoupsomeofthecostinthe
formoflowerturnoverandabsenteeismandincreasedproductivity.Forexample,
studiesoftheLosAngelesairportestimatethatthelivingwagereducedturnoverof
between4percentand16percent(Fairrisetal.2005;Fairris2005).Astudyof
homecareworkerscoveredbyalivingwageincreaseinCaliforniafoundthat
turnoverdecreased57percentafterthewagewasimplemented(Howes2005).
Studiesforcitywideminimumwagelawsfindsimilarresults.AllegrettoandReich
examinedtheeffectsofa25percenthikeintheminimumwageonrestaurantprices
inSanJose,Californiaandfoundnonegativeemploymenteffects.Theyconclude,
“theseresultsimplythatcitywideminimumwagepoliciesneednotresultin
negativeemploymenteffectsorshiftsofeconomicactivitytonearbyareas”
(AllegrettoandReich2015).
Prospectivestudiesoflargerwageincreasesatthestatewideornationalindustry
levelsuggestsimilarresults.Reichetal.(2016)estimatetheemploymenteffectsof
theNewYorkStatewageof$15.Theirmodelpredictsthatbysubstitutingsome
workerswithautomation,andeliminatingsomejobsduetoproductivityincreases,
22ForareviewseeBrownetal.(1981).
23DavidCardandAlanB.Krueger(1995);Reichetal.(2005);Dube,etal.(2010)
;Allegrettoetal.(2011).ForanalternativeviewseeNeumarkandWascher(2008).
24Prominentmeta-analysesoftheliteraturehavefound,onbalance,littleornonegativeeffectson
employment(OECD2006;DoucouliagosandStanley2009;BelmanandWolfson2014).
25Forareviewoflivingwageeconomicimpactresearch,seeChapmanandThompson(2006).
13
employerswouldcutapproximately41,600jobs.Inaddition,asemployerspasson
someofthewageincreaseintheformofhigherprices,consumerdemandwould
dropsomewhat,resultinginanother36,764jobslost.Altogether,thiswouldbea
lossof78,364jobs.Atthesametime,thewageincreasewouldhaveindirectpositive
employmenteffectsthroughwage-inducedincreasesinconsumerdemand.Thatis
expectedtogenerate81,532jobs—leavinganetgainof3,168jobs.
Relyingon“simpleillustrativeexercisesofthephase-inofa$15wage,Pollinand
Wicks-Lim(2015,p.1)concludethatcostincreases“couldbeabsorbedbythefastfoodindustrynotonlywithoutcausingemploymentlosses,but,crucially,without
businessfirmswithinthefast-foodindustryhavingtoreducetheiraveragerateof
profitability.”
b) HowFirmsSetWagesandEmployment
Howcanemployersbemandatedtopayahigherhourlywagewithoutresponding
withjobcuts?Therearetwoanswers.First,employerscancutormaintaintheir
wagebillbycuttinghoursinsteadofworkers.Butthegeneralansweristhat
employersrarelyfaceanythingclosetoperfectproductandlabormarkets—the
foundationalassumptionofbasiclabormarkettheorythathasdominatedtextbooks
forgenerations.Undertheseimperfectconditionsthereisusuallysubstantialroom
forimprovingthedesignandmanagementoftheworkplace.AsJohnSchmitt(2015)
hasexplained,
Someemployersmaycuthours;others,fringebenefits;stillothers,the
wagesofhighlypaidworkers.Someemployersmayraiseprices
(particularlyiftheircompetitorsareexperiencingsimilarcostincreasesin
responsetotheminimumwage).Someemployersmayseetheirprofitsfall
(alongwiththoseoftheircompetitors),whileothersmayreorganizethe
workprocessinordertolowercosts.Someofthestrongestevidence
suggeststhatmanyemployersmayexperiencedeclinesincostlyturnover.
Andworkersmayrespondtothehigherwagebyworkingharder.Anyof
thesechannelsmightbesufficienttoeliminatetheneedforemployment
cutsorreducethesizeofemploymentcuts(Schmitt2015,pp.547-581).
Wewouldaddthatemploymenteffectsalsodependonwhethercostsareshiftedto
higherpaidemployeesandwhetherincreasedconsumerspendingbymorehighly
paidminimumwageworkersaffectsprofitmargins.TheResolutionFoundation
(2014)comestoasimilarconclusionfortheexperienceoftheUnitedKingdomwith
14
anationalwagefloorsince1999—despiteitsrapidincreasetolevelssubstantially
higherthantheU.S.federalminimumwage(seefigures5and6).26
Theambiguousevidenceontheemploymenteffectsoftheminimumwageis
consistentwithwhattheoryandevidencesuggestaboutwagesettinginrealworld
workplaces.Whetheranemployerwillcuthoursorworkersinresponsetoa
mandatedwageincreasedependsontheabilityandwillingnessofthefirmto
absorbcostincreasesthroughproductivitygains,lowerturnovercosts,adjustments
intheinternalfirmwage/salarystructure,orlowerprofitmargins.Theseproximate
determinantsofthewage-employmentrelationshipareinturnareflectionofthe
low-wageshareofoveralloperatingcosts,theresponsivenessofproductmarket
demandtocostincreases,andthebusinessmodelsrelieduponforcompetingin
imperfectlabormarkets.27
Theseproximateandunderlyingdeterminantsofthewage-employment
relationshipwillvarysubstantiallybyestablishment,firm,region,andsector.One
hasonlytocompare,forexample,thewage-settingpracticesatWal-Martand
Costco.28Botharelargediscountstoresprovidingasimilarservice,butCostcopays
itsemployeesmuchhigherwages,providesbenefits,andoffersmorehoursper
workweekthandoesWal-Mart.Totakeanotherexample,collectivebargaininghas
ledtolargewageincreasesfordoormenandcleanersinluxuryapartmentbuildings
intheNewYorkmetropolitanareainrecentyears,which,becauseoftheverylow
laborshareofoperatingcostsandhighinelasticityofhousingdemand,hasledtono
negativeemploymenteffects.
4.TheCurrentDebate:What’sWrongwith‘NoJobLoss’Framing
Withlittleornoempiricalsupportfortheorthodoxpredictionofemployment
effectsfrompreviousmodestincreasesinthewagefloorfromrelativelylowlevels,
andabetterunderstandingofalternativechannelsofadjustmenttohigherwage
costs,thediscoursehasincreasinglyfocusedonwhatthemostcredibleevidence
saysisasubstantiallyhigherwagefloorthatwillrisksomejobloss.A“credible”
positioninthecurrentdebaterequiresmakingthecaseforaparticularwagefloor
onthebasisofthisNJLthreshold,withoutreferencetohowthiswouldcomparetoa
wagefloorsetbyastandardoflivingwagethreshold.Thissectionbeginsby
26“Researchintowhythoseofjoblosseswerenotborneoutsuggeststhatemployersadaptina
varietyofways,includingraisingprices,givingsmallerpayrisestohigher-paidworkers,reducing
profits,andboostingtheproductivityoftheirstaff”(D’arcyandCorlett2015,p.1).
27Theseunderlyingdeterminantshavebeenwell-knownsinceAlfredMarshallspelledthemoutover
acenturyago.
28AnothercanbefoundinClark(2014).
15
describingthecurrentoverwhelmingdominanceofNJLframingoftheminimum
wagediscourseandthenturnstothecritique.
a) TheNJLCriterionintheCurrentDebateandPractice
AgoodexampleoftherelianceontheNJLcriterioninmakingthecaseforalarge
increaseinthefederalminimumwageistheEPIBriefingPapertitled“WeCan
Afforda$12MinimumWagein2020.”Cooperetal.(2015)makethecasethat
Americacan“afford”a$12wagein2020(worth$10.58in2014dollarsaccordingto
theauthors,or$10.92in2016dollars29)onthegroundsthatthisvalueinrealterms
wasachievedbackinthelate1960s.Theauthorssupporttheircasebynotingthat
thecountryisfarbetterpositionedtoaffordasubstantiallyhigherwagefloor
becauselow-wageworkereducationlevelsandtheeconomy’sproductivitylevels
arebothmuchhigherthanfourdecadesago.Forthesereasons,$12isareasonable
“benchmarkfortheeconomy’sabilitytosustainaparticularwagefloor.”
Thisreportreviewsamuchwiderrangeofbenchmarksinorderto
evaluatehowhighthefederalminimumwagecangoandstillfallwithin
ourhistoricalexperience.Anextensivebodyofresearchsincetheearly
1990shasinvestigatedtheemploymentimpactsoffederal,state,and
localminimumwagesinarangethatfallsroughlybetween$6and$10
perhour.Thatresearchsuggeststhatminimumwagesinthisrangehave
littleornonegativeeffectonemployment(Cooperetal.2015,p.2).
ThispassagecontainsalltheelementsoftheNJLcriterionasdefinedabove:thegoal
isthehighestwageflooralreadyestablished(withinhistoricalexperience)for
whichthereisreliableevidenceoflittleornonegativeemploymenteffects.30
ConfirmingtheNJLrulelaterinthepaper,Cooperetal.writethatevidenceofwage
convergenceatthestatelevel“shouldhelptoallayconcernsthatahigherfederal
minimumwagewouldhurtemploymentinlow-wagestates”(Cooperetal.2015,p.
10).Cooperetal.donotaddressthequestionofwhetherahigherwage,say$15an
hour,couldalsobesustainedbytheU.S.economy.
OtherexamplesofexclusiverelianceontheNJLstandardincludeleadinglabor
economistsandminimumwageresearcherswhohavestronglysupportedraising
thelegalwagefloorsubstantially,amongthemAlanKrueger,AlanManning,and
29Cooper(2016),Table1.
30Infact,thecurrentvalueofa2020$12wagefloor,at$10.92,isabovethe“chartedwaters”of$6-
to-$10.Ontheotherhand,itmightbeviewedtobewithinhistoricalexperienceifthecriteriawere
theKaitzindex(critiquedbelow)orthelevelofproductivity(thechannelthroughwhichnational
productivitygrowthwouldaffectthewage-employmentrelationshipforlow-wagefirmsisfarfrom
evident).
16
ArinDube.Krueger(2015)recentlywrotethatwhileanational$12wagefloorrisks
“littleornojobloss,”a$15wagewouldtakeusinto“unchartedwaters”andthat
doingsowouldbe“arisknotworthtaking.”31Asheputit,“Althoughsomehighwagecitiesandstatescouldprobablyabsorba$15-an-hourminimumwagewith
littleornojobloss,itisfarfromclearthatthesamecouldbesaidforeverystate,city
andtownintheUnitedStates”(italicsadded).32Kruegerdidnotcontendthatat
levelsabove$12therewillbediscerniblejobloss,muchless“toomuch”jobloss,but
onlythatsincewedon’thavetheevidence(unchartedwaters),itisnotworththe
risk.Krueger’sargumentisaclearexampleofthebackward-lookingNJLstandard
forsettingtheappropriateleveloftheminimumwage:anincreaseinthefederal
wagefloorisnot“toomuch”ifwell-establishedevidencefromtestsonselected
jurisdictions(cities,counties,statesorforeigncountries)confirmsthatthereislittle
ornoriskofjoblossacrossU.S.states,citiesandtowns—anextremelystringent,
andarguablyimpossible,hurdle.Aswenotebelow,thisapproachrequiresthatthe
locationsthatprovidedthecrucialevidenceonemploymenteffectscouldnothave
usedabackward-lookingNJLcriterionforestablishingtheirwagefloors—ifall
jurisdictionsweretorelyonanNJLrule,thehigherwagefloorsnecessaryfortests
ofemploymenteffectswouldberuledoutforlackofevidence(“unchartedwaters”).
Anothercriterionforsettingthewagefloorisnecessary.
Inarecentdiscussionpaper,Manningmakesacompellingcasethatnegative
employmenteffectsofmoderateminimumwagehikesare“elusive,”basedonbotha
reviewoftherecentstate-of-the-artevidenceandhisownevidenceforU.S.
teenagersacrossstatesbetween1979and2014(Manning2016).“Evenforgroups
whereonecanestimateasizeable,robustwageeffect,theemploymenteffectishard
tofind”(p.7).TheimplicationManningdrawsfromthisevidenceisthat“itis
perhapstimefortheliteraturetomoveontotrytoaddressthequestionofhowhigh
theminimumwagecanberaisedwithoutsignificantemploymenteffectsappearing”
(p.3).
ThisisclearlyanexampleofNJLframing,butitisonethatisconsistentwiththe
possibilityofusingaggregateemploymenteffectsasthetest(assuggestedbythe
31InadebatewithBernieSanders,HillaryClintonsaid,“IdotakewhatAlanKruegersaidseriously.
