Sunday, May 28, 2017

Frequently Asked Questions About Raising the Minimum Wage

This is a long article on the issues involved in raising the minimum wage. I prepared it last year for the Advocacy Committee of the City Club of Portland, following up the City Club's endorsement of raising the Oregon minimum wage. Subsequently, the Legislature did adopt a plan to significantly increase the minimum wage over a period of years. The minimum wage remains a national issue and a key element of the progressive movement.

Frequently Asked Questions and Answers
The City Club of Portland Report On Raising the Minimum Wage Concludes:
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Portland Needs a Higher Minimum Wage
The Minimum Wage Pre-Emption Statute should be repealed to give local jurisdictions the option of having a minimum wage higher than the state’s mandated minimum.
The City Club of Portland Board of Governors created the Minimum Wage Research Committee in 2015 and charged it with answering two questions:
  • -  Should individual Oregon municipalities be allowed to set a minimum wage rate higher than the state-set minimum?
  • -  Should Portland specifically set a higher minimum wage than the state-set rate?
    The committee of nine individuals began its work in April, 2015 and met every week for five months, hearing testimony from every side of the minimum wage debate, including business interests, politicians, economists, activists, employers and interest group representatives. The committee also examined a large body of research targeted at the public and academics alike. The unfolding political story of the minimum wage in other cities also was followed.
    The committee’s report was completed in November and it concluded that the answer to both questions put to it by the Board of Governors was “Yes.”
    The membership of the City Club approved the report and its recommendations by a super-majority vote.
    Questions and Answers About the Minimum Wage
    Q: What is the origin of the idea of a minimum wage?
    A: Probably the first economist to write about a minimum wage was Adam Smith in 1776 when he wrote in his enormously influential classic, The Wealth of Nations: “A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family.”
    The labor movement began pressing for established minimum wages in the late 1800s.. To reduce labor strife, New Zealand in 1894, Australia in 1896 and the United Kingdom in 1909, established boards to set minimum wages in industries. When former President Theodore Roosevelt ran as the Progressive Party Presidential candidate in 1912, the party platform contained a demand for a "living wage." In speaking to that party's convention, Roosevelt said:
“We stand for a living wage. Wages are subnormal if they fail to provide a living for those who devote their time and energy to industrial occupations. The monetary equivalent of a living wage varies according to local conditions, but must include enough to secure the elements of a normal standard of living--a standard high enough to make morality possible, to provide for education and recreation, to care for immature members of the family, to maintain the family during periods of sickness, and to permit of reasonable saving for old age.”

In the 1920s and early 1930s, the U.S. Supreme Court effectively prevented a national minimum wage by ruling unconstitutional minimum wage laws of some states as violations of the right of contract. The Fair Labor Standards Act, enacted in 1938 established a national minimum wage of 25 cents/hour ($4.14/hour in 2015 dollars) and a work week maximum of 44 hours. The Supreme Court unanimously upheld the Act in 1941 and there have no effective legal challenges to the minimum wage since then.
There have been 22 increases in the minimum wage in the 77 years since it was enacted. Its peak value in 2015 dollars was in 1968 when its $1.60 would be worth more than $11.00 today. Because it never was indexed to inflation it has lost value since then.

Q: Why is the minimum wage receiving so much attention now? It has not been this controversial in many years.

