One of the economic debates already shaping up for the 2016 presidential election is over the efficacy and benefit of increasing the federal minimum wage and encouraging states to follow suit. While such a debate over a real economic issue would be a refreshing departure from the ideological goop we generally get from presidential campaigns these days, the real concern should be not over minimum wages, but over how to ensure a living wage for all American workers.
First, though, the minimum wage: possible 2016 presidential contenders New Jersey Governor Chris Christie (R) and New York Governor Andrew Cuomo (D) have strongly opposite minimum wage views that could foreshadow the economic policies of a future presidency. An instructive post on the blog of the progressive Roosevelt Institute highlights those governors' differing economic views, noting that Christie vetoed a minimum wage increase in New Jersey while Democrat Cuomo has called for a modest minimum wage increase in New York.
Christie shares the general supply and demand view argued by conservative economists that when minimum wages rise, low wageworkers get priced out of the market and unemployment rises. Cuomo maintains the opposite position, saying that, increasing the minimum wage leads to greater economic growth. Low-income individuals spend a larger percentage of their income than higher-income earners and salary increases in low wage occupations lead to increased demand for goods and services.
Conservative economists like to talk about an equilibrium wage, essentially a market-derived wage balancing available jobs and workers. Those economists contend that, when the minimum wage is set higher than the equilibrium market price for unskilled labor, unemployment results because a minimum wage above the equilibrium wage would increase wage costs without increasing profits — thus inducing employers to hire fewer workers.
Does this happen?
The evidence is equivocal at best. In fact, a 1992 study in Christie's home state by economists David Card and Alan B. Krueger, concluded that an increase in the minimum wage had actually increased employment in New Jersey fast food restaurants. In fact, a blog post from The Hill's Congress Blog says, "empirical studies even before Card and Krueger's landmark New Jersey study found no increase in the unemployment rate for teens and young adults from a 10% rise in the minimum wage, while it was clear that higher wages were bringing housewives into the workforce."
There are a variety of possible reasons for this, one of the strongest coming from the idea that minimum wages generally settle at about the equilibrium point where labor supply and demand would bring them anyway.
The debate is ongoing and facts are unlikely to sway progressive and conservative sides from the economic metaphors they adhere to. Frankly, I don't think the minimum wage issue matters nearly as much, though, as the far bigger one of ensuring that all Americans have the opportunity to earn a real, living wage. A living wage is defined as that which can meet the basic needs to maintain a safe, decent standard of living within the community and have the ability to save for future needs and goals.
What's the difference between a minimum wage and a living wage? My state of California has set the minimum wage at $8.00 an hour, which is $.75 per hour above the federal $7.25 minimum wage. For someone working a 40-hour week, California's minimum wage comes to a before tax income of $16,640 a year. A calculator created by MIT economists shows that the minimum necessary living costs for food, medical care, transportation, and housing for a single working person in California is $23,295 a year. Add a child, and the minimum living wage costs rise to $47,212 a year. Using this calculator you can plug in your own state, county and city and see what the MIT calculation of a minimum living wage for that location is. A number of communities in the U.S. have passed living wage laws. San Francisco's – which applies to almost all workers in the city – was $10.24 in 2012 and is indexed to the CPI to "prevent inflation from eroding its value."
As to the effects of a living wage, a piece from the Economic Policy Institute notes that living wage laws have had little impact on the cost of public sector contracts upon which most living wage laws in the country focus. I imagine that is because such contracts factor in living and benefit costs so that the living wage for such contracts is already at the equilibrium point. A Johns Hopkins University study in Baltimore found that for the city's 1994 first-in-the-nation living wage law — for 26 living-wage contracts that could be directly compared before and after the law went into effect — the aggregate cost increase to the city amounted to 1.2%, less than the rate of inflation.
Other forces are also at work. China, where much of U.S.' manufacturing has moved, is seeing a rise in living standards that is boosting wages, narrowing the wage differential between Chinese and American workers and starting a trickle of jobs moving from there back to the U.S. The result will likely be an increase in U.S.' manufacturing and also a reduction in downward wage pressures created by off shoring.
So, in the end, it may well be that market forces will render the minimum wage issue moot. But that question itself calls for further action on other key economic issues, at the core of which is the continuing increase in wealth inequality in the U.S. But that is a question for another discussion.