Minimum Wage Increase: Bush Did It, So Why Can't Obama?

According to a new study by the liberal Economic Policy Institute, minimum wage workers today earn two dollars less than a minimum wage worker of more than four decades ago ... specifically, 1968. These findings are entirely consistent with what EPI has reported in the past, ultimately further illustrating the gap in inequality, social mobility, and productivity against earned wages, suggesting its time we again consider raising the minimum wage.

With many Republicans openly opposing President Obama's proposal to raise the minimum wage another two dollars — literally the same amount it was raised under President Bush — there's no current hope for an increase on the horizon. Many Republicans defend their position, claiming that raising the minimum wage would have disastrous effects on our economy, if not the very people the people the policy were intended to help.

The most useful tool Republicans wield in this debate is a simple, but elegant, thought experiment:

A business' income is determined by its ability to sell products or services. The cost of these products or services is reflective of the costs for resources, such as labor, and the need to earn profit for future investment. Raising the minimum wage raises the cost of labor, so, either companies have to raise prices to compensate, or they have to lay people off, leaving fewer people to do the same amount of work, and more people unemployed.

Beauty, eh? However, the problem with simplicity is that it does just that: mask the complexities of the problem, and thus, muddy the real outcomes. As multiple researchers have shown, and not just recently, raising the minimum wage does not seem to have an effect on employment, but instead is absorbed by the system in many ways. Rising labor costs can potentially raise prices or shrink take home pay, but they can also be absorbed by the businesses as either a reduction in profits, increased efficiency, deductible tax credits, or a variety of other methods.

For example, Byron, Salvatori and Taylor of the Institute for Social and Economic Research found while studying the UK that a minimum wage increase had little effect on employment retention even during the recession. Even where they find an affect may have occurred in 2006, they find an increase in employment retention instead of a decrease. Overall, they found businesses may have reduced work hours for youth by as much as four hours — potentially diminishing their weekly earnings — but that for adults, the results were a mixed bag:

"For adults, we do not find a systematic effect of the [minimum wage increase] on basic hours across the years, but there is some evidence of impacts (both positive and negative) in specific years."

Ultimately, the authors concluded that they need more data.

An article by David Metcalf, in the Journal of Industrial Relations, finds that this non-change in employment can be explained by shifting the costs to various points in the system, instead of just directly onto the employee or consumer. Metcalf finds that costs were absorbed by "an impact on hours rather than workers; employer wage setting and labour market frictions; offsets via the tax credit system; incomplete compliance; improvements in productivity; an increase in the relative price of minimum wage-produced consumer services; and a reduction in the relative profits of firms employing low paid workers."

In the United States, an article by Hirsch, Kaufman and Zelenska found similar results, as we adjusted to our most recent minimum wage increase. The authors examined restaurants in Georgia and Alabama for three years and found, surprisingly, no effect on employment or — in contrast to our previous example — hours. Instead, the authors found that:

"Cost increases were instead absorbed through other channels of adjustment,
including higher prices, lower profit margins, wage compression, reduced turnover, and higher performance standards."

While it differs somewhat from our example in the UK, the principle is still the same; increased costs will not hit one point or another exclusively, but instead be distributed as efficiently as possible to minimize negative impacts. This is an understanding that can be explained in terms just as simple as those of the Republican argument:

Raising the minimum wage raises costs, but it does not mean workers or consumers shoulder most of the burden. Businesses have options, and the best option is to minimize negative impacts for both their employees — so that they remain motivated, productive, and reliable — and the consumer. Minimizing negative impacts means keeping good staff, optimizing internal processes, and maintaining product integrity to remain competitive.

It's important to note that there is still a documented increase in costs, and still a documented increase in prices or potential decrease in pay. However, as explained by Sara Lemos in a 2004 study of the effects of minimum wage hikes on prices, the benefits of raising the minimum wage vastly outweigh the consequences. Per Sara's research, a staggering 10% increase in the minimum wage yields only a 4% increase in the price of food, and a 0.4% increase in prices overall.

Ultimately, all that this means is that the Republican argument is true, but only in the most shallow of senses. Costs will rise, and thus so will prices, but an economy is a complex system with various points in which costs can be sequestered. What we need to evaluate is whether these costs are offset by gains. And so far, that looks to be the case.