The Agenda

The President’s New Minimum Wage Proposal: From $9 to $10.10

In 2013, President Obama proposed an increase in the federal minimum wage from $7.25 to $9. Last night, the president proposed increasing the federal minimum wage from $7.25 to $10.10. That is, while the president called for a 24.1 percent increase in the federal minimum wage in 2013, he is now calling for a 39.3 percent increase. (I won’t speculate as to whether he will call for an even higher increase in the minimum wage in 2015.) So what has changed from 2013 to 2014? We have to assume that the Obama administration put a great deal of thought into the wisdom of its proposal to increase the federal minimum wage last year, yet the president and his allies seem to have concluded that its old proposed increase was in fact much too small. Are there some new facts about the world that might have prompted this change? 

The unemployment rate has declined from 7.9 percent in January to 6.7 percent of December of last year, but hardly anyone believes that the labor market is in good shape, particularly for less-skilled workers. For workers with less than a high school diploma, the unemployment rate declined from 12.3 percent in December of 2012 to 9.8 percent in December of 2013, and for workers with a high school diploma it declined from 8.1 percent to 7.1 percent over the same vulnerable. This less-skilled group is greatly overrepresented among workers earning the minimum wage, and wages close to it, so the “tightness” of the labor market for the less-skilled seems like a relevant consideration. Keep in mind that the unemployment rate reflects people who are actively searching for work. It could be that a higher minimum wage will attract more workers into the labor market, including workers with stronger skills. Yet a higher minimum wage could also make it more difficult for workers with limited skills to get on the first rungs of the jobs ladder. My question for the president would be whether he believes that the labor market for workers with less than a high school diploma has tightened enough over the course of 2013 to suggest that an increase in the federal wage floor will have no impact on net job creation for the least educated U.S. workers. 

One development over the past year is that during the 2013 legislative session, 23 states and the District of Columbia introduced legislation to increase their minimum wages, and four states (California, Connecticut, New York and Rhode Island) enacted legislation that has taken effect this year. Though California is scheduled to implement a $10 minimum wage that will take effect in 2016, no other state has proposed a minimum wage as high as the president’s proposed $10.10 minimum wage. The sophisticated case for minimum wage increases tends to emphasize that minimum wage increases don’t appear to do much harm at the levels we’ve seen so far. That is, because we haven’t seen really dramatic increases in minimum wages at the state level, we can’t really assess the impact of such changes. What we do know (so goes the sophisticated case) is that modest increases don’t appear to make much of a difference. The 39.3 percent increase in the federal minimum wage proposed by the president seems like a fairly significant increase, and I’d be curious to see how much of the recent minimum wage research applies to increases of this magnitude. Because there has been considerable movement at the state level, the federal minimum wage is applicable to a relatively small number of workers. What the president is proposing is a federal minimum wage that will override every current state minimum wage. His earlier proposal would have left the federal minimum wage slightly below the state minimum wages in Washington and Oregon, identical to the minimum wages in California as of July of 2014 and New York state as of the end of 2015. Is it reasonable to conclude that research that centers on comparatively modest increases in state minimum wage will be entirely applicable in this case?

If you believe that state minimum wages reflect the local political consensus regarding the appropriate balance between the costs and the benefits of preventing employers from offering low wages and preventing workers from accepting them, it is noteworthy that while the president’s 2013 proposal would override this consensus in all but four states while his new proposal would override it in all of them, with the exception of California in 2016. The president seems to believe that lawmakers in all states, with the partial exception of California, have not weighed the evidence properly, and that variation across local labor markets is not reason enough to establish different wage floors in different jurisdictions.

I recommend consulting Richard Florida’s chart of median wages across major U.S. metropolitan areas. Florida is an advocate of a large increase in the minimum wage, yet his chart illustrates that the wage gap between low-wage metropolitan areas like Orlando-Kissimmee-Sanford, Florida, where the median wage is $17.86, and high-wage metropolitan areas like San Jose-Sunnyvale-Santa Clara, California, where the median wage is $31.43, is significant. This wage gap reflects, among other things, a productivity gap. And the president’s proposed federal minimum wage will be higher than 50 percent of the median wage in a large number of U.S. metropolitan areas, many of which are in the South, a region that has historically had lower productivity levels than the rest of the country. 

The president’s minimum wage proposal brings to mind (once again) the concept of cartel federalism. Consider that if California raises its minimum wage, it is possible for states with somewhat lower minimum wages to attract low-wage employment. But if the federal government sets a statutory minimum higher than that of any state, including California, states will no longer be able to compete along this dimension. Some will no doubt see this as a positive development, as it will prevent a “race to the bottom.” It is worth keeping in mind, however, that a higher federal wage floor might make it harder for states with large numbers of less-skilled workers to increase employment levels over time. (For example, the economists Jonathan Meer and Jeremy West have found that while increases in state minimum wages don’t lead to short-term job losses, they do appear to reduce net job creation.)

Defenders of the president’s minimum wage increase point to the fact that the value of the minimum wage has deteriorated over time. This is true. The Census Bureau uses the CPI-U-RS index for historical analyses, and it finds that in 1968, the value of the minimum wage was $9.25 (and not the $10.60 that you’d find under CPI-U, an index that is widely believed to overstate inflation). So last year, the president proposed almost raising the federal minimum wage to its highest level; now he is proposing that we raise the minimum wage to a level that is roughly 9.2 percent higher than its highest historical level. 

This might seem reasonable enough given that we are a more affluent country. Yet we are a different country along many different levels, e.g., the labor market is far more inclusive now than it had been in the past, when women were largely excluded from the labor force, through active discrimination and norms that discouraged women’s work, and when less-skilled immigrants represented a far smaller share of the workforce. In 1970, 4 percent of the U.S. population was foreign-born; as of 2013, the foreign-born share has increased to 13 percent, which is to say that it has more than tripled. In a related vein, the share of U.S. residents over the age of 5 with limited English language proficiency has increased dramatically in recent decades — by 80 percent from 1990 to 2010, when it reached 9 percent of the over-5 population. 

It could be that increasing the minimum wage by a substantial margin will have no material impact on the employment prospects of workers with limited English proficiency, workers with less than a high school diploma, workers who have been unemployed for six months or more, and ex-offenders (a population that has increased dramatically since the 1960s, and faces enormous difficulties in reintegrating into the formal labor market). It could be that increasing the minimum wage will not have a much larger negative impact on employment levels in low-productivity, low-wage regions, thus obviating the case for a more decentralized approach. And it could be that the difference between a 24.1 percent increase in the federal minimum wage and a 39.3 percent increase in the federal minimum wage is so trivial as to not require any justification. I suppose I’m a bit skeptical.

It is worth noting that none of these criticisms apply to measures like creating a federal wage enhancement designed to increase the take-home pay of all low-wage workers, including childless adults. President Obama referenced Florida Sen. Marco Rubio’s suggestion that the EITC’s treatment of childless adult workers ought to be revisited, yet he failed to appreciate the ways in which wage subsidies are meaningfully different from minimum wages — including minimum wages that will impact Orlando-Kissimmee-Sanford, Florida very differently than jurisdictions in other parts of the country. There is good reason to believe that if we want to “give America a raise,” we should do it through something like a federal wage enhancement. 

(The inflation rate over the last year has been a modest 1.5 percent. But perhaps the president has joined the ranks of the “inflation truthers.”)

P.S. I should specify that the president has endorsed the Harkin-Miller minimum wage bill, which will raise the minimum wage in three steps over three years.


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