America’s complicated relationship with the minimum wage

America’s complicated relationship with the minimum wage

Raising the U.S. minimum wage is a powerful political idea that will increase both sales and labor costs for businesses.

The debate over increasing the minimum wage in the U.S. keeps getting more complicated. No longer is it a trade-off between losing jobs or raising wages.

President Obama used this year’s State of the Union speech to tout the centerpiece of his economics agenda: raising the minimum wage to $10.10 per hour, up 40% from its current $7.25 rate. As the debate has continued since then, Republicans have raised concerns over its interference with business. But the relatively quiet front from some of the U.S.’ largest employers is becoming indicative of a more nuanced opinion on the legislation.

Increased labor costs, but increased sales too?

Unsurprisingly, Wal-Mart employs the most workers who would receive a new minimum wage. Company-wide, its average wage is just $8.81. Along with Wal-Mart, other fast food and retail companies are the largest low-wage employers: Yum! Brands (owners of Taco Bell, Pizza Hut, and KFC), McDonald’s (including franchisees), Target, and Sears round out the top five.

These companies have attempted to avoid any negative publicity from their positions on the president’s proposal, however they actually feel. The exception is Yum! Brands, which has actively lobbied the Senate against action on minimum wage and warned investors of an adverse impact on profits. Instead, industry groups, which have less public recognition and more connections with policymakers, have been responsible for most of the strong lobbying against the proposal.

Wal-Mart has taken a different approach in remaining neutral.  Until a few weeks ago, Wal-Mart had even toyed with the idea of supporting a gradual increase to the minimum wage as it did in the mid-2000s. Their reasoning lies in the fact that employees with higher incomes will spend more money. Since Wal-Mart is the nation’s largest retailer, especially among low-income individuals, much of the increase would find its way back into their cash registers.

The impact could be relatively large, if anything like that of the cut in food stamps last year. Profits fell 21% in the last quarter of 2013, in part because many Wal-Mart customers saw a cut in their food stamp allowance.

Estimated impacts

Wal-Mart’s story is indicative of the overall impact of the minimum wage hike. The Congressional Budget Office (CBO) estimates that the law will increase the incomes of 16.5 million workers and decrease the number of Americans in poverty by 900,000, but also decrease employment by 500,000.

Naturally these are just estimates and there is a large margin of uncertainty in the numbers published, but most observers think the results are reasonable. Reviewing the academic literature on minimum wage shows that the impact on total employment is negligible.

In some sense, Republicans and industry groups are right that there will be negative consequences for employment. At the margin, there will be employees whom it doesn’t make sense to hire or keep on board. But this only looks at half the equation; it ignores the ‘accelerator effect’ that the increased income for cash-strapped households will be spent very quickly. How and where this money will be spent is uncertain, and likely part of the reason industry groups are unwilling to embrace the increase.

A more efficient way to bolster incomes? 

Even with the CBO’s conclusions seeming mildly positive for the economy as a whole, the private costs that Yum! Brands emphasizes are real. They are also the reason many economists prefer expanding the Earned Income Tax Credit (EITC), either instead of or as well as raising the minimum wage. The EITC works by directly redistributing cash to the working poor without changing the wages employers pay. It has been very successful since it was first implemented in the 1970s.

EITC expansion is less likely to become law than the $10.10 minimum wage, however. The Democrats have been working for several years to forge a strong enough coalition to push a minimum wage increase, and it is too late to move the goal.

Further, the messaging of the minimum wage is much simpler for politicians – pay Americans a fair wage – than a complicated tax form. The messaging from this coalition is finally hitting a nerve; the American public overwhelming supports an increase now, too.

Republicans, who have traditionally supported the EITC, no longer do either. The Republicans’ House budget replaces some of the EITC with a credit targeted only to families, leaving out those without children. If Republicans opposed minimum wage because it interfered with the private sector, then they have opposed the EITC because it does the exact opposite: It leaves the private sector alone but leaves the government to fund the anti-poverty measure. Since both EITC and the minimum wage will be difficult to pass through Congress, it’s an easy bet that the Democrats will continue to focus on the minimum wage.

Despite its imperfections, the minimum wage debate is one they can win, since they have already won the messaging battle.

Categories: Economics, North America

About Author

Alex Christensen

Alex is an Editor at Global Risk Insights, who also currently works in investment research. His work on political risk and economic policy has appeared in many forums, including Business Insider, Seeking Alpha, & The Emerging Market Investors Association. He holds a Master’s in Economics from the London School of Economics and BA from Washington University in St. Louis.