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June 06, 2014
Raising the minimum wage: The discussion continues

Should the federal minimum wage be raised to $10.10 per hour? The topic has been under discussion for some time, and both sides are passionate in their positions. Raising the minimum wage to a point that, along with tax credits, would keep a family of four with one full-time worker above the federal poverty line would either:

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  • Cause a devastating ripple effect throughout the economy, or
  • Improve the financial situation of society’s most vulnerable.

Which answer is more correct remains to be seen. To shed light on the discussion, we consulted with Stephanie R. Thomas, PhD., from the Institute for Compensation Studies at the ILR School of Cornell University. Thomas is a labor economist, and is a favorite source for clarifying murky economic concepts, especially those that impact employers and their workforces.

A brief history of the minimum wage

The federal minimum wage was instituted in 1938 as part of the Fair Labor Standards Act (FLSA) at 25 cents per hour. It now stands at $7.25 per hour, although states may set their own minimum wage, which currently range from none to as high as $9.32. Some local jurisdictions define their own minimum wage; San Francisco, for example, has a current 2014 minimum wage of $10.74 per hour.

People under the age of 25 represent 60 percent of minimum wage workers, according to James Sherk, Senior Policy Analyst in Labor Economics at The Heritage Foundation, and they are not generally their family’s sole breadwinners. Two-thirds of them are enrolled in school and are working part-time, with a family income more than $65,000 a year.

Still, there are many over the age of 25 who work minimum wage jobs. The Heritage Foundation maintains that most of them earn well above the poverty line, though, on average $42,500 annually compared to the federal poverty level of $23,050 for a family of four.

The position of this conservative think tank is that the minimum wage is a learning wage. “Minimum wage jobs are learning wage jobs – they teach inexperienced employees skills that make them more productive,” Sherk said in his June 25, 2013, remarks before the Health, Education, Labor and Pensions Committee of the U.S. Senate. “They are the first step on many workers’ career ladders.

“The notion that workers are trapped earning $7.25 per hour for much of their working lives is mistaken and ignores the primary value of minimum wage jobs. Over half of Americans started their careers making within one dollar of the minimum wage. Over two-thirds of workers starting out at the minimum wage earn more than that a year later,” he testified.

The President’s position

The White House sees things differently. A statement posted February 12, 2014, confirms President Obama’s support of raising the minimum wage to $10.10 per hour, calling the move a “smart business decision.” It goes on to say, “An extensive body of research suggests that giving a raise to lower-income workers reduces turnover and raises morale, and can thus lower costs and improve productivity.”

The statement refers to a presentation by the Council of Economic Advisors, which brings out statistics and reaches conclusions that are significantly different from those quoted by The Heritage Foundation. “Only 12% of minimum wage beneficiaries are teenagers and the remainder of the beneficiaries include a wide cross section of families with children, couples and others,” it says. “Many economists now believe that a substantial portion of the cost to employers of minimum wage increases is offset by savings from reduced employee turnover and higher worker productivity.

“Moreover, in the short-run in an economy that is still demand-constrained, raising the minimum wage will increase the purchasing power of a vital segment of workers and contribute to stronger overall economic activity.”

Both arguments have merit

Cornell’s Thomas says both sides make valid arguments. She cites a Brookings Institute report. “They have something called the Hamilton Project, which looks at these kinds of issues – income, employment, things like that. They estimate that an increase in the minimum wage could raise wages of up to 35 million people, which is almost 30% of the workforce. That’s a pretty big deal.”

Employers should prepare now

That would result in compression of wages at the lower end – the concept that people making at or around $10.10 an hour may end up making near the same amount. Employers would need to make decisions about how to treat those workers. “If we have to increase pay for all the people who are now below $10.10, that puts upward pressure on our labor costs,” Thomas says.

And what about the people who make more? “We want to try to minimize the impact of the increase on labor expenses, so we don’t want to have to increase everybody’s salaries. But is it really fair to hire somebody at a starting wage of $10.10 when somebody else has been here for 3 or 4 years and is making $10.50 now? There are all kinds of potential impacts on things like employee perception of fairness and pay equity. It could be a real morale problem.

“Employers are likely to be resistant to increasing everyone’s pay. If you have employees who are making $3 an hour more than the current minimum wage, and employees making $5 an hour more, companies are going to be reluctant to preserve that $3 or $5 difference because then their labor costs would explode.

“There are a lot of potential problems for employers that are difficult to measure quantitatively,” Thomas continues. “It’s difficult to measure the impact on things like employee engagement. We know that some people are going to feel worse about their pay, but what is that going to really translate into? Will there be increased sick days when people aren’t really sick, shirking, even sabotage?

“Even if employers do try to combat wage compression by increasing everybody’s salaries, then that’s going to have inflationary pressures; if everybody’s wages go up, then all of the products they buy – gasoline, food, housing – those are going to rise, too. So in real terms, we’re probably not going to be in much better shape than where we are right now.”

Increase in lawsuits possible

She also points out the potential for wrongful termination lawsuits, as employers make decisions about who to keep and who to let go. “I don’t know for sure if it will happen, and in fact we don’t know for sure that the minimum wage will go up. But it would not surprise me to see an uptick in wrongful termination lawsuits if it does. There is going to be some sort of an employment impact, so companies may have to downsize, and anytime we have downsizing and massive layoffs, there is an uptick in wrongful termination lawsuits.

“Employers would be best positioning themselves to start thinking about what they might do, how they might structure things, what criteria they might use, if the minimum wage does go up,” Thomas advises. “It’s just a good time to review the kinds of performance evaluation documentation you keep, how you’re evaluating people, whether you have the information you need if you were forced to make some of these decisions.

“Overall, I think it’s going to be a balancing question. Do the gains outweigh the losses? Those who lose their jobs will likely be unemployed longer and are going to have a harder time finding employment, because the market would constrict. And if we have to make layoffs, it may not even be the minimum wage people who are laid off. It might be that instead of having 3 middle managers, they decide now we’re only going to have 2. That’s going to be somebody in their 40s or 50s who is displaced, and it’s harder for them to secure another job.”

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