A: Issues involving the minimum wage have been debated since the late 1800s and many of the arguments pro and con have changed very little. However, the American economy has changed enormously. Manufacturing employment has declined dramatically since the 1970s and today more low-wage jobs are being created than middle or high wage jobs. This has helped to generate the worst economic inequality in our history. (Low wage jobs are defined by the Labor Department as jobs that pay less than two-thirds of the national median hourly wage of $17.00, or less than $12.00/hour).
Low-wage workers today comprise more than 30% of the workforce, (25% in Portland) the highest percentage of low wage workers of any developed nation. In fact, the median hourly wage of $17.00 has declined slightly over the past ten years. More than 50% of all hourly workers today are making less than what is considered a "living wage." A substantial increase in the minimum wage also would push up the wages of the tens of millions of low wage workers.
The financial crisis of 2008 and the resulting Great Recession sparked renewed focus on the national minimum wage, which has been $7.25 since 2009. With many more people trying to support themselves - and their families - on minimum or low-wage incomes, pressure has been growing to make the minimum wage a "living wage," sufficient to provide basic support. And as shown above, when progressives like Theodore Roosevelt promoted the idea of a minimum wage early in the 20th Century, their concept of it was as a "living wage," capable of supporting a family.
Because the minimum wage has not kept pace with inflation, or productivity, today it provides less than half of what is considered a very basic "living wage." If it had kept pace with inflation it would be 50% higher than it is today. If it had kept pace with productivity growth it would be more than $18/hour today.
Support for increasing the minimum wage has been growing among the general population but efforts to raise it have stalled in Congress. As a result, campaigns pushing higher minimum wages increasingly have been focused on states and on major cities, especially those with high costs of living. Since 1996, 18 of 20 ballot initiatives to increase the minimum wage have been successful in 16 states, including Oregon. Today, 29 states and the District of Columbia, comprising about 61 percent of the population, have minimum wages higher than the national minimum.
Oregon’s minimum wage of $9.25 currently is ninth highest, behind $9.47 in Washington, $9.60 in Connecticut, Rhode Island and Vermont, $9.75 in Alaska, $10.00 in Massachusetts and California and, in July, 2016, $11.50 in the District of Columbia. Minnesota will have a $9.50 minimum wage for large employers in August, 2016.
Higher minimum wages are in the process of being implemented in a number of other states and cities, including $15.00 minimum wages being phased in over several years in Seattle, Los Angeles and San Francisco. Two potential 2016 ballot initiatives are underway in Oregon, one that would set the minimum wage at $15.00, the other at $13.50, with local option to go to $15.00. The City of Portland and Multnomah County have adopted a $15.00 minimum wage for their employees.
There also have been industry-specific efforts by unions, especially in the fast-food industry, promoting the $15.00 minimum wage as a “living wage” because so many low- wage and minimum wage workers are older than they used to be and are trying to support families.

Q: What is the origin of Oregon’s current minimum wage?
A: In 2002 Oregon voters approved Measure 25, which raised the state minimum wage to $6.90 and, unlike the national minimum wage, set it adjust annually based on the Consumer Price Index.

Q: Why are local municipalities currently unable to have minimum wages higher than the state’s minimum?
A: The Legislature approved a law in 2001 that prohibits localities from setting their own minimum wages different from the state minimum. This is known as “pre-emption.” Fifteen other states have similar laws.

Q: Why should there be different minimum wages in different parts of the state?
A: The cost of living in Oregon varies greatly across the state. The Center for Women’s Welfare at the University of Washington School of Social Work has developed "The Self- Sufficiency Standard," a compilation of the various costs of achieving very basic self- sufficiency without any public support. Self-sufficiency standards have been computed for 37 states, including Oregon. A self-sufficiency standard was developed for every county in Oregon in 2014. The highest cost counties are those around the Portland area and the lowest cost counties are in the rural areas of the state. The hourly wage to support one adult and two children in Portland is $28.42 compared to $17.85 in Medford.
Costs of living also are increasing in considerably different percentages. The cost of self-sufficiency in Multnomah County has increased by 68% since 2008 but only by 10% or less in 11 mostly rural counties. And the self-sufficiency standard was computed prior to the recent significant increases in housing costs in the Portland area.
There are other methods of computing the differences in cost of living but all models agree that in Oregon the cost of living is significantly higher in Portland than in rural areas and the state average. Most models place the cost of living in Portland at 50-80 percent higher than in rural parts of the state. Due to this variation, Oregon needs a system that allows the minimum wage to vary by city and by region.

Q: Won't it be difficult and confusing to have different minimum wages in different parts of the state and expensive to manage?
A: There are many places in the country where different minimum wages exist side by side with no significant problems. For example, in the Washington DC metropolitan area, which includes the District of Columbia and portions of Virginia, Maryland and West Virginia, with a population greater than all of Oregon's, there are four different minimum wages, ranging from a low of $7.25 in Virginia to a high of $11.50 in the District of Columbia. In New England, six adjacent states have six different minimum wages, ranging from a low of $7.25 in New Hampshire to $11.00 (in 2017) in Massachusetts. There are 12 cities in California with minimum wages higher than the state's minimum wage of $10.00, ten of them in the Bay area, ranging from $10.30 currently to $15.00 being phased in over a period of years.
We found no evidence that local governments will necessarily respond with an unwieldy patchwork of divergent policies. We also found no evidence to support the claims that eliminating preemption would create a significant administrative cost burden. It is possible that eliminating preemption could lead to competing efforts for local minimum wage initiatives, but local governments already face strong incentives to coordinate minimum wage policy and avoid widespread variation that preemption supporters fear.