Heistheforemostexpertinourcountryontheminimumwage,andwhatitseffectsare.ThatiswhyI
supporta$12nationalfederalminimumwage.”http://www.ontheissues.org/2016/Hillary_
Clinton_Jobs.htm
32“Researchsuggeststhataminimumwagesetashighas$12anhourwilldomoregoodthanharm
forlow-wageworkers,buta$15-an-hournationalminimumwagewouldputusinunchartedwaters,
andriskundesirableandunintendedconsequences”(Krueger2015,p.5).Similarly,JaredBernstein,
theformereconomicadvisortoVicePresidentBidenexpressedhisreservationsbyreferringtothe
$15wageas“out-of-sample”:“Therecouldbequitelargesharesofworkersaffected(bya$15wage),
andresearchdoesn’thavealottosayaboutthat”(NoamScheiber2015,p.A1).
17
researchdesignheusedforidentifyingwageandemploymenteffectsforteens),and
notanyjoblossanywhere—animportantdistinction.Italsoopensupthepossibility
ofrelyingonforward-looking(ornear-real-time)evidenceonemploymenteffects
asthewagefloorispushedup.ThishasbeentheapproachoftheU.K.’sLowPay
Commission,whichwaschargedbythegovernmentwithanNJLstandard.33
Since1999theLowPayCommissionhascommissionedover130
researchprojectsthathavecoveredvariousaspectsoftheimpactof
theNationalMinimumWageontheeconomy.Inthatperiodthelow
paidhavereceivedhigherthanaveragewageincreasesbutthe
researchhas,ingeneral,foundlittleadverseeffectonaggregate
employment;therelativeemploymentsharesofthelow-paying
sectors;individualemploymentorunemploymentprobabilities;or
regionalemploymentorunemploymentdifferences(LowPay
Commission2014,p.12).
TheResolutionFoundationsimilarlyrecommendsthatthenationalminimumwage
intheUnitedKingdomshouldbesetbyaforward-lookingNJLstandard:“theLPC
shouldcontinuetomaketheempiricaljudgmentofthevalueatwhichtheminimum
wagecanbesetwithoutemploymenteffectsyeartoyear”(ResolutionFoundation
2014,p.44).TheFoundationcallsforthetargetwagefloortobesetbythevalueof
theminimumwagerelativetotheoverallmedianwageof60percent.Thegoalis
expresslynottoachievealivingwageortoeliminatelowpay,butrathertoreduce
“theUnitedKingdom’shighincidenceoflowpayfrom21percentto17percent,a
reasonablegoalagainstinternationalbenchmarks”(p.9)withlittleornothreatof
jobloss.This17percenttargetischosenbecauseitistheOECDaverage(p.36).34
“Ourview,basedonU.K.andinternationalevidence,isthatawage-floorworth60
percentofthemedianwageisareasonablelodestar,indicatingthemostthata
minimumwagecouldcontributetothegoalofreducinglowpayoverthemediumto
longterm(p.10).35Noreasonisgivenforwhyawagefloorsetat60percentofthe
33“OurannualremithastypicallyaskedtheLPCtoreachajudgmentonthelevelthatwillhelpas
manylow-paidworkersaspossible,withoutanysignificantnegativeeffectonemploymentorthe
economy”(LowPayCommission2016,p.vii).
34This“lodestar”seemsastrangebasisforsettingtheU.K.wagefloor.TheaverageKaitzratioacross
OECDcountrieshasnoobviousconnectiontotheNJLthreshold,anappropriatelevelofbottom-end
wagecompression(inequality),orminimallyacceptablestandardoflivingfortheU.K.working
families.ThreeofthefiveOECDcountrieswiththelowest(best)incidenceoflowpayonthe
Foundation’sfigure,“LowPayintheOECD”(page37)arePortugal(7percent),Chile(9percent),and
Greece(12percent),allfarbelowtheOECDaverageof17percent;fivecountrieswithhigherlowwage-incidenceratesthantheaveragearePoland,Ireland,Israel,SouthKorea,andtheUnitedStates.
35AccordingtotheResolutionFoundation,“Theminimumwagecannotsimplyberaisedto66per
centofthemedianwageinordertoeradicatelowpay—eveninthelongtermthisisnot(sic)kindof
roleaminimumwagecanplay”(p.44).Noreasonisgiven.Itshouldbenotedthatthis60-percent
18
medianwageistheNJLthreshold,orwhytheLPCshouldn’tgraduallyincreasethe
wageflooruntilsignsofintolerablelevelsofjoblossappear.
Anotherleadingminimumwagescholar,ArinDube(2014),hasalsorecommended
thatthewagefloorforU.S.statesandcitiesshouldbesetrelativetothemedian
wage—theKaitzratio—butunliketheLPCandtheResolutionFoundation,Dube
appearstorelyonabackward-lookingNJLstandard.Hispreferredratiois50
percentofthelocalmedianwage,whichwouldbringthelegalminimumuptowhat
hecallsits“natural”and“appropriate”level.Dube(2014)estimatesthatiflegislated
atthestatelevel,this50percentformulawouldincreaselegalwagefloorsby26
percentonaverage,reachinglevelsrangingfrom$12.45forMassachusettsto$7.97
forMississippi(in2014dollars).
The50percentKaitzrulewouldgeneratesubstantiallyhigherwagesthantheflat
$12phased-in2020wage($10.92in2016dollars)forstateswithhighmedian
wages,althoughitshouldbenotedthatmostalreadyhavehighstateminimum
wages(e.g.,theMassachusettsstatewagefloorisnow$10.00).Incontrast,Dube’s
proposalwouldlockinalowminimumwageanddolittletopushthelowerpartof
wagedistributionuptowardthenationalaverageinstateswithlowmedianwages
(suchasMississippi),whichformanyminimumwageadvocatesisoneofthemain
goalsofahigherfederalstatutorywagefloor.
Aminimumwagesetat50percentofthemedianwageisnaturalandappropriate,
accordingtoDube,becauseitwouldincreasethewagefloorbutposelittleornorisk
ofjobloss.“Overall,Ibelievethebestevidenceconcludesthatthenetimpactofthe
proposedincreaseintherealstatutoryminimumwagewouldbelikelysmall,and
likelytoosmalltobemeaningfullydifferentfromzero”(ibid.p.8).Dube’sstrongest
empiricalevidenceforthisclaimisthatafewstatesthathaverecentlyintroduced
wagefloorsthatarejustunderthe50percentmarkhaveshownnonegative
employmenteffects:“U.S.evidencethatsuggestssmallemploymenteffectsisbased
onanumberofstates(e.g.,Nevada,Oregon,Vermont)thathaveallraisedtheirstate
minimumwagestolevelsthatsurpass46percentoftheirmedianfull-timewage”(p.
9).TheexperienceoftheUnitedKingdomsince1999isalsocitedinsupportofthe
50percentrule,withaKaitzIndexofaround45percent.
LikeKrueger(2015)andCooperetal.(2015),Dube(2014)offersnoevidence—and
indeeddoesnotcontend—thattheproposedNJLwage(inthiscase,setbythe50
percentratio)marksthethresholdabovewhichthereisconsequentialand
targetisrelativetotheoverallmedian,notthefull-timemedian,whichwouldbeamuchmore
ambitioustarget(andonethat,forexample,France,hasalreadyachieved(seeFigure5below).
19
escalatingjobloss.Ifthatthresholdactuallyturnsouttobe55percent,65percent
or75percent,therewouldbehugeforegonewagebenefitsforlow-wageworkers
andtheircommunities,andfortheeconomyasawhole—atnocostinjobs.The
same,ofcourse,goesforsettingthetargetat$12,withoutevidencethat$13.50,$15,
or$17istheNJLthreshold.Insum,thebackward-lookingNJLruleisthereforea
necessarilyconservativecriterionbyconstruction—onethatmustbelowerthanthe
NJLthresholdbutbyhowmuchisunknown—potentiallyleavingagreatdealof
“wagesonthetable.”
b)What’sWrongwiththe‘NoJobLoss’Criterion
WebrieflyoutlinesixproblemsposedbyrelyingontheNJLcriterionforsettingthe
appropriatewagefloor.
1) TheStatisticalProblem:theLimitsofaPurelyStatisticalCriterion
IdentifyingtheNJLwagefloorfromeconometricevidenceisbothextremely
challengingandinherentlycontroversial.Giventhemanypartieswithbigstakesin
theoutcome,relyingonastatisticallyderivedNo-Job-Lossthresholdallbut
guaranteesendlessdebatesoverempiricalresearchdesign.36Forexample,Cooper
etal.(2015)pointoutthattheevidencewehaveonemploymenteffectsisbasedon
increasesintheminimumwagewithinthe$6-to-$10range(althoughmostofthose
testswereinfactconductedwithreferencetowagefloorsbelow$9.00).Although
Schmitt(2013),Manning(2016),andmanyothershaveconvincingly(tous)
concludedthatthebalanceofevidenceisthatdiscernibleemploymenteffectsof
modestincreasesinlegalwagefloorsremainelusive,manyresearcherscontinueto
argue,withcrediblestatisticalsupport,thatsizableincreases,evenjusttolevelsat
thetopofthis$6-to-$10range,willcauseatleastsomejoblossinsome
establishmentssomewhere.RequiringthatthereisevidenceofNJLtothe
satisfactionofmostresearchersandinterestedpartiesleavesthesettingofthe
minimumwagesubjecttotheoutcomeofastatisticalcontestoverwhosedataand
researchdesignsaremostcredible—adebateinwhichhardlyanyonecan
meaningfullyparticipateexcepttheresearchersthemselves—seemsapoorbasisfor
makingpolicythatmatters.
36Thismaybeparticularlytruegiventhenatureofsomeofthelow-wagesectors,wherethereis
usuallyveryhighturnoveramongemployees,andahighfailurerateinsomeindustries.Forexample,
onestudyfoundthatalmost60percentofallrestaurantscloseorchangeownershipwithintheirfirst
threeyears(Parsaetal.2005).
20
2)TheMethodologicalProblem:HowareHigherWageFloorsSetintheFirstPlace?
Asthehighestwagefloorpossiblethatposeslittleornoriskofjobloss,theNJL
thresholdrequiresreal-worldevidencethatcanidentifythewagefloorabovewhich
discerniblejoblossislikely.Butsinceitisevidence-based,withinanygiven
jurisdiction(say,attheleveloftheUnitedStates),thiscriterionrulesoutthe
possibilityofsettingthewagefloorsinthefirstplace.Wagefloorsmustprecedethe
empiricaltestsoftheireffects.
Inshort,thebackward-lookingNJLrulerequiresthatthereareplacesthatdonotset
thewagefloorwiththiscriteriontogettheevidenceforsettingawagefloorthat
satisfiestheNJLcriterion—likeSeattle,orCaliforniaandNewYorkState,orFrance,
Australia,andtheUnitedKingdom.Butthatmeansthattheevidencemustcome
fromlocationsthatuseothergroundsforsettingthewagefloor,likestandard-oflivingcriteria.This,inturn,meansNJLjurisdictionsarecondemnedto“following
theleader,”oralwaysbeingyearsbehindothercountries(orlocaljurisdictions)
whilewaitingforevidencethatraisingthewagefloorgenerateslittleornojobloss.
Extrapolatingfromtheexperiencesofotherjurisdictionssomeyearspreviously
raisesotherproblems.Wemustassumethatthestatisticaleffectsofawagefloorin
labormarketsinwhich,forexample,thereissupportforaMinimumLivingWage
(MLW)criterion(sayAustraliaorFranceorSeattle)applytoalocationwhosesocial
normscallonlyforanNJLrule.Anevidence-basedapproachwouldneedstatistical
supportforthisexpectation.Moregenerally,theremaybemanyotherreasonsfor
doubtingwhetherolderevidencefromMLWjurisdictionscanbeexpectedtopredict
effectsofafederalminimumwageacrossthenation’sstates,counties,cities,and
towns.ItshouldbeclearthattheNJLcriterion,especiallyonethatis“backward
looking,”cannotstandonitsownasacoherentandmeaningfulstandardforsetting
thelegalwagefloor.
3)The“MoneyLeftontheTable”Problem
Closelyrelated,itistellingthatneitherCooperetal.(2015),Krueger(2015),Dube
(2014),orManning(2016),theResolutionFoundation(2014),northeLowPay
Commission(2014,2016)citeevidencethatcrediblyidentifiestheNJLthreshold—
thewagebelowwhichitisknownthatthereislittleornoriskofjoblossanywhere,
andabovewhichthereisknowntobeariskofjoblosshighenoughtobe“notworth
taking,”asKruegerputit.Adherencetoabackward-lookingNJLcriterionprecludes
settingawagefloorhighenoughtodiscoverthisthresholdbydefinition—thereis
noevidenceunlessahigherthanexistingwagefloorisset,andthisrequiressome
21
othercriterion.Asaresult,theNJLapproachtosettingtheminimumwagemust
leave“moneyonthetable,”meaningthewagefloormustbebelowtheNJL
threshold.37
4)TheNetMonetaryBenefitsProblem:WhyisJobLosstheOnlyConsideration?
