Hey, Washington! The Pay Is Too Damn Low: The Minimum-Wage War

Giving America’s lowest-paid workers a raise is great for the economy. And even better for Democratic prospects in 2014

The Minimum-Wage War, National Affairs, RS 1204
Illustration by Victor Juhasz
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Nearly five years into the recovery from the Great Recession, the American economy remains fundamentally broken. Inequality is getting worse: Ninety-five percent of income gains since 2009 have gone to the top one percent of earners. Private employers have added more than 8 million jobs, but nearly two-thirds are low-wage positions. The American worker's share of the national income is as low as it's been in the six decades since World War II. But even as most Americans struggle just to tread water, corporate profits have soared to record highs.

Why It's Time to Start Pushing For a Minimum Wage Hike

Worse: The bottom rung of the economy is growing crowded; 3.8 million Americans – the equivalent population of the city of Los Angeles – now labor at or below the minimum wage. And that wage itself has lost more than 12 percent of its value since it was last hiked to $7.25 in 2007, due to inflation. In a more prosperous era, the stereotype of a minimum-wage worker was a teenager flipping burgers, earning a little beer money on the side. But in the new American economy, dominated by low-wage service jobs, fewer than one in four minimum-wage workers are teens. More than half are 25 or older. "The demographics have shifted," says Rep. George Miller, ranking Democrat on the House labor committee. "These are now important wage earners in their families."

As a matter of public policy, the solution is obvious. There are few government interventions that can match the elegance of a higher minimum wage. It boosts the fortunes of the working poor and the economy at large, with minimal trade-offs. Raising the minimum wage does little or nothing to dampen job growth. The Congressional Budget Office estimates that an increase to $10.10 would trim payrolls by less than one-third of one percent, even as it lifts nearly 1 million Americans out of poverty.

Outside of Washington, D.C., raising the minimum wage is not a partisan issue. Supported by more than 70 percent of Americans, the policy achieves both liberal and conservative goals: It alleviates poverty even as it underscores the value of hard work. It reduces corporate welfare even as it lessens dependence on the social safety net. Today, taxpayers are shelling out nearly $250 billion a year on welfare programs for the working poor. Nearly 40 percent of food stamps are paid out to households with at least one wage earner.

And yet, the Republican Party is going all out to portray a mandatory pay hike as just more job-killing nanny-state overreach. "You've gotta totally wipe out this notion of fairness," said Rush Limbaugh. "That's not what a job is. It isn't charity."

The GOP's mysterious determination to wrong-foot itself with the American electorate on the minimum wage is handing the Democratic Party a potent political weapon – one that could make the difference in holding the Senate in November.

California Hikes Minimum Wage And More Reasons 2013 Wasn't the Worst

For Democrats, the politics of a higher minimum wage are as solid as the economics. The issue unites progressives and independents even as it drives a wedge between mainstream Republicans and Tea Party extremists. In his January State of the Union address, President Obama threw down the gauntlet, calling on the GOP to join Democrats in increasing the minimum wage to $10.10 an hour. "Say yes," Obama said. "Give America a raise."

The current federal minimum wage is $7.25 an hour. That represents a pay cut, in real terms, of more than 30 percent from 1968's bottom wage. That decline in the value of the minimum wage has been a key driver of income inequality. "And unlike inequality that's been brought about by technological change or globalization," says Arindrajit Dube, labor economist at the University of Massachusetts Amherst, "we could have prevented it just by pegging the minimum wage to the cost of living."

There is no natural level for the minimum wage. Where it is set is purely a policy decision. In previous decades, the minimum wage kept pace with advances in productivity; as workers created more value for a company, they gained, too. Had the minimum wage tracked productivity gains since 1968, it would now stand above $20 an hour. More telling: Had workers on the lowest rung kept pace with the gains that have accrued to the one percent, it would have vaulted past $30 in 2007.

But there are other more wide-reaching effects of setting the minimum wage below what it takes to scrape by. A family of four trying to live on the earnings of a minimum-wage worker – $15,080 a year – falls more than $8,000 below the poverty line. As a result, today's minimum-wage workers are really expensive for the rest of us. They have to rely on taxpayers to supplement their subpoverty wages.

Essentially, a low minimum wage adds up to a massive stealth subsidy for corporate America. A recent University of California, Berkeley study reveals that the nation's largest fast-food chains earn $7 billion a year in inflated profits because the rest of us pick up the tab for the food stamps, housing vouchers, tax credits and Medicaid benefits that the businesses refuse to cover by paying adequate wages. Big-box stores get an even sweeter deal. A federal analysis of a Walmart Supercenter in Wisconsin found that safety-net subsidies ran approximately $5,500 per low-wage associate. If that's representative, every Supercenter in America is enjoying a rolling bailout of nearly $1 million a year.

Taxpayer subsidies to the working poor make welfare queens of some of the world's most profitable corporations. "The large restaurant chains, the Walmarts – they hold themselves up as captains of the free-enterprise system," Rep. Miller says, "but their whole business plan is dependent on using the social safety net."

One of the most expensive programs that taxpayers fund is the Earned Income Tax Credit – which doles out $60 billion in welfare payments to poor working parents every year at tax time. The EITC lifts millions out of poverty. But thanks to the inadequacy of the minimum wage, it also creates a perverse incentive. The EITC subsidizes poverty-wage work, so businesses can – and do – drive wages even further below the poverty line.

More than one-third of the EITC is pocketed by employers through artificially low labor costs, according to a Princeton economic analysis. Worse: The EITC actually hurts many single workers without kids, who don't qualify for the subsidy and are made strictly worse off by its existence.

A rising minimum wage is a tide that lifts all ships. This is common sense: If a shift worker gets a raise and is now making what the line manager has earned, the line manager is also going to get a bump in pay. Raise the minimum wage, and the bottom 20 percent of wage earners soon enjoy larger paychecks, says Dube of UMass.