Q: Why couldn't the state government manage a structure of different regional minimum wages?
A: Creating a state-generated minimum wage policy that accommodates more than one minimum wage for different regions would be very difficult. This does not mean that state management of two or more minimum wage schedules is impossible. In theory, the state could assign a unique minimum wage schedule for Portland and other Oregon cities where the need is most pressing. We recognize that preemption will be difficult to overturn, and a creative and responsive solution at the state level would be better than nothing. If the state legislature is willing to consider solutions that respond to the need for multiple minimum wages, and if preemption is unavoidable, then they should try to implement the best solution available to them.
However, we think that eliminating preemption altogether is the best solution. In the long run, important advantages of local policy ownership are lost under preemption. Professor Paul Diller of Willamette University Law School has argued that preemption inhibits policy innovation, begging the question: why would it not serve the interests of minimum wage opponents to demonstrate the effectiveness of lower minimum wages by applying it in specific places?
Local control would improve the chances of achieving many important minimum wage policy goals. Local control would provide Oregon with the greatest likelihood of minimum wages that reflect Oregon’s geographic diversity. Cities have an incentive to
respond to this opportunity with awareness of the behavior of the other cities around them.

Q: If so many workers are not making living wages, how are they managing to live and support their families?
A: Millions of people are working more than one job. Some people - maybe more than a million - work three part-time jobs. Then there are the government assistance programs, the two most important of which are the foodstamp program (SNAP) and the Earned Income Tax Credit (EITC). There also are other programs that provide assistance with housing costs, nutrition, and child care. SNAP and the EITC account for about $150 billion in federal spending. Oregon also has some assistance programs that supplement the federal ones. Under a number of different scenarios a low income family trying to live on minimum or low wage incomes may be able to receive enough government aid to meet their subsistence requirements.
The EITC program has been popular with both political parties because aid only goes to people who work, and virtually all of it only goes to families with children. About $70 billion is spent on this program, which in simple terms is nothing more than a program that subsidizes employers whose wages are so low their employees must obtain government aid to survive. For example, according to a Congressional committee estimate, employees of the nation's largest corporation, Walmart, a $400 billion company with profits of more than $15 billion, receive more than $6 billion in government aid to make up for their very low wages. Much of that subsidy would not be necessary if Walmart paid living wages to its employees. Is there any logical reason why Walmart should receive this subsidy? Or that any other corporation should?
The fact is that American taxpayers are subsidizing profitable - in many cases enormously profitable - businesses that do not pay living wages to their employees. Would not everyone be better off if living wages were paid and much of the $150 billion in foodstamps and EITC were spent on rebuilding our infrastructure, providing free, or low- cost advanced education or training, and helping new businesses and technologies to be developed?

Q: But aren't businesses, such as fast food companies, paying low wages because their work requires very little skill or education and thus can be done by just about anyone?
A: Just because a job requires little skill does not mean that it does not have value. No private business employs people it doesn't need. Someone has to flip the hamburgers or toss the pizzas, or stock the shelves at Walmart. That work generates profits for the business. It is the value of that work that should determine what it pays and, given the considerable profits of most of these businesses - and the wealth of their owners - how can there be any doubt that the workers who generate these profits should be entitled to wages that provide them a decent living?

Q: Won't increasing the minimum wage cause unemployment as businesses cut jobs to make up for the higher wages?
A: This is one of the classic questions that has generated substantial research over many years. The general consensus today - with a vocal minority - is that there is very little evidence that increasing the minimum wage - if done in reasonable step-ups - causes unemployment. In fact, some of the most recent empirical evidence - an expansion of
restaurant business in Seattle - is that it may stimulate the economy and increase employment because workers with more money spend that money and generate increased economic activity.
Companies do not routinely hire people they don't need. The bigger the company the more efficient they can be in calculating exactly what they need, and hiring no more than that. For most of these large corporations, wages are not their major expense. Most of the studies that have been done of this issue have concluded that increases in the minimum wage have had little or no effect on employment.
In June, 2014, more than 600 economists signed a letter to the Congressional leadership supporting an increase in the minimum wage to $10.10 and stating:
"In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market."
There are situations that need consideration for possible exemptions, carve-outs, or longer phase-in periods.. They include non-profits that may be locked into financing contracts, as well as small, mom-and-pop family businesses where no one is making a lot of money and where increasing prices to offset higher wages may be quite difficult, especially if it had to be done rapidly.