TheNJLcriterionisconcernedonlywiththecostsideofanincreaseintheminimum
wage.Framingthequestionthiswayensuresthatthepossibilityofcostsrelatedto
joblossnecessarilytrumpsthecertaintyofthebenefitsofwagegains,bothdirectly
fortheworkersreceivingwageincreasesandindirectlybyreducingtheneedfor
socialspendinginsupportofworkingpoorfamilies.Itiswell-establishedthatif
therearenegativeemploymenteffects,theyaresmall,reflectingasteep(highly
inelastic)labordemandcurveevenfordisadvantagedteens(CardandKrueger
2015;Manning2016),whichmeansthatawagehikeincreasesthetotalwagesto
workers.TheNJLstandardforsettingtheappropriatewagefloorentirelyignores
themaintraditionaljustificationfortheminimumwage—themoral,social,
economicandpoliticalbenefitsofamuchhigherstandardoflivingfromworkfor
lowincomeworkersandtheirfamilies.
5)TheEquityandEfficiencyProblems:WhyShouldn’tFairnessandSystem-Wide
WelfareGainsCount?
TheNJLcriterionfailstotakeintoaccountthefundamentalethicalandefficiency
justificationsthathavemotivatedlivingwageadvocatessinceatleastthe19th
century.Thesejustificationscanbeusefullyexpressedintheformofthree
arguments:sustainability,capability,andexternality(Stabile2008;WernerandLim
2015).
Onbothhumandignityandeconomicefficiencygrounds,workersshouldbeableto
sustainthemselvesandtohavetheopportunitytodosofromemploymentrather
thanfromeithertax-basedredistributionorprivatecharity.Thecapability
argumentextendsthatofsustainability.AsRyan(1912,p.73)argued,thewage
shouldbehighenoughtomeetthe“minimumconditionsofrightandreasonable
living,”whichisnecessarytoa“lifeworthyofahumanbeing”(WernerandLim
2015,p.5).Theaffronttohumandignitydimensionisbestexpressedinthewords
ofworkersthemselves.Thefollowingisanonymous,from1935.
37Aforward-lookingNJLrule,byallowingaregularincreaseintherealandrelativewageflooruntil
thereisactualevidenceofjobloss,couldproducethisthreshold,andbyknowingit,wecouldthen
calculatethetheforegonewagesattributabletobackward-lookingNJLframing.
22
Themostsurprisingdayeverseeninthisplacewasyesterdaywhenthe
bosswasorderedtopayusthecoderate…Youcanguessthemoneyis
handy.Butthereissomethingmorethanthemoney.Thereisknowing
thattheworkingmandon’tstandaloneagainstthebossesandtheir
smartlawyersandalltheirtricks.Thereisagovernmentnowthatcares
whetherthingsisfairforus.Itellyouthatismorethanmoney.Itgives
youagoodfeelinginsteadofallthetimeburningupbecausenothingis
fair(Waltman2004,p.183).
FollowingSen(1999)andStabile(2008),WernerandLim(2015)addamore
instrumentalargument,onethattiesmoralitytoefficiency:adecentwageis
necessaryfor“people’scapabilitiesinregardtothefunctionstheyhaveasmembers
ofsocietyandasworkers,andtotheirabilitytoenhancecapabilitiesintheir
children.”
Althoughoftenneglectedinthecurrentdebate(butwascommoninthelivingwage
discussionacenturyago),thereisalsoapowerfulefficiencycaseforaMinimum
LivingWage(MLW)onexternalitygrounds.Awagethatfailstomeetminimal
thresholdsforsustainabilityandcapabilitymeansthatemployersareimposing
socialcostsonthenation,whichiswhySidneyWebbreferredtopaymentofbelow
subsistencewagesasa“viciousformofparasitism”(Webb,1912;seealsothequote
byRooseveltonthetitlepage).UsinglanguagelikeSidneyandBeatriceWebb,the
U.S.SupremeCourtstatedthefollowingintheirmajorityopinioninWestCoastHotel
v.Parrish(1937)that:
Denialofalivingwageisnotonlydetrimentaltotheirhealthandwell
being,butcastsadirectburdenfortheirsupportonthecommunity.
Whattheseworkersloseinwagesthetaxpayersarecalleduponto
pay.Thebarecostoflivingmustbemet.….Thecommunityisnot
boundtoprovidewhatisineffectasubsidyforunconscionable
employers(QuotedinAnker2011,p.78).
Inadditiontoadrainongovernmentresources,employerspayinglowwagescould
drivedownwagesinotherindustries.ACongressionalResearchServicereporton
theFLSAnotes:
Atthetimeoftheact’spassage,Congressfoundthatafewemployers
whopaidsubstandardwagescausedadecreaseinwageswithintheir
respectiveindustries,becauseotheremployerssoughttocompetein
themarketplacewithlowerpricedgoods.Congressalsofoundthat
thesedecreasedwagescausedone-thirdoftheU.S.populationtobe
23
“ill-nourished,ill-clad,andill-housed(CongressionalResearchService
2013,p.1).
ThecaseforrelianceonaNJLcriterionwouldhavetorestonthebeliefthatthe
costsofjoblosswouldmorethanoffsettheethicalandefficiencybenefitsofa
higherwagefloor.Thisisthedebatethatisneeded.
6)ThePublicPolicyStraitjacketProblem:ASpecialHurdleforLow-WageWorkers?
ThefinalproblemconcernstheimplicationsoftheNJLcriterionforpolicymaking.
Requiringthatanewpolicymustpassthishurdleasestablishedbytheagreement
among“experts”regardingthestatisticalevidencewouldeffectivelyruleoutmany
newpoliciesandregulations.Fromahistoricalperspective,strictadherencetosuch
acriterionforpolicymakingwouldhavemadeitimpossibletopassahostof
regulationsandpoliciesthathaveemploymenteffects,suchaschildlaborlaws,
occupationalhealthandsafetyregulations,andenvironmentalregulations.
Insum,muchofthepolicydebateovertheappropriateleveloftheminimumwage
hasbeenconductedasiftheonlyrealquestionisoverthewagefloorthatposes
littleornoriskofjobloss.Butasamatterofstatisticalpractice,thisisnearly
impossibletoestablish;itfailsmethodologicallyasageneralcriterionforsetting
wagefloorsbecausegeneratingtherequiredevidencerequiresthathigherthan
existingwagefloorsmustbeset,whichinturnrequiressomeothercriterion;itisby
constructionconservative,likelytoleavemuch“moneyonthetable”;itentirely
ignoresthenetbenefitsofawagethatmaycausesomejoblossbutiscertainto
producefarlargerbenefitsintheformofhigherwageincomes;itignoresimportant
equityandefficiencyconsiderations;anditrepresentsanextraordinarily
conservativeruleforpolicymakingthatiftakenseriouslyoverthecourseofthelast
centurywouldruleoutmuchofthesocialregulationthatcurrentlygovernsU.S.
society.
5.IdentifyingtheNJLThreshold:WhatRolefortheMedianWage?
Whileaforward-lookingNJLrulewouldnotgenerateawagefloorthatmaximizes
netmonetarybenefitstolow-wageworkers,muchlessoverallbenefits(accounting
ethicalandefficiencyconsiderations),itwouldatleastoffertheprospectof
identifyingtheNJLthreshold.Forthispurpose,itwouldbeusefultohaveasimple
metricthatcouldbeusedtopredictjoblossinresponsetoaminimumwage
increase.ManyhavepointedtotheKaitzIndex—theratiooftheminimumwageto
24
themedian(orsomeotheraverage)—asjustsuchametric.Itisausefulmeasureof
therelativegenerosityand“bite”oftheminimumwage:thecloserthewageflooris
tothemedian,themorecompressedthebottomofthewagedistribution,andthe
largerwillbethenumber(andshare)ofworkersaffected.Inthedebateoverthe
minimumwage,ithasbeenashortstepfromtheuseofthisratiotomeasurethe
relative“bite”oftheminimumwage,toitsuseasareliableguidetotheriskofjob
loss.TheheavyrelianceontheKaitzindexintheCooperetal.andDubepapers,and
bytheResolutionFoundationandLowPayCommissionintheUnitedKingdom,
illustratethegreatappealofthissimplemetric.Butisitameaningfulguidefor
settingtheNJLwagefloor?
Wethinknot.Asnotedabove,thedeterminantsofwage-setting,andconsequently
thedynamicsofthewage-employmentrelationship,arecomplexandvaryacross
establishments,firms,industrysectors,andregions.Itisnotjustthechangeinthe
laborshareofoperatingcoststhatmatters(whichwillbedeterminednotjustbythe
wageincreasesbutalsobyrelatedchangesinproductivityandturnovercosts),but
theabilitytoaccommodatethesechanges,whichwilldependontheelasticityof
productdemand,changesinconsumerdemandandemployerprofitability(and
whatisviewedbyemployerstobean“acceptable”levelofprofitability),andall
thesefactorswillallbeimpactedbyprevailingsocialnorms.Themedianwage,
definedbysomegeographicarea,notonlyfailstocapturethesecriticaldimensions
ofwageandemploymentsetting,butisalsoinherentlyproblematicasausefulguide
becauseitwillvarywiththejurisdictionallevel(reflectingtherelevantgeographic
area’smedianwage),whichislikelytobelargelyindependentofthefactorsthat
determinetheemploymenteffectsofamandatedwageforverylow-wageworkers.
Ahelpfultheoreticaljustificationforthemedianwageasaguidetothe(presumed)
tradeoffbetweenwagesandemploymentwouldneedtoexplainwhichreference
wage(overallmedianormean?forallworkersorjustfull-timeworkers?forhourly
wageworkers?forteenageworkers?)andwhichjurisdictionallevel(nation,state,
county,city,town,neighborhood?)wouldbetherightonesforidentifyingboththe
NJLthresholdandthelikelyemploymenteffectsofwagefloorsabovethethreshold.
a) TheKaitzIndexandtheLow-WageEmploymentDecision
Weknowofnosuchatheoreticaljustificationintheliterature,butDube’s“Proposal
13:DesigningThoughtfulMinimumWagePolicyattheStateandLocalLevels”
(Dube2014)offerssomearguments.Hegivesthefollowingexplanationforthe
usefulnessoftheKaitzindexasaguideforsettingthestatutorywagefloorandfor
whya50-percentratioisthemostappropriate.
25
Therearethreereasonstopayattentiontothismeasure,especially
usingthemedianasthereferencewage.First,acomparisonofthe
minimumwagetothemedianoffersaguideforhowbindinga
particularminimumwageincreaseislikelytobe,andwhattypeofwage
thelabormarketcanbear…ahighratio—sayaround.8—indicatesa
highlyinterventionistpolicywheretheminimumwageisdramatically
compressingdifferencesinwagesfornearlyhalftheworkforce.Second,
thiscomparisonalsoprovidesuswithanaturalbenchmarkforjudging
howhighorlowaminimumwageisacrosstimeperiodsoracross
countriesthatvaryintermsoftheirlabormarketsandwage
distributions.Third,themedianwagealsoprovidesanaturalreference
pointforjudgingwhatisareasonableminimumwagelevels:noone
expectsthattheminimumwageshouldbesetequaltothemedian
wage,butfairnessmaybecomeafactorwhentheminimumwagefalls
below,say,one-fourthorone-fifthofthemedianwage(Dube2011,p.
2).
Reason#1ispresumablythemostimportant,anditiscertainlytruethattheratio
“offersaguideforhowbindingaparticularminimumwageislikelytobe.”Butthis
is(almost)truebydefinition—ahigherminimumwagewilltendtoaffectmore
workers—andshortofagoodtheoryorcompellingempiricalevidence,thisalone
tellsuslittleabout“whattypeofwagethelabormarketcanbear.”Duberefersto
twoextremeexamples,butnoreasonisgivenforwhyweshouldbeconfidentthata
20-percentKaitzratiowillnotcausediscerniblejobloss,whilean80-percentratio
willsurelygenerateunacceptablylargejoblosses,orforthatmatter,why50
percentistherightratio.
Reason#2istheclaimthattheKaitzindexisausefulmetricforcomparisonsofthe
relativevalueofthewageflooracrossjurisdictionsandovertime.Thisiscertainly
true,butitisnotareasonforrelyingonthisindicatorasagoodguidetotheriskof
jobloss,muchlessasthemeansforidentifyingaparticularNJLwagethreshold.