A $10.10 minimum wage would boost the incomes of 27.8 million workers, according to an analysis by the Economic Policy Institute. Far from the image of a teen flipping burgers at Jack in the Box, the median worker who would benefit is a full-time working woman in her thirties, responsible for half of her family's income.

Because these workers spend all the money they make, the $35 billion in extra wages they would earn as $10.10 is phased in would get pumped right back into the U.S. economy – doing far more to stimulate growth than if the same dollars were bloating some billionaire's bank account.

At $10.10, a full-time worker would earn $21,000 a year. If not a living wage, that's at least enough to pull a family of three above the poverty line. According to Dube's math, this boost in wages would drive a 10 percent reduction in poverty – pushing the official poverty rate back down where it was before Bear Stearns.

Skeptics of minimum-wage hikes have long argued that increased wages cost jobs for those who need them the most. As House Speaker John Boehner put it, "When you raise the price of employment, guess what happens? You get less of it." His line is echoed by many of the party's potential 2016 presidential contenders. Texas Sen. Ted Cruz calls it "wrongheaded"; Kentucky Sen. Rand Paul claims it will hurt the "least-skilled people in our society"; and Florida Sen. Marco Rubio declares that "raising the minimum wage does not grow the middle class."

For other Republicans, blocking an increase in the minimum wage isn't radical enough; they argue America must repeal the wage floor altogether. Texas Rep. Joe Barton recently declared that the minimum wage has "outlived its usefulness." In a sign of how far the national GOP has tilted to the extreme right, such outré notions are now being advanced by senators long regarded as moderates. Last June, Lamar Alexander – the GOP's ranking member on the Senate labor committee – announced, "I don't believe" in the minimum wage, insisting that employers should be able to get away with paying $2 an hour.

Such arguments may have intuitive appeal, but in recent years the conventional wisdom has been upended. The minimum wage is the most exhaustively researched subject in economics. Social scientists have scrutinized bordering counties that run along state lines – think Washington and Idaho – measuring what happens when one state boosts its minimum wage and the other doesn't. The results are in: A 2013 meta-analysis of minimum-wage studies by the Center for Economic Policy and Research concludes that higher minimum wages "have no discernible effect on employment." To the degree that mainstream economists still debate the topic, says Dube, it's whether the jobs impact is "fairly small or something close to zero."

Minimum-wage foes – prominently Tyler Cowen, a free-market economist who directs the Koch-funded Mercatus Center – like to point to a controversial 2009 study by University of California, Irvine economist David Neumark, which argues that high minimum wages are disadvantageous to teen job seekers. Yet even Neumark himself does not oppose minimum-wage hikes. "It doesn't mean we shouldn't do it," he said, announcing his study. "If 10 workers lost their jobs but 1,000 families were lifted out of poverty, we'd probably say that was a pretty good trade-off."

The trade-offs of a $10.10 minimum wage came into sharp relief in February, when the CBO projected that such an increase could reduce payrolls by 0.3 percent, or 500,000 jobs. If accurate, that jobs number is nothing to scoff at. But for a sense of perspective, consider that the CBO also estimated that the GOP-led sequester killed 750,000 jobs last year, providing zero benefit to the economy. In contrast, the CBO minimum-wage report calculates that for every disadvantaged job seeker, 33 workers would receive a fatter paycheck. Taken as a group, the nation's low-wage workforce would have an extra $31 billion to spend every year, stimulating the economy. "The bottom line from the CBO report," says Larry Katz, a Harvard economist, "is that for the vast majority of Americans, an increase to $10.10 is a big win."

Nearly all minimum-wage jobs – greater than 85 percent – are now found in restaurants, retail, nursing homes and office buildings. Jobs loading up the deep-fat fryer, changing bedpans and mopping floors can't be shipped to Bangladesh or cheaply automated. The dark reality of the American economy today is that globalization has already done its number on us. "These are the jobs that are left, and they're left for a reason," says Dube. "Barring teleportation," he says, laughing, these jobs will have to be filled in America even at higher wages.

Counterintuitively, those higher paychecks can create benefits for the businesses that write them. Better pay leads to quicker hiring, reduced turnover and happier workers. The success of high wage discount retailers like Costco demonstrates that livable wages and low prices aren't mutually exclusive. But even if every penny of increased labor costs were passed on to shoppers, the results wouldn't give anyone sticker shock. A UC Berkeley study found Walmart could finance a pay hike to $12 an hour for its nearly 1 million low-wage associates by boosting prices just 1.1 percent – at a cost to the average shopper of just $12.49 a year, or the price of a bag of Cat Chow.

Minimum-wage hikes haven't always been held back by partisanship. George W. Bush signed the last increase into law in 2007. But with the national GOP wildly out of step with the American public on this issue, Democrats are pressing their advantage. This is not a new playbook. The minimum wage proved its worth as an off-year wedge issue as recently as 2006, when Claire McCaskill ran blistering ads in her Missouri Senate campaign against Republican Jim Talent, describing him as the kind of politician who "votes 11 times against increasing the minimum wage but takes six congressional pay raises." On Election Day, boosted by unusually high turnout, McCaskill secured a 50,000-vote victory.

Seeking to shore up the most vulnerable incumbents in the Senate, labor activists are now pushing state minimum-wage ballot initiatives in Alaska, Arkansas and South Dakota. Quite apart from the obvious economic benefits, the political goal is to give the party's base voters – who often sit out nonpresidential elections – some skin in the game on Election Day.

Proving that the issue can be used to play offense as well as defense, Kentucky Democrat Alison Grimes has turned the minimum wage into the driving issue of her candidacy against Senate Majority Leader