Q: Won't a substantial increase in the minimum wage cause inflation?
A: It may to some extent if there is a substantial increase and if the increase is not phased in over several years, as most jurisdictions are doing. A major increase in the minimum wage will have its greatest effect on industries that employ the largest numbers of minimum wage and low-wage workers, but they may be more able to minimize the impact of the increased cost.
Excessively low minimums allow employers to keep all wages very low, in an environment where low-wage workers will receive public assistance. A low minimum wage is a kind of subsidy to employers of low-income workers and the largest ones are among the most profitable corporations in the world, hardly needing these subsidies.
For a real world example, consider Walmart, the nation's largest employer. From the company's Annual Report, its revenues in 2014 were $473 billion, of which $279 billion was generated by stores in the United States. Operating income was $26.8 billion, of which 83% was gained from U.S. operations. Its wages, on average, are so low that its employees received at least $6 billion in government assistance.
Based on information publicly available about Walmart's wage structure, as well as from its financial reports, raising the minimum wage to as much as $15.00 seems likely to cause an increase in Walmart's annual wage expense of $15 to $18 billion. With Social Security and Medicare withholding the total increase may be around $20 billion. The company's domestic U.S. revenues were $279 billion in 2014. That $20 billion is about 7% of its U.S. revenues. If the increase to $15.00/hour were spread over three years, Walmart could cover the expense by increasing prices about 2.3% per year. That seems like a very reasonable price to pay for a living wage for its employees - and for saving $6 billion annually in federal subsidies.
The overall impact of the influx of cash into the economy would more than offset price increases. By spreading the doubling over several years, employers would have time to adjust, as would the economy overall.

Q: However, the vast majority of businesses do not have the economic power of Walmart. To make up for a much higher minimum wage, won't they raise prices in a highly regressive fashion?
A: Businesses may increase prices but if the minimum wage is phased in, the increases may be minimal. In most industries prices are set by competition, not by labor costs.

Q: What is the philosophical argument for the minimum wage being a "living wage?"
A: Excessively low wages are simply unfair, irrespective of their economic impact. People who work full-time for a living should not remain in poverty, but rather should be able to afford the very basic requirements of an ordinary economic life, particularly housing.

Q: What would be the impact on the level of poverty and government revenues and expenditures if the minimum wage were increased to a "living wage" level?
A: Minor increases in the minimum wage have minor effects. Raising the minimum wage to a "living wage" level would make a significant contribution to the reduction of poverty and save substantial government expenditures. $150 billion is being spent by the federal government on the two major programs, foodstamps and the Earned Income Tax Credit. If the minimum wage were raised to the level of a "living wage" a substantial portion of these programs might be eliminated. In addition, the higher the minimum wage the more workers affected by the increase will be paying in Social Security, Medicare and income taxes.

Q: But isn't it true that the majority of minimum wage workers live in households with a surprisingly high median income, and are not typically heads of households? Instead, aren't they typically first time workers, workers who quickly rise from the minimum wage after acquiring some on-the-job experience, or workers who are marginally employable and would otherwise fall out of the labor market entirely?
A: The majority of minimum wage workers are older than 25 and are trying to support themselves and, in many cases, a family. The pattern has changed from several generations ago. Now the majority of minimum wage workers are trying to support themselves and their families, and opportunities to increase their earnings have declined dramatically.

Q: Doesn't the minimum wage violate the right of contract? Doesn't it prevent people from negotiating wages that more closely align with their needs that they best understand?
A: This is the oldest argument against the minimum wage, one that was prominent before it finally was dismissed by the Supreme Court in 1941 when it ruled that the public interest outweighed the "liberty of contract." The idea that most workers can negotiate contracts with most employers simply is absurd. The minimum wage
protects the bargaining power of low-income workers in an economic relationship that is otherwise dominated by employers. Fewer than 10% of private industry employees are represented by unions today and half the states have right-to-work laws that have reduced the influence of unions.