Reason#3appealstowhatis“natural,”“reasonable,”and“fair,”butdoesnottellus
whatmakesaparticularratenatural,reasonableandfair.Isthepreferred50percentrationaturalandreasonablebecauseitreflectsafair(equitable)degreeof
wagecompression(bottom-endwageinequality)orbecauseitistheratioatwhich
therewillbenojobloss,orboth?Howdoweknowthatwhatisviewedtobefair
andwhatturnsouttobetheNJLthresholdwillbethesameacrossjurisdictionsas
differentastheUnitedStatesandFrance,MississippiandMassachusetts,or
metropolitanMiamiandSanFrancisco?
26
Todemonstratewhathis50-percentproposalwouldmeanatthelocallevel,Dube
presentstablesthatshowthe“targetminimumwage”generatedbya50-percent
Kaitzratioforstatesandselectedmetropolitanareas.Totakejustoneexample,
accordingtoDube’sTable13.1,thewagefloorshouldbe$12.25fortheNewYorkNewark-JerseyCitymetropolitanarea.Butifthemedianisagoodbenchmarkon
equityandjoblossgrounds,thenNewark’stargetwagefloorshouldbefarlower
thanManhattan’s:becauseNewark’smedianwageismuchlowerthanManhattan’s,
a50-percentKaitzratiowouldrequireamuchlowerlegalwagefloorforNewark.In
short,implementingthe50-percentKaitzruleattheleveloftheNewYork
metropolitanareamustwillleadtojoblossinNewJerseyifthisratioisagood
approximationfortheNJLthreshold.Onthissameassumption,usingauniform
Kaitzratiotosetwagefloorsatthestatelevelwouldlikelyposeevengreaterthreats
oflocaljobloss.
Ataminimum,thisexamplesuggeststhattheKaitzratiowouldbeexpectedtodoa
betterjobasapredictorofjoblossthesmallerthejurisdictionalunit.Butifthat’s
rightthenwhatmakesNewarktherightgeographicunit?Toextendtheexample,we
canbesurethatNewark’smedianwagewillbeaffectedbychangesinthe
compositionofNewark’semploymentbase.Let’ssaythatabigincreasetakesplace
intheshareofbigheathcarefacilities,nonprofitorganizations,andgovernment
agenciesthathaverelativelyhighwages.Withthisgrowth,thecity’scity’smedian
wagewillincrease,causingtheratiooftheminimumwagetothemedianwageto
fallandconsequentlysowillitsKaitzratio—let’ssayfromtheoriginal50percentto
the37percent,the2014figurefortheentirecountry.Tomaintainthe50-percent
rule,Newark’swagefloorwouldhavetobeincreased.Butthereisnoobvious
reasonwhythesecitywideshiftsinemploymentcompositionshouldmakeit
possibleforinnercityretailshopsandfastfoodrestaurantsthatcaterto
neighborhoodcustomerscaneasilyadjusttothenew,higherminimumwage.Inthis
scenario,the50-percentKaitzratioshouldbeappliedtosubsectionsofNewark,
leadingtodifferentwagefloorswithinthecity’sboundaries.Thisillustratesthe
potentialimpracticalityofusingaparticularKaitzratiotoachieveanNJLwagefloor.
38
Inshort,themedianwageseemsapoorguidetosettinganappropriatelegalwage
floor—onethatishighenoughtomakeadifferencebutnotonethatrisksjobloss.A
38IftheKaitzindexprovestobebetterperformingasaguidetojoblossatsmallerjurisdictional
levelsthenthechallengethenbecomesthefeasibilityofupdatingthelocalKaitzratioandtherefore
thelocalminimumwageasthereferencemedianwagechanges.Thereisalsotheobviousinefficiency
andunfairnessofstatutorywagefloorsthatvaryacrossneighborhoods,fromcitytocity,andacross
statesthatsharethesamemetropolitanarea,asinthecaseofmetropolitanNewYork.
27
thought-experimentthatextendsthisdiscussiononthedifficultiesposedbya
geographicallydefinedKaitzindexforsettingthewagefloorappearsinthe
Appendix.
b) ImplicationsoftheCross-CountryEvidence
Withouttheory,orevenstrongintuition,forwhyaparticularKaitzratiowoulddoa
goodjobofidentifyinganNJLwagefloor,itsusefulnessisanempiricalquestion.We
willfocusonthecross-countryevidencefromtheOECD,whichillustrateshow
widelyvaryingtheKaitzratiois,bothovertimeandacrosscountries.Focusing
mainlyonacomparisonoftheUnitedStates,France,andAustralia,weshowthat
thereislittleevidenceofalinkbetweentheKaitzindexandemployment
performance.Thatis,countriesthathavechosentosetthelegalwageflooratahigh
levelrelativetothemedianwage(FranceandAustralia)donotshowsystematically
higherunemploymentrates,orloweremploymentrates,thantheUnitedStates.Nor
doweobservethepredicteddivergenceovertime:astheKaitzratiohasrisento
over60percentforFranceandAustraliawhilefallingtoaround37percentforthe
UnitedStates,thepredictedwideninggapinemploymentperformancedoesnot
appearinthedata.
Wealsocomparetheincidenceoflowpayandemploymentperformanceacross
countries.Asthelegalwagefloorincreasesrelativetothemedian—ahigherKaitz
index—thebottomofthewagedistributioniscompressed,leadingtolowerbottomendinequality(wagedispersion)aswellasalowerincidenceoflowpay.The
conventionaldefinitionofthelowpaythresholdis2/3ofthemedianwage—the
conventionaldefinitionoflowpay.AhigherKaitzratiowillreducetheincidenceof
lowpayastheminimumwageconvergestothelow-paythreshold.Wealsofindno
correspondencebetweentheincidenceoflowpayandtheemploymentrateof
younglesseducatedworkers.
Figure5showsthesameseriesalongwithKaitzratiosfortheUnitedStates(Figure
3)andfourotherrichcountries.Sincethemid-1980stheUnitedStateshasheldthe
lowestposition.By2014,theU.S.ratioofthewagefloortothemedianwagewas
only37percentcomparedto61percentforFrance,53percentforAustralia,48
percentfortheUnitedKingdom,and45percentforCanada.Thisfigureshowsthat
whileFrancemaintaineditscommitmenttoahighandrisingwagefloor,theUnited
Statestooktheoppositepath.
28
Figure5:TheRatiooftheMinimumWagetotheMedianWage(“KaitzRatio”)forFive
Countries,1960-2014
0.70
0.65
France
0.60
0.55
Australia
0.50
United:Kingdom
0.45
Canada
0.40
United:States
0.35
0.30
Source:OECD.stat(dataextractedJanuary2016)
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0.25
AsimilarpatternisshowninFigure6fortheminimumwageintermsofthe
absolutevalueoftheminimumwage,withFigure6areportingpurchasingpower
(usingtheOECD’sindexofpurchasingpowerparity)andFigure6bshowingthe
valueintermsofexchangerates.Bothmethodsofvaluingtheminimumwageput
AustraliaandFrancefarabovetheothercountries,withtheUnitedStatesatthe
bottom.
TheperformanceofAustraliaisparticularlynotable,inthatitillustratesthe
sensitivityoftheKaitzindextochangesinthevalueofnotjusttheminimumwage
(thenumerator)butthemedianwage(thedenominator).Figure5reportsafairly
strongdeclineintheAustralianKaitzratio,fromwellabovetowellbelowthatof
France.ButasFigures6aand6bshow,thebuyingpowerofAustralia’sminimum
wage(howevermeasured)hascontinuedtoincrease;thereasonforthedeclinein
theKaitzindexshowninFigure5isnotbecausethegovernmentfailedtoraisethe
valueofthewagefloor(perhapsforfearofjobloss?),butbecausethemedianwage
increasedevenfaster.Thisunderscoresthepotentialdifficultyofrelyingonafixed
KaitzratioastheNJLtarget,asproposedbyDube(2014),theU.K.government(Low
PayCouncil2016)andtheResolutionFoundation(2014).
29
Figure6:TheValueoftheNationalMinimumWagesforFiveCountriesinConstantUS
Dollars(2014),1960-2014
a.Measuredin2014constantpricesusingUSDollarPurchasingPowerParities(OECD)
$12
France
Australia
$10
UK
Canada
$8
US
$6
$4
$2
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
b.Measuredin2014constantpricesusing2014USDexchangerates(OECD)
$16
Australia
$14
France
$12
UK
$10
Canada
$8
US
$6
$4
$2
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source:OECD.stat(dataextractedMay2016)
30
FranceandAustraliaofferagoodexamplesofnationalcommitmenttoaMinimum
LivingWage.InthecaseofFrance,theminimumwagewasestablishedanddesigned
topromotesocialinclusionthroughemployment.AsCaroliandGautie(2008,p.18)
explain,theFrenchminimumwagereflects“apoliticalandsocialconsensus
accordingtowhichadecentwageshouldbedefinednotonlyinabsolutebutalsoin
relativetermsandthuslowwagesshouldbenefitfromgrowthandbeindexedtothe
averagewageincrease.”Likewise,accordingtotheWorkplaceRelationsActof1996,
thegoaloftheAustralianminimumwageistoensurea“fair”wage,judged
accordingtolivingstandards“generallyprevailingintheAustraliancommunity”
(Healy2011,p.633).
Accordingtotheconventionalwisdom,Francehaspaidaheavypriceforthis
commitmenttoeradicatingextremelowpay,intheformofalong-runworseningof
employmentoutcomesforyoung,less-educatedworkers,especiallyrelativeto
countrieswithacommitmenttoflexible,lessregulatedlabormarketssuchasthe
UnitedStates.Butthedatasuggestotherwise.Torecap,whilebothcountrieshada
Kaitzindexofaround45percentto47percentinthelate1970s,bythemid-2000s,
theFrenchratiohadrisenabove60percentandtheU.S.ratiohadfallento31
percent.TheU.S.-Francegapwasequallymassiveinrealpurchasingvalues:asthe
U.S.minimumwagefellfromaround$9.50to$7.25,theFrenchminimumwagerose
from$7.00to$11.00(in2014dollars-Figure6a).Hastheopeningofa25
percentagepointgapintheKaitzindexforFranceandtheUnitedStates—onethatis
reinforcedbyabuyingpowergapthathasreached$3.75—ledtoadivergencein
employmentandunemploymentratesforthemostvulnerableworkersinthesetwo
countries?
Figure7ashowsthattheconventionallydefinedunemploymentrateforyoung
workers(ages15to24)wasmuchhigherinFrancethanintheUnitedStatesinthe
mid-1980sandmid-1990s(theheightoftheEuropeanrecession).However,this
gapnarroweddramaticallyinthe2000s,andespeciallyduringthe2008-10financial
crisis,whiletherelativevaluesoftheFrenchandU.S.minimumwagescontinuedto
sharplydiverge.Withtheexceptionof2011to2013(inpartareflectionofthe
commitmenttoEuropeaneconomicausteritypolicies)thereisnoevidenceofa
secularwideninggap,aswouldbeexpectediftheKaitzindexwasagoodpredictor
ofemploymentperformanceforthemostvulnerableworkers.
Figure7:AlternativeUnemploymentRates(U/LFandU/POP)forAges15-24,19832014*
31
a.TheUSandFrance
30
25
U/LFFR
%
20
15
U/LFUS
U/POPFR
10
5
U/POPUS
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
b.TheUSandAustralia
20
U/LFUS
18
16
%
14
12
10
8
6
U/LFAUS
U/POPUS
U/POPAUS
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
*U/LFisthestandardunemploymentrateandistheratiooftheunemployedtothelaborforcefor
15-24yearolds;U/POPistheratiooftheunemployedtothepopulationfortheseages.Source:
OECD.stat(dataextractedJanuary2016).
Figure7aalsoshowsthattheorthodoxpredictionofdivergingU.S.andFrench
employmentperformancefaresevenworseifabettermeasureofyouth
unemploymentisused.Theconventionalmeasureisdefinedastheunemployed
shareofthelaborforce(theunemployedplustheemployed).ButunlikeU.S.
students,moststudentsinFrancedonotwork,andthisisnotsimplyareflectionof
theabsenceofjobopportunities.Thesamewastrueinthe1960s,whentheFrench
economywasatnear-fullemployment(HowellandOkatenko,2010).Withlower
employment,thesamenumberofunemployedwilltranslateintoahigher
32
unemploymentrate,byconstruction.Amuchbettermeasureofunemploymentfor
youngpeopleistheunemployment-to-populationrate,whichisshownforFrench
andAmerican15to24yearoldsatthebottomofFigure7.TheseFrenchandU.S.
unemploymentrateshavetrackedeachothercloselysincethe1980s,both
fluctuatingbetween6percentto10percent.Thereisclearlynoevidenceofthe
predicteddivergenceinFrench-U.S.employmentperformance.
Figure7bpresentsthesameunemploymentdatafor15-24yearoldsintheUnited
StatesandcomparesthemtoAustralia.LikeFrance,Figures5,6aand6bshowhigh,
andinthecaseofFigures6aand6b,stronglyrisinginflationadjustedvaluesofthe
Australianminimumwage.Thisshouldhaveledtohigheranddiverging
unemploymentratesforAustraliarelativetotheUnitedStates.ButFigure7boffers
nosupportforthisconventionalprediction:TheAustralianconventional
unemploymentrate(U/LF)fellsharplybetweentheearly1990sandtheglobal
2008economiccrisis,tolevelsbelowtheUnitedStates.Asimilarpatterncanbe
seenusingunemployment-to-populationrates.Themostrecentdatashownearly
identicalyouthunemploymentratesonbothmetrics(despitetheeffectsofa
collapseincommoditypricesontheAustralianeconomysince2012).
Figure8:TheIncidenceofLowPayand2015EmploymentRatesforYoung(25-34)LessEducatedWorkersfor17Countries
LowEduEmployRate
70.00
65.00
NOR
60.00
55.00
POR
NL
DEN
FR
IT
50.00
AUS
UK
GER
FNL
BEL
AUT
NZ
CA
SP
GRE
45.00
40.00
0.00
US
IRE
5.00
10.00
15.00
20.00
25.00
30.00
LowWageShares
Sources:OECD“LowPayIncidence”dataextractedfromOECD.Stat,June1,2016,andarefor2013
excepttheNetherlands(2006),France(2005),andNorway(2009),whicharefromSchmitt (2012);
theloweducationemploymentrateisfor25-34yearoldswithlessthanuppersecondaryschooling,
(EO-OECD2015,tableE).
33
AnotherperspectiveonFrench,AustralianandU.S.employmentperformanceis
providedbyFigure8,whichshowsascatterplotofthelow-wageshareof
employmentagainstthelow-educationemploymentrate.Ahigherminimumwage,
togetherwithhigherratesofcollectivebargaining(amongotherfactors)explain
cross-countrydifferencesintheincidenceoflowpay.Ifthese“labormarket
rigidities”priceworkersoutofthelabormarket,thenreducingthelow-wageshare
shouldalsoreducetheloweducationemploymentrate,asyounglesseducated
workershaveahardertimefindingandkeepingjobs.
ButFigure8showsnocross-countryrelationshipbetweentheincidenceoflowpay
andthelow-educationemploymentrate.Indeed,whilethereisa14percentage
pointgapinthelow-wageshareofemploymentbetweenFrance(11percent)and
theUnitedStates(25percent),theemploymentratesforyounglesseducated
workersisnearlythesame.Similarly,Australia’sincidenceoflowpayis9
percentagepointsbelowtheU.S.level,butwithlow-educationemploymentrates
about7pointshigher.WehavealsohighlightedDenmark,whichshowsthe
strongestchallengetotheorthodoxprediction—alow-wageshareofemploymentof
just8percent,17pointsbelowthe25percentrateoftheUnitedStates,but
Denmarkstillshowsasuperiorlow-educationemploymentrateforyoungworkers.
RelyingonabroadermeasureofhowtheFrenchandU.S.economiesperformfor
youngworkers,Figure9comparestheNEETrate(NotinEmployment,Education
orTraining)for20-to-24yearolds.Ifyoungpeoplenotattendingschoolare“priced
out”ofthelabormarketbyahighminimumwagethenweshouldexpectaveryhigh
andrisingNEETrateforFrancecomparedtotheUnitedStates.Figure8showsthat
FrancehasonlyslightlyhigherNEETratesthantheUnitedStates,andthegaphas
closedsignificantlysince2000,from3.2pointsin2000(17.6percentforFranceand
14.4percentfortheUnitedStates)tojust0.6points(19.4percentcomparedto18.8
percent).WhiletheFrenchNEETrateincreasedby1.8pointsoverthese13years,
theU.S.rateincreasedby4.4points.Again,basedonthelevelsandchangeinthe
relativevalueoftheminimumwage,fromaconventionaltextbookperspectivewe
shouldbeseeingdivergence,notconvergence.
Insum,thiscross-countryevidenceoffersnosupportfortheconventionalviewthat
ahighrelativevalueofthelegalwagefloor(theKaitzindex)offersagoodguideto
theabilityofaneconomyto“afford”amuchhigherwagefloor(whethersetbuya
34
statutoryminimumwageorbycollectivebargaining).IftheKaitzratioturnsoutto
beagoodbenchmark,itwouldhavetobeintheregionwellabove60percent.39
Figure9:TheShareofFrenchandAmerican20-24YearOldsNotEmployed,Enrolled
inSchool,orinTraining(the“NEETRate”),2000and2013
20
+4.4
+1.8
25
17.6
19.4
18.8
14.4
15
2000
10
2013
5
0
NEET. France
Source:OECD(2015),Table3.4.
NEET. U.S.
c) TheSector-LevelKaitzIndex:ABetterNJLMetric?
WhilethemedianwageforageographicareaseemsapoorguidetosettinganNJL
wagefloor,abetterjobmightbedonebyusingthemedianwageforanarrowly
definedlow-wagesector(suchasretailtradeorfoodservices),becausethe
conditionsfacingemployersthatmatterforthewage-employmentrelationshipmay
befairlysimilar.TheexperienceoftheUnitedKingdomspeaksdirectlytothe
questionofhowhightheKaitzratiocanbeinthelow-wagesectorswheremost
minimumwageworkersareemployed.
Table1showsthatthecountry’sNationalMinimumWage(NMW)-to-medianratio
inalllow-payingsectorsincreasedfrom67.5percentin1999to80.2percentin
2015(secondtolastrow).Forspecificsectors,overthese16yearstheNMW-tomedianratiorosefrom81.9percentto92.5percentincleaning,from78.6percent
to88.1percentinhospitality,andfrom69.5percentto79.5percentinretail.This
39ItshouldbenotedthatwearereferringtotheOECD’sKaitzratios,whicharemeasuredbythefull-
time median, a more stringent standard than the targets proposed by the UK government and the
UK’sResolutionFoundationforawagefloorthatis60percentoftheoverallmedian.
35
verysubstantialwagecompressionoccurredwithoutevidenceofnegative
employmenteffects(LowPayCommission,2014,p.12).
ThisevidenceindicatesthattheNJLKaitzratioforlow-payingsectorsintheUnited
Kingdomisabove80percent,the2015value.Howmuchabove?HadtheLowWage
Commissionadoptedthebackward-looking“unchartedwaters”NJLcriterion,
evidencewouldhavebeenrequiredtoconfirmthateachoftheseincreasessince
1999wouldnottriggerjobloss.Intheabsenceofsuchevidence,wewouldnot
knowthattheseincreasesintheNMW-to-medianratioof10-to-15percentage
pointscouldtakeplacewithoutanyjobloss,muchlesslarge-scalejobloss(aswas
predictedinthe1990s)—andmanyU.K.workerswouldbemuchworseoffasa
consequence.40
Table1:TheUK’sKaitzRatioforLow-WageSectors,1999-2013
Sector
1999 2008 2012
2013
2014
2015 Highestbite
Cleaning
81.9
90.1
93.5
92.5
92.7
92.5
93.5
2012
Hospitality
Hairdressing
78.6
83.5
85.3
80.4
86.9
85.8
88.1
84.4
87.7
85.1
87.7
86.7
88.1
86.7
2013
2015
Childcare
Retail
-
69.5
69.6
76.7
82.8
79.5
84.2
78.1
83.7
79.4
84.8
79.1
84.8
79.5
2015
2012
Socialcare
60.8
72.2
76.8
78.4
78.7
79.5
79.5
2015
Agriculture
Textiles
67.5
62.1
71.7
69.9
75.1
71.7
71.8
71.0
72.1
71.0
73.2
73.0
75.1
73.0
2012
2015
Leisure
59.3
66.8
69.5
70.8
71.1
72.1
72.1
2015
Employment
agencies
-
67.7
68.0
68.1
71.5
70.4
71.5
2014
Foodprocessing
55.6
65.2
70.4
68.4
70.0
72.2
72.2
2015
Low-payingsectors
67.5
75.5
79.4
78.9
79.6
80.2
80.2
2015
Nonlow-paying
sectors
42.2
45.6
46.0
45.9
46.2
47.0
47.0
2015
All
47.1
51.2
52.8
52.5
53.2
54.1
54.1
2015
40AccordingtotheUK’sLowPayCommission(2014),itispossiblethattheremaystillberoomfor
higherincreasesinthelow-paysectorKaitzratioswithoutriskofjoblossifthenationalminimum
wageisincreasedgradually.“Thebite(Kaitzratio)isatornearitshighesteverlevelinthesesectors.
AgainstthatbackgroundourviewisthatintheseconditionsanincreaseintheNMWsuchastocause
alargeriseinthebitewouldrunahighriskofadverseemploymenteffects.Thatriskwouldbemore
acuteifanincreaseweretotakeplaceveryquickly:theevidencefrompastincreasesintheNMWis
thattimetoadjustbusinesspracticeinordertomanageadditionalwagecostshasbeenimportantin
enablingemployerstocope.Wecontinuetoreceiveadvicefromemployersthataverybigrisethat
takesplaceinonegowouldbethehardestforthemtoabsorb”(LowPayCommission2014,pp.312).
36
Source:LowPayCommission(2016).
TheResolutionFoundationestimatesthattheincreaseinthebitefromtheNMWin
2014totheNationalLivingWage(NLW)in2020wouldbefrom83percentto98
percentintheretailtradesector,from93percentto110percentin
accommodationsandfoodservices,andfrom85percentto101percentincleaning
services.41Theincreaseinthewagebillofthesethreesectorsisestimatedtobe2
percent,3.4percent,and3percentrespectively.Evenintheselabor-intensive
sectors(becausethewagebillisonlyapartoftotaloperatingcosts)onlyafraction
ofthis2-to-3.4percentwageincreaserangeneedstobeaccommodated,andasboth
theLowPayCommissionandtheResolutionFoundationhaveindicated,U.K.
employershaveshownthattheycanrespondnotnecessarilyoronlybycutting
hoursandjobs,butalsoviapriceincreases,reducedturnovercosts,higher
productivity,andlowerprofits(D’ArcyandCorlett2015,Table1).
Insum,theexpectedchangeinthewagebillafterlikelyadjustmentstocopewitha
mandatoryincreaseinthewagefloorisamuchbetterguidetoexpectedjobloss
thantherelativemedianwage.ButiftheKaitzindexistobeusedastheguide,itis
probablybestcalculatedatthesectorlevelinappropriatelocalities.TheU.K.
evidencesuggeststhatveryhighsector-levelKaitzratiosareconsistentwithlittleor
nojobloss.
6.TheFederalWageFloor:AMinimumLivingWage
Everyworkershouldbeensuredaminimumwagewhichwill
enablehimorhertomaintainabecomingstandardoflifefor
himselfandhisfamily.Apartaltogetherfromconsiderationsof
humanityitisonthehighestinteresttotheStatethatchildren
shouldbebroughtupunderconditionsthatwillmakethemfitand
efficientcitizens.
BritishPrimeMinisterLloydGeorge,191942
41TheestimatedratiosoftheNLWtothesectormediancanbeover100percentbecausethe
Foundationdidnotestimatethefuturemedian;theobjectivewasonlytoshowthechangefromthe
NMWbitein2014towhatitwouldbein2016and2020undertheNLWwithoutchangingthe
median.ButclearlytheNLWwouldcontinuetheconvergenceoftheoftheKaitzratiotowards1in
verylow-wagesectors.
42QuotedbyWaldman(TheIncidenceofLowPayand2015EmploymentRatesforYoung
(25-34)Less-EducatedWorkersfor17Countries2004,p.196).
37
Theconcernoverjoblosshasalwaysplayedacentralroleintheminimumwage
debate,butuntilrecentlytheunderlyingmotivationwasthatexpressedin1919by
LloydGeorge(above)andintheopeningsentencesofthe1938FairLabor
StandardsActasnotedabove.Andintheolderrhetoric,patriciannationalpolitical
leaderscouldspeakofthe“nationalevil”ofthepaymentofpoverty-levelwages
(Churchill)andthatfirmsthatdidsohad“norighttocontinueinthiscountry”
(Roosevelt).43Itisnotablethatthisearlierframingtookplaceinaperiodwith
virtuallynosocialsafetynetandnojobprotectioninextremelycompetitivelabor
markets.AnymandatedwagefloorcouldbeexpectedtoresultinjoblossinU.S.and
U.Keconomiesthatwerestrugglingwithasurpluspooloflaborthatthatproduced
whattheU.S.economistJohnBatesClarkcalled“hungerdiscipline.”Thisearly20th
centurydebatewasframedintermsofalivingwage.