Q: Doesn't the minimum affect only a small percentage of the total workforce?
A: A major increase in the minimum wage will increase the wages of many more workers than just those at the minimum wage. While only about 3.8 million people (a little over 100,000 in Oregon) work at the minimum wage, almost one-third of all workers are being paid at low-wage rates - less than $12.00/hour. The minimum wage sets a baseline that recalibrates other wages. The effect of the minimum wage is visible throughout the lower end of the wage spectrum, not just for those who earn the minimum wage. A 2013 report from the Congressional Budget office estimated that 16.5 million low-wage workers would benefit from a $10.1o/hour wage, including 900,000 who would be lifted out of poverty. A CNN analysis projected that a $10.10 minimum wage would lift 5 million out of poverty. That probably would not be the case in Portland where living costs are relatively high - about equal to Seattle's. Based on federal wage statistics, if the minimum wage were increased to $15/hour at least 40 million workers would get a raise and for most it would be substantial.

Q: Isn't it possible that a substantial raise in the minimum wage could increase overall employment?
A: A higher minimum wage can increase employment by stimulating the economy. Raising the minimum wage means minimum and low-wage wage workers have more money to spend which means more money ripples throughout the economy. There is a "multiplier" effect generating greater economic activity, increasing overall demand, and then businesses expanding to meet the increased demand, including the hiring of more employees.

Q: Are there benefits to employers who pay living wages?
A: Yes, substantial benefits - reduced turnover and absenteeism, better morale, and better service. Employees who are making a higher wages feel more comfortable and satisfied and they are less likely to quit. This means there would be a lower turnover rate, which results in fewer expenses to hire and train new employees. It also means better performance on the job, better service to customers and less theft.

Q: Doesn't a minimum wage creates a serious drag on overall performance of the economy because Employers roll back the number of jobs they would otherwise offer, and make substitutions in ways that deny access to the workforce and inhibit production?
A: Businesses do not cut production if they are selling their product. And, as discussed earlier, there is no substantial evidence that the minimum wage negatively affects employment.

Q: Isn't the minimum wage is a protectionist policy that unfairly protects the existing workforce at the expense of newer workers entering the market?
A: No, it sets a level below which no wage should be acceptable.

Q: Won't a significant raise in the minimum wage increase labor costs to the point that threatens the viability of small businesses?
A: There is no objective evidence that this is the case except for very marginal businesses in which almost no one is making any money. Then the question is if these businesses need to pay slave-labor wages - which is what the minimum wage is today - in order to survive, should they really survive?

Q: Won't some workers now receiving government assistant lose much of that assistance if there is a substantial increase in the minimum wage and wind up worse off, financially, victims of what is called the "Benefits Cliff?"
A: This is a reasonable concern and it needs to be taken into account in calculating how high the minimum wage should be. The higher it is, the less of a problem this will be.

Q: Don't workers lose valuable training opportunities from entry-level employment when the minimum wage rises? And are not low wage jobs helpful as gateways into the workforce, and teach basic skills that are relevant to any job?
A: Most minimum wage jobs are dead-end jobs and do not require much training or skills, nor do they offer them. By and large minimum wage jobs are not "bootstrap" jobs. Employers that hire workers for higher skill jobs pay more for those workers even if they require training.

Q: As the minimum wage rises don't employers face greater incentives to dodge it, creating a greater challenge to enforcement?
A: The fact that a law may be evaded by some has never been an argument against its validity. The penalties for violating wage and hours laws are very severe and very few employers are going to take the risk of being caught. And those who do will get caught.

Q: Doesn't the argument for raising the minimum wage ignore growth in other kinds of compensation, such as health care, sick leave, incentives, and tip compensation?
A: No, because almost none of the those are available to minimum and low-wage workers, with the exception of tip compensation - and what evidence is there that it is increasing? Some American restaurants are beginning to follow the French example, where employees are paid living wages and diners are not asked to tip.

Q: Don't most good businesses recognize the advantages of paying higher wages without the regulatory burden of a higher minimum wage?
A: Businesses set their wages according to what is competitive in their industry and generally pay no more than absolutely necessary to obtain the workers they need.

Q: Aren't certain industries disproportionately affected when the minimum wage is raised, either because of the size of the affected workforce, or because they cannot respond by raising prices? Examples include non-profit organizations, and companies with a significant offshore revenue base."

A: Some accommodation will have to be made for certain kinds of businesses and organizations. That does not mean they should not pay higher minimum wages, just that how the increase is done, and over what period, may have to be modified for their circumstances.

Q: Even though the minimum wage may not threaten their viability won't higher minimum wages affect long-term profitability?
A: American businesses, especially the large ones, have been experiencing record profits since the Great Recession. A higher minimum wage will generate increased economic activity. They will sell more of their products and services and make even more money.