Bycontrast,intoday’sdebate,inacontextofmuchlowerunemploymentand
substantiallygreatersocialprotection(howeverinadequate),thediscourseis
dominatedbywhatthestatisticalevidencesaysabouttheeffectsofincreasesinthe
statutorywageflooronjobloss.Withthebestevidencenowshowingnodiscernible
employmenteffects,manyofthestrongestadvocatesforsubstantialhikesintheU.S.
federalminimumwagehavemadethecaseonNoJobLoss(NJL)grounds.Indeed,
theargumentisthatnotonlywillworkersnotlosejobs,buttherewillbelittleorno
harmdonetoanyone—aperfectexampleoftheeconomist’s(near)Paretoimprovement:manygainalotandnooneloses.Settingasidethemeritsofthisview,
whatisstrikingaboutthisframingisthattheultimateprogressivegoal(aliving
wage)andthestrongRooseveltianrhetoricinsupportofithasallbutdisappeared.
Thisleavesthecaseforminimumwagethatcanmeaningfullyimprovetheliving
standardsofworkingfamiliessubjecttothevagariesofthestatisticalanalysisover
theriskthatsomepoverty-wagehigh-turnoverjobswilldisappear,withnoplacein
thepolicydebatefortheethicalandefficiencypayoffsthatusedtobefrontand
center.
Inthissection,wesuggestthatethicalandefficiencyconsiderationsshouldbe
reintroducedtothedebate.Theprogressivecaseforasubstantialincreaseinthe
minimumwageshouldbereorientedfroma“no-harm”(NJL)framingtoabenefitbasedonethatexplicitlycallsforaMinimumLivingWageonbroadlydefinednetbenefitgrounds,whichincludenotjustthenetmonetarybenefitsofahigherwage
forthestandardoflivingofworkingfamilies,butalsothemanypositivespillover
effectsofa“high-road”employmentmodel.Decentpayhelpsworkingfamiliesavoid
dependenceonpublicspendingthatisstigmatizingandpoliticallydivisive,and
43Seethetitlepageforthefullquotes.
38
wouldhelpendthecurrentpracticeofsubsidizinglow-wage,“race-to-the-bottom”
employmentmodelsthathaveincreasinglycharacterizedthehumanresource
practicesoffor-profit,non-profit,andgovernmentemployersalike.Althoughwedo
notattempttoidentifyaparticularMLWlevelorthedateatwhichitshouldbefully
phasedin,weoffersomeevidenceofthekindthatmightbeusedtodoso.
a)TheProblem:ALow-WageSocialModel
Theresponsibilitythatathestatutorywagefloormustbeartobringtheincomeof
workingfamiliestolevelssufficienttoprovideadecentstandardoflivingdepends
onthelargerinstitutionalcontext.Thisincludesthenatureofsocialprotection
policy(e.g.,targetedtaxbenefitsliketheEarnedIncomeTaxCredit,andchild,
housing,education,andhealthbenefits),theextentandeffectivenessofcollective
bargaining,andthesecurityandbargainingpowerthatcomeswiththestrengthof
labormarketinstitutionssuchasemploymentprotectionlawsandunemployment
benefits(Grimshawetal.2016;MarchalandMarx2015).Inaddition,corporate
governanceandwage-settingnormsintheprivatesectorcanplayabigroleinthe
settingofwagesforless-skilledworkers.Onalloftheseinstitutionaldimensions,
U.S.workersfacetheskimpiestsocialsafetynetandthemostcompetitiveand
precariousjobmarket.Todate,thefederalminimumwagehasbeensettoalignwith
this“low-road”labormarketmodel,witharealandrelativewagefloorthatisthe
lowestintheaffluentworld(seeSection2).
ThefailureoftheU.S.labormarket—andthefederalminimumwage—toseta
decentlowerboundaryforhourlypaycanbeseeninthedata,whichshowssteadily
worseningperformancesince1979,particularlyforyoungworkers.Defining“lousy
jobs”asthoseinwhichworkerswerepaidlessthan2/3ofthemedianwageforfulltimeworkersages18to64($12.50in2014)orwereworkinginvoluntarilyparttime,theincidenceoflousyjobsforyoungworkersages18to34withoutacollege
degreehasincreasedastronomicallysince1979.Forfemales,thelousy-jobratefor
thisgroupincreasedfrom53.1percentin1979to70.1percentin2014;forsimilar
youngmen,theincreasewasevenlarger:from28percentin1979to57.1percentin
2014.Thiscomparestolousy-jobratesforyoungmenwithoutacollegedegreeof
44.9percentintheUnitedKingdomandjust18.1percentforFrance(2012).
ComparedtotheU.S.youngfemalerateof70.1percent,theyoungU.K.andFrench
femaleratewere59.9percentand29.2percent.44
44Author’scalculations(Howell’sEquitableGrowthDecentJobsProject).Canada’slousy-jobratefor
theseworkerswasalmostasbad:68.6percentforfemalesand47.5percentformales.
39
b)From‘NoJobLoss’toa‘TotalEarnings’andMinimumLivingWageStandard
Wesuggestthattheprimaryconsiderationforsettingthefederalwageflooristhe
standardoflivingthatcanbeattainedfrompaidemployment.Wedonotproposea
specificdetailedplanforsettingthefederalwagefloor,muchlessaparticular
MinimumLivingWage(MLW).Butwedoarguethattheprimaryconsiderationin
thesettingoftheMLWisasociallyacceptabletargethourlywageonstandardof
livinggrounds,andthatemploymenteffectsoughttobeanimportantbutsecondary
consideration.
Inasking“Cantheminimumwagebe‘toohigh?”,thedominantminimumwage
researchersofthelastgeneration,DavidCardandAlanKrueger,implya
conventionalNo-Job-Loss(NJL)criterion.
Ultimately,however,aminimumwagethatissettoohighwouldbe
expectedtocauseemploymentdeclines,evenwhenfirmshavemarket
powerandsetwagesmonopsonistically.Ourviewisthatthepolitical
processusuallypreventstheminimumwagefromexceedingthepoint
whereitadverselyaffectstotalemployment,butitisimportantfor
researchtoestablishwheresucheffectswouldoccur…Evenifthe
minimumwagedoesexceedthislevel,however,itwillstillincrease
totalearningsforlow-wageworkersiftheelasticityofdemandisless
thanoneinabsolutevalue(CardandKrueger2015,p.xx).
“Toohigh”isdefinedinthispassageasalevelthatcausesemploymentdeclines—a
levelabovewhatwehavecalledtheNJLthreshold.Buttheyalsoappeartoenvision
anotheryardstick,anarrowlydefinedmeasureofnetbenefits:thechangeintotal
earningsforlow-wageworkers.ThiswouldgofarbeyondthestrictNJLcriterion,in
whichthewagefloorshouldbesettoprecludetheriskofanyjoblosstakingplace
anywhere.Sinceitiswell-knownthattheelasticityoflabordemandisfarbelow
one—Manning(2016)hasarguedthatitmaybeessentiallyzeroevenforU.S.
teenagers—therewouldbeagreatdealofroomunderthis‘totalearnings’standard
forwagefloorstobesetwellabovetheNJLthreshold.
Thecaseforthismoreambitiouswagefloortargetwouldbeevenstrongerifwe
heededtherecommendationsmadebyJohnBatesClarkin2013andclosely
monitoredemploymenteffectsinnear-real-time,with“emergencyrelief”legislated
alongwiththeminimumwageincreasestosupportworkerswhowereharmed.
Emergencyreliefneedstoaccompanytheminimum-wagelaw,and
effectivemeasuresforitmustbereadytoactthemomentthelawis
40
passed.Itwillnotdotodischargetheworkersandthendebatethe
questionastohowbesttogivethemwork.Moreover,such
employmentaswefurnishshouldbesuchasself-respectingpersons
mayproperlyaccept(quotedbyPrasch,2000,pp.257-8).
Adoptingthe“totalearnings”criterion,theMLWshouldbesetwiththegoalof
eliminatingextremelowpay,asBelgium,France,andtheScandinaviancountries
(throughcollectivebargaining)havealreadyaccomplished,andifthisshouldleadto
somejobloss,thereisnoquestionthatthenetbenefits(evenifmeasuredonlyin
termsofearningseffects)wouldvastlyoutweighthecostsofgenerous“emergency
relief.”InsteadofinvokingthenarrowParetoCriterionofnoharmtoanyone,this
wouldmeantheadoptionofwhateconomistsrefertoastheCompensation
Criterion,inwhichnetbenefitscanbeusedtofullycompensatethoseharmedbya
policy.
TheLowPayCommissionintheUnitedKingdomoffersamodelofaninstitutional
setupthatcouldoperationalizeanMLW,onethatisinextricablylinkedtoa
compensationschemethateffectivelyensuresfullemployment.45Thiscommission
wouldberesponsiblefor(1)decidingtheappropriateMLW;(2)regularmonitoring
andadjustmentsofthesemandatesbasedonevidenceoftheeffectsonbothliving
standardsandemployment;and(3)planningeffectiveresponsestoanyjoblosses
thatcannotbeavoided.46
c)TheMLW:HowLittleisTooLittle?
Althoughonlyahandfulofcountrieshadestablishedminimumwagesatthetimeof
theTreatyofVersailles(1919),thetreatycalledfor“thepaymenttotheemployedof
awageadequatetomaintainareasonablestandardoflifeasthisisunderstoodin
theirtimeandcountry”(Anker2011,p.16).Similarly,theopeningsentencesofthe
FairLaborStandardsActof1938makeclearthattheprincipalmotivationfor
legislatingaminimumwagewastoeradicatethose“laborconditionsdetrimentalto
themaintenanceoftheminimumstandardoflivingnecessaryforhealth,efficiency,
andgeneralwell-beingofworkers.”Theminimumwagewasalsoincludedinthe
generalprinciplesoftheInternationalLabourOrganization(ILO);aresolution
adoptedin1945recommended“theestablishmentofappropriateminimumwage
standards,adequateforsatisfyingreasonablehumanneeds”inorderto“assistthe
progressiveraisingofthestandardoflivingofallworkers”(ILO2014,p.3).
45AstheResolutionFoundation(2014)haspointedout,theLowPayCommissionshouldhavebeen
calledthe“MinimumWageCommission”becauseit’schargewasnottoreducetheincidenceoflow
pay.
46AstheAmericaneconomistJohnBatesClarkwroteoveracenturyagoin1913(Prasch2000).
41
Thereisnoconsensus—nationallyorinternationally—abouthowtodefinea
specificandrealisticlivingwage.Mostapproachesagreethatataminimum,the
livingwageshouldbehighenoughtoallowaworkerwithafamilytocoverthebasic
subsistencecostsofshelter,food,transportation,clothing,andutilities.Itemssuch
ashealthcareandeducationarefreeinsomecountriesandnotinothers,sothat
impactsthenecessarywage.TheILO’sRichardAnker(2011)hasdevelopeda
methodologyfordeterminingalivingwageinaninternationalcontext.
Perhapsthelivingwagecalculationsfromabroadthataremostdirectlyrelevantfor
thinkingaboutanappropriateMLWfortheUnitedStatescomesfromtheLiving
WageFoundationintheUnitedKingdom,whichreliesonresearchfromtheCentre
forResearchinSocialPolicy(CRISP)atLoughboroughUniversity.Theirliving-wage
estimatesareintendedto“showhowmuchhouseholdsneedinaweeklybudgetand
howmuchtheyneedtoearninordertoachievethisdisposableincome”fora
varietyofhouseholdtypes.47TheFoundation putsthe2016livingwageat£8.25
outsideLondonand£9.4inLondon.48Thesefigureswouldtranslateintoa2016U.S.
livingwageofbetween$11.77and$13.41.49
IntheUnitedStates,thereareseveralmethodologiescommonlyusedtoestimatea
basic-needsbudgetforworkerswithdifferentfamilytypes(e.g.singleadult,single
adultwithonechild,twoadultswithtwochildren).50Mostfindthatthewage
neededtopaythebasiccostsofliving—housing,food,transportation,utilities,taxes,
healthcare,savings,clothing,andpersonalitems—requiresafull-timejobatawage
thatis,asFigure10suggests,atnearly$14perhourforasingleperson,andatleast
$22forasingleadultwithonechildinlowcost-of-livingareas.Forexample,among
theninecitiesshowninthefigure,Minneapolishasthelowestbasic-needsbudget
forasingleperson($13.62)andHoustonhasthelowestforasingleadultwithone
dependentchild($22.67).Thiscomparestotheproposed2020federalminimum
47http://www.lboro.ac.uk/research/crsp/mis/whatismis/
48FortheLivingWageFoundation,seehttp://www.livingwage.org.uk/;ForCRISP,see
http://www.lboro.ac.uk/research/crsp/
49Theseareroughestimates,calculatedbyusingtheOECD’sPurchasingPowerParity(PPP)
multiplier(1.426)for2014totheLivingWageFoundation’sestimateoftheLondonandoutside
London2016livingwage.The1.426factorwascalculatedbytakingtheratiooftheU.K.PPPadjusted
2014nationalminimumwagefromtheOECD($9)totheUnitedKingdom’s2014nationalminimum
wageinpounds.
50ThisincludestheEconomicPolicyInstitute’sFamilyBudgetCalculator,theSelf-Sufficiency
StandarddevelopedbyDianaPearce,andtheMITLivingWageCalculatordevelopedbyAmy
Glasmeier.Alloftheseprovideestimatesoftheincomeneededtocoverbasiclivingcosts,byfamily
sizeandtypeaswellascityandstate.AlsoseeFredericksen(2015).
42
wageof$12,whichistheequivalentof$10.92in2016(basedonCBOinflation
projections),andtheproposed$15in2021—about$13.34intoday’sdollars.
Figure10:TheFull-TimeHourlyWageRequiredforBasic-NeedsBudgetbyFamily
TypeforSelectedCitiesfor2016(withlinesshowingproposed2020and2021
minimumwagesin2016dollars)
39.35
40.00
2021: $15<($13.34)
2020:<$12<($10.92)
35.00
29.58
30.00
25.00
23.59
24.06
26.76
24.90
14.64
14.10
25.86
22.67
21.07
20.00
15.00
26.40
13.45
13.91
15.67
13.62
17.00
14.03
10.00
5.00
0.00
Bakersfield
Phoenix
Colorado<Spr
Houston
Minneapolis
Single< Adult
Chicago
Buffalo
Baltimore
Washington
With<1<Child
Source:Tungetal.(2015),table3.1;derivedfromEPI’sFamilyBudgetCalculator).
Figure11:TheFull-TimeHourlyWageNecessarytoRentaModest2-Bedroom
Apartment:tenselectedstates,statewideaverageandthenonmetropolitanaverage
in2015(withlinesshowingproposed2020and2021minimumwagesin2016
dollars)
28.00
26.00
24.00
22.00
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2021: $15:($13.34)
2020::$12:($10.92)
Alabama
Arizona
California
Minnesota
State
Montana
New: York
Ohio
Oregon
Pennsylvania
Tennessee
Combined:Nonmetro:Areas
Source:NationalLowIncomeHousingCoalition(NLIHC2015).NLIHCcalculatestheseestimates
basedonHUD’spublishedFairMarketRentandassumesthathousingcostsare30percentof
income.
AsecondsourceforbenchmarkingtheMinimumLivingWageistheevidencefrom
theNationalLowIncomeHousingCoalition.Torentamodest,two-bedroom
apartment,theaveragewagerequiredforafull-timeworker(40hoursand52
43
weeks)was$19.35perhour,or$15.50foraone-bedroomunit(assumingrentsare
30percentofhouseholdincome).
AsFigure11shows,evenforruralAlabama,therentrequiredforaminimally
decenttwo-bedroomapartmentinnon-metropolitanAlabamaisestimatedto
requirea$12.18hourlywageforafull-timeworker,whichisabout$1.20morethan
theproposed$12wagefor2020wouldprovide($10.90in2016).Theaveragerural
Alabamaworkercouldaffordthisapartmentwithawageequivalenttotoday’svalue
oftheproposed2021$15wage,butwithonly$1leftoverperhour($13.34vs
$12.18).However,eventhe$15proposal($13.34today)wouldbetoolittletocover
therentalofamodesttwo-bedroomapartmentinthefivemostexpensivecitiesin
Alabama,whichwouldrequireafull-timehourlywagerangingfrom$15.15to
$15.63(NLIHC2015,p.16).Thesecost-of-livingestimatessuggestthata2020wage
floorof$12wouldnotcomeclosetosatisfyingareasonableMLWstandard—even
forruralAlabama.Indeed,theysuggestthattheMLWwouldneedtobeatleast$14
in2016dollars,andperhapsintherangeof$16.00to$17.00by2021.
Additionalevidenceonbasic-needsbudgetscanbefoundinthe“MakingWorkPay”
reportsbytheNationalCenterforChildreninPoverty(NCCP),whichprovide
estimatesoftheincomefamiliesrequireforbasicneedsincitiesofselectedstates.
Thisisaparticularlyvaluablesourceforwhatisneededfromawageaftertaking
intoaccounttheavailabilityofcity,county,state,andfederalmeans-testedsocial
support.Forexample,themostrecentfindingsforMontana(for2010)suggest:
AcrossthesevenlocalitiesexaminedinMontana,familiesneedincomes
ofovertwicethefederalpovertyleveltocovertheirbasicexpensesof
housing,food,transportation,healthinsurance,childcare,andother
necessities….(thefigure)showsthatasingleparentwithtwochildren,
onepreschool-agedandoneschool-aged,needsanannualincome
rangingfrom$39,000inHavreto$46,000inKalispelltocoverthese
expenses.Thisisequivalenttoawageof$19to$22perhour—twoto
threetimesthevalueoftheminimumhourlywageof$7.35andoneanda
halftimesthevalueofMontana’smedianwageof$13.65(Chau2011,p.
4).
TheNCCP’sstudyofIowa(for2008)producedsimilarresults.InbothIowaand
Montana,thecombinationoflocal,stateandfederal“work-support”programscan
potentiallymakeupformost,orevenall,ofthegapbetweenthesebasicexpenses
andnetearningsifthe“take-uprate”is100percentinareaswiththemost
comprehensivesetofsupportiveservices.Buteligibilityforthesepublicsubsidies
variesovertimeandbyjurisdiction,andrequiressubstantialtimeandenergyto
knowwhatisavailable,toshoweligibility,andtoapplyandcollect.Asaresult,
44
accordingtoNCCP,“manyfamiliesdonotaccessalloftheprogramsforwhichthey
areeligible.”51
d) NetImpactsforWorkers
Iftheminimumwageisraised,workersmayloseeligibilityforsomeprograms,such
astheEarnedIncomeTaxCredit(EITC),theSupplementalNutritionAssistance
Program(SNAP),orfoodstamps,52childcareandhousingassistance,andmedical
care.Atthesametime,policycanbeusedtooffsethigherlaborcostsforemployers
(suchastaxpolicyorsubsidies).Inordertodeterminethe“right”federalminimum
wage,itiscriticaltotakeintoaccountthenetoutcomesforbothworkersand
employers.
Thispointishighlightedwhencomparingminimumwagesintheinternational
arena.AccordingtoOECDestimates,theaveragenetU.S.minimumwagewasjust
$6.26in2013,about$1.00lessthanthegross$7.25wage.53Thiscomparestoanet
wageof$7.06fortheUnitedKingdom,$7.18forCanada,$8.24forFrance,and$9.54
forAustralia(OECD2015a).TheOECDestimatesthatthenetgain—theshareofthe
minimumwageincreasethataworkertakeshomeaftertaxesandbenefit
reductions—toaU.S.minimumwageworkerwasbarelyover40percent(40cents
foreachdollarincreaseintheminimumwage)in2013,whichwasmorethanin
Australia(32percent)butslightlylessthanFrance(45percent)andfarlessthan
Canada(over60percent)andtheNetherlands(over80percent)(OECD2015b).
Goodillustrationsofthepotentialfortheseoffsettingeffectscanbefoundinthe
NCCP’s“MakingWorkPay”reportsforIowaandMontana(discussedabove).Both
showasubstantial“cliffeffect”whereworkingfamilyincomesactuallyfallasthe
worker’shourlypayincreases.InthecaseofIowa,asFigure12shows,income
woulddropforafamilyofthree(asingleparentandtwochildren,ages2and6)in
DesMoinesbynearly$8,000duetothelossoffoodstampsandachildcaresubsidy
51AccordingtotheChau’sNCCPMontanareport(2011,p.6),“ArecentpaperfromtheUrban
InstituteshowsthatnationallyoneinfiveeligiblechildrendonotparticipateinMedicaidor
Children’sHealthInsurancePrograms(CHIP),nearlyfourin10eligibleworkinghouseholdswith
childrendonotreceiveSNAP,andsevenin10familieseligibleforchildcaresubsidiesarenot
served.5Thesefindingsechothoseofapreviousstudy,whichfoundthatonlyfivepercentoflowincomeworkingfamiliesreceivedabroadworksupportpackageofpublichealthinsurance,SNAP
andachildcaresubsidy.”
52SupplementalNutritionalAssistanceProgram.
53TheOECDestimatesthetaxesthatworkersmustpay,includingmandatorycontributionsto
retirementpensions,incometaxes,unemploymentinsurance,andothersocialprograms.Thenet
minimumwageistheestimatedtake-homepayforafull-timeminimumwageworker.Wagesare
adjustedusingPurchasingPowerParitiesforprivateconsumption(OECD2015a).
45
astheworker’spayincreasedfrom$10.50to$12(2008)(Fassetal.2008,figure1).
AsimilarfamilyinBillings,Montanawouldhaveseenadropofabout$7,000in
2010fromawageincreasefrom$13to$13.50duetothelossofthechildcare
subsidy.Inaddition,anincreaseinpayfrom$15to$18wouldincreaseannual
incomebyjust$1,000becauseofthelossoffoodstamps)andotherbenefits(Chau
2011,figure4).Theseexampleshighlighttheneedforacarefulassessmentofthe
correctminimumwagebasedonlocality,andavailablepolicies.Italsoshowshowit
iscrucialthattheminimumwagebeunderstoodaspartofapackageofpoliciesin
additiontothewage.
TheNCCPreportprofilespotentialimpactsforhypotheticalfamilies,butwealso
havesomeresearchontheactualimpactofincreasedwagesonbenefiteligibility
andnetoverallearningsfromresearchonmunicipallivingwageordinances.
Researchersconductedinterviewswithworkerscoveredbythelivingwage
ordinancetocomparetheirbefore-and-afterincome,includingrelianceonsocial
programs.
Figure12:NetFamilyResourcesasEarningsIncrease:DesMoines,IA
(SingleParentwithtwoChildren,Ages2and6)
Source:NationalCenterforChildreninPoverty(2008).
Forexample,Fairrisetal.(2005)studiedtheimpactoftheLosAngeleslivingwage
ordinance,whichrequiredfirmscoveredbytheordinancetoraisewagesfroma
minimumof$4.25to$7.25perhour(plushealthinsurance)in1996.54Theyfound
thatafterthelivingwagewasimplementedinLosAngeles,amajorityofworkers
54Thelivingwageisadjustedeachyearwiththecostofliving.By2015theL.A.livingwageratewas
$11.17plushealthbenefits(http://www.lawa.org/welcome_LAWA.aspx?id=596).
46
reportedlessincomefromsocialprogramsbutanetincreaseinannualincome
(Fairrisetal.2005).Thegainsweregreatestforsingleormarriedworkerswithout
children,astheywereeligibleforfewerprogramstobeginwith.Singleparentswith
childrenwere,onaverage,themostdependentongovernmentprograms,and
thereforeexperiencedthebiggestdropineligibility.Still,workersinterviewed
reportedanetgaininincome.Thenetgainwasnotenoughtoliftmanyworkersout
ofpoverty,giventhatthelivingwageratewassetjustatthefederalpovertyline,
whichsuggeststheneedforahigherwagelevel.
Toensurethatminimum-wageworkersgetthemostofanyincrease,appropriate
adjustmentstothebenefitschedulesofprogramssuchastheEITCandSNAPshould
becentraltothedebateovertheappropriatelevelofthefederalminimumwage.55
7.Conclusion
TheUnitedStatesisjustemergingfromaglobalfinancialcrisisthathaddevastating
consequencesformanyU.S.workers,mostvisiblyinjoblessnessandthecollapseof
housingvalues.Somesevenyearsafterthetrough,theemploymentrateisonly
slowlyrecovering,buttheconventionalunemploymentrateisnowaround5
percent,halfwhatitwasin2009-10.Astheemploymentcrisisrecedes,what
remainsisthemuchlongertermcrisisinlowpay,onethatshowsasteady
worseningsincethelate1970s.AccordingtotheBureauofLaborStatistics,there
aremorethan35millionpeoplewhoare“workingpoor.”Theshareofworkingpoor
wentfrom5.1percentofthelaborforcein2007to7.2percentin2010,andhas
changedlittlesincethen,despitethetepideconomicrecovery.Familieswith
childrenunder18yearsoldwerethreetimesmorelikelytobeamongtheworking
poor.Theseratesofworkingpovertyarethehighesttheyhavebeensincethe
1980s,whentheBLSstartingcollectingdata(BLS2015).56
Theproblemofin-workpovertywillnotbesolvedbysmall-scaletinkeringwithour
currentlabormarketpoliciesandinstitutions.Workersrequireamassiveinfusion
ofbargainingpower.Intheabsenceofeffectivecollectivebargainingonanorthern
Europeanscale,theinterventionthatcanbemosteffectiveintheneartermisa
substantialhikeinthenationalwagefloor,onethatrequiresemployers—for-profit,
non-profitandgovernmentalike—topayadecentlivingwage.
55Onhowtobestcombinethesepolicies,see,forexample,Wicks-LimandPollin(2012).
56Theworkingpooraredefinedasdefinedaspeoplewhospentatleast27weeksinthelaborforce
butwhosehouseholdincomesstillfellbelowthefederalpovertylevel.Giventheinadequacyofthe
federalpovertylinemeasures,theactualrateofworkingpoorislikelymuchhigher.
47
Whilethelivingwagemovementhasmadegiantstridesincitiesandstatesacross
thecountry,thefederalminimumwageremainsatjust$7.25,alevelfarbelowthat
ofmostotheraffluentcountrieswithstatutorywagefloors,inbothreal(buying
power)andrelative(tothemedianwage)terms.Yet,evenamongmanyadvocates
forahigherfederalminimumwage,thegoalsseembarelyadequate,withtargetsof
$10.10,$12,oreven$15thatarenottobefullyphasedinuntil2020-23,depending
ontheproposal.Afterall,AustraliaandFranceeffectivelyoutlawedlowpay,defined
bywagesthatarelessthantwo-thirdsofthemedianfull-timewage.Butcrucially,
theseotheraffluentcountriesalsoprovideamuchhigher“socialwage”thanthe
UnitedStatesintheformofuniversal(notmeans-tested)supportforhealth,
education,andespeciallychildsupport.Inthecurrentcontext,thelegalwagefloor
mustcarryamuchhigherburdenformaintainingminimallydecentfamilyincomes
intheUnitedStatesthaninotheraffluentcountries.
Atthesametime,itisunrealistictoexpectanationalstatutoryminimumwageto
carrythisentireburden.OneapproachwouldbetocomplementaMinimumLiving
Wage(MLW),setperhapswithreferencetoabasic-needsbudgetforasingleadult
worker,complementedbyafederaluniversaltaxablechild-cash-benefitprogram
alongthelinesmodeledbyGarfinkeletal.(2016).Thiswouldbesimilarto
allowancesystemsalreadyinplaceincountriesincludingCanada,theUnited
Kingdom,andFrance.Garfinkeletal.showthatunconditionalcashallowanceslike
thesecanbemoreeffectiveatreducingpovertythanotherkindsofpoliciessuchas
achildtaxcredit.AstheprominentU.K.economistAnthonyAtkinsonhasargued,“A
ChildBenefitthatissubstantialbuttaxable,combinedwithaprogressive(income)
ratestructure…isaneffectivewayofensuringthatallfamiliesreceivesome
recognitionoftheirfamilyresponsibilitiesbutthatmoreisgivenperchildtothose
onlowerincomes”(Atkinson,2015,p.2014).
Still,therootoftheproblemofin-workpovertyisinadequatepay,andthatiswhere
themainsolutionmustbefound.AstheUniversityofChicagoeconomistPaulH.
Douglas(1925,p.16)wroteinremarkablystronglanguageforanacademicjournal:
Itisthemostcruelformofunconscioushypocrisyforbusinessmento
payinsufficientwagestothoseoftheiremployeeswhoarefathersof
familiesandthenbycontributingtochildwelfareagenciestofeelthat
theyhavedischargedtheirduty…employersandsocialworkersalike
needtobewareofthinkingthatsocialwork,forallitsvaluable
contributions,isanadequatesubstituteforadecentwage.
48
Partoftheexplanationforourpersistentfailuretoestablishaminimallydecent
wageflooratthefederallevelhasbeenthewaythediscoursehasbeenframed—
evenbymanyofthestrongestadvocatesforsubstantiallyhigherminimumwage.
Therhetorichasbeendominatedbyeconomics101thinking,inwhichincreasesin
theminimumwageareconstrainedbytheeconomist’sParetoCriterionof“noharm
toanyone.”It’smanifestationinthecurrentAmericanminimumwagedebateis
whatwehavecalledtheNo-Job-Loss(NJL)criterion.Thisrhetoricisthemirroroppositeofthemoraloutragevoicedinbyintellectualandpoliticalleadersofearlier
generations,fromleadingeconomistssuchasAdamSmithandPaulDouglas,tothe
patricianpoliticiansWinstonChurchillandFranklinRoosevelt.
AsTonyAtkinsonhasargued,toeffectivelycombatpovertyandinequality,weoften
needachangeinthediscourse.Concerningthedebateovertheminimumwage,the
criterionforsettingtheappropriatelevelofthenationallegalwagefloorshouldnot
bedrivenbystatisticalcontestsoverwhatparticularwagethresholdposes“littleor
noriskofjobloss,”butratherbywhatwagewillensureaminimallydecent
standardoflivingfromfull-timework,andwhatpoliciescancomplementa
MinimumLivingWagethatwillensurethatanycostsofjoblossareadequately
compensated.
Ifwereallycareaboutmaximizingemploymentopportunitiesthenwewouldputa
muchhigherpriorityonfull-employmentfiscalandmonetarymacroeconomic
policy,minorvariationsofwhichhadmassivelygreateremploymenteffectsthan
eventhehigheststatutorywagefloorsthathavebeenproposed.Butitisalsowell
withinourcapabilitiestocounteranyjoblossthatcanbelinkedtotheadoptionof
whatJ.B.Clarkin1913called“emergencyrelief”suchasextendedunemployment
benefits,educationandtrainingsubsidies,andpublicjobsprograms.AMinimum
LivingWagecombinedwithmeaningfulchild-cashallowanceswouldputtheUnited
Statesbackamongotheraffluentnationsbypromotingworkincentiveswhileallbut
eliminatingbothin-workpovertyandchildpoverty.Itwouldputthecountryinto
watersthatmostotheraffluentnationshavechartedandarealreadynavigating.
49
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Appendix:AKaitzIndexThoughtExperiment
ArinDube(2014)hasproposedthatthecriterionforsettingthestatutoryminimum
wageshouldbetheKaitzindex—theratiooftheminimumtotheaverageormedian
wage—andfurtherproposesthatthe“natural”and“appropriate”Kaitzratioshould
be50percent.ThiswouldraisetheminimumwageeverywhereintheUnitedStates,
butbasedonhisassessmentoftheevidence,employmenteffectswould“likely(be)
toosmalltobemeaningfullydifferentfromzero”(p.8).Thisisagoodexampleof
theapplicationofthebackward-lookingNo-Job-Loss(NJL)criterion:theminimum
wageshouldbesetatthehighestwagethatevidenceshowswillposelittleorno
riskofjobloss.Asheputsit,
…acomparisonoftheminimumwagetothemedianoffersaguide
forhowbindingaparticularminimumwageincreaseislikelytobe,
andwhattypeofwagethelabormarketcanbear.Whenthisratiois
low—sayaround0.2—minimumwagepolicyisnotraisingthewages
ofmanyworkers.Incontrast,ahighratio—sayaround.08—
indicatesahighlyinterventionistpolicywheretheminimumwageis
dramaticallycompressingdifferencesinwagesfornearlyhalfthe
workforce….Nooneexpectsthattheminimumwageshouldbeset
equaltothemedianwage….(p.2).
ThatconclusionmaybeafairdepictionofthemainstreamU.S.minimumwage
discourse,butmanycountrieshavechosenpoliciesthatseverelycompressthe
bottomofthewagedistributionandhavedonesoexplicitlyonethicalcriteriaof
whatisaminimallydecentincomefromwork.The10-50(or50-10)ratioisa
standardmeasureofinequalityatthebottomofthewagedistribution.Themost
recentdata(2013-15)showthattheratioofgrossearningsofthe10thpercentile
workertothemedianworkerwas45.5percentfortheUnitedStates(notmuch
abovetheU.S.Kaitzratioof37percent).Thiscomparesto55.5percentand57.5
percentfortheUnitedKingdomandAustralia,respectively,justover68percentfor
DenmarkandFinland,and72percentforBelgiumandSweden.Ahighly
compressedlow-endwagedistributionisclearlycompatiblewithahighemploymentlabormarketintheaffluentworld.
ThefundamentalproblemwiththeKaitzindexasaguidetotheriskofjoblossis
thatthelevelandchangeofalocation’smedianwage—thedenominatorofthe
ratio—mayhavelittleornothingtodowiththedynamicsofwageandemployment
settingatthelevelofthefirm.Dube’sproposalfocusesontwolevelsatwhichthe
Kaitzcanbeoperative,statesandmetropolitanareas.IftheKaitzindexdefinedfor
55
geographicjurisdictionsisatallusefulasaguidetothelikelihoodofconsequential
jobloss,itshouldperformbestatthelocallevel.
Thefollowingthought-experiment(withfairlyrealisticnumbers)showsthatthe
Kaitzratiowillbewildlydifferentforthesameworkersemployedinthesamefast
foodfranchisesdependingonthejurisdictionforwhichtheKaitzratioiscalculated,
rangingfromthetwoextremes(.8and.2)intheDubepassagequotedabove.
Webeginwithanextremelylocallabormarket:let’scallitabigreststopontheNew
YorkThruwaythatisthedominantemployerinthearea,whichisrural.Let’ssay
thereare300employedworkers,rangingfrommanagerstoentry-levelcashiers,
cleaners,andmaintenancestaff.AssumethattheNewYorkstateminimumwagehas
recentlyrisento$9,pushingupthewagesofmanyoftheworkersandseverely
compressingthebottomhalfofthewagedistribution.Asaconsequence,half(150)
arenowpaidlessthan$11,sothemedianwageinthislabormarketis$11,andthe
Kaitzindexis82percent($9/$11).
SincethisreststopislocatedinupstateNewYork(abovethenorthernNewYork
Citysuburbs)whichisscheduledforaslowerphase-inofahigherwagefloor
(perhapsto$15),thisisanotherrelevantjurisdictionforwhichtheKaitzindexcan
becalculated.Iftherelevantlabormarketisthisupstateregionandthemedian
wageis$18,thentheKaitzindexwillbe50percent($9/$18).Butiftheentirestate
istherelevantjurisdictionandthemedianis$27,theoperativeKaitzratiois33
percent($9/$27).
Thisexampleillustrateshowdifferencesinmedianwagesacrossdifferentpolitical
jurisdictionscancausethe$9state-widewagefloortogenerateKaitzindexvalues
rangingfrom33to82percent,dependingonwhetherthereferencemedianwageis
definedatthelevelofthereststop,upstateNewYork,ortheentirestate.Butfor
eachKaitzvalue,theworkersarethesame,thelikelihoodthattheworkerquits
(turnover)isthesame,theabilitytopayforpastandfutureminimumwage
increasesbyreducingpayraisesforthetopearning150workersisthesame,and
theabilitytopassalonglaborcostincreasesinpricesorreducedprofitsisthesame.
Whatmakesthe50percentKaitzratiotherightone?
WhatwouldtheKaitzindexcalculatedforeachofthesejurisdictionstellusabout
thelikelyemploymenteffectsofanotherminimumwagehike,sayto$10(asthe
phase-intothe$15wagebegins)?Ifthisincreaseinthestatewagefloorpushedthe
medianwageatthereststopto$12buthadnoeffectontheupstateorstate-wide
medians(tokeeptheexamplesimple),thenthechangesintheKaitzratioswould
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be:from82percent($9/$11)to83percent($10/$12)forthereststoplabor
market;from50percent($9/$18)to56percent($10/$18)fortheupstatelabor
market;and33percent($9/$27)to44percent($10/$27)forthestate-widelabor
market.Whichofthesechangesshouldbeusedasthebestguideto“whattypeof
wagethelabormarketcanbear”?
Turningthisthoughtexperimentaround,wecanaskabouttheimplicationsforthe
“natural”wagefloorforeachjurisdiction,shoulda50-percentrulebeusedtosetthe
minimumwageafterthestatutorywagefloorisincreasedfrom$9to$10.Ifthe
labormarketwasheldtobethelocalarea—overwhelminglydominatedbythe300
workerreststop—thenthetheappropriatewagewouldbejust$6(50percentof
$12).IfmanyupstateNewYorkStatelegislatorsarerightthattheupstateareaisthe
mostappropriatelabormarketforthepurposesofdeterminingminimumwage
effects,thenthe50percentKaitzrulewouldgenerateawagefloorof$9(50percent
of$18).Butifthosewhoarguethattheminimumwageshouldbesetfortheentire
state,theproperwagefloorwouldbe$13.50(50percentof$27).Doesaformula
thatgeneratesoutcomesthatrangefrom$6to$13.50offerausefulguidetosetting
theappropriateminimumwageforourNewYorkThruwayreststopworkersand
theiremployers?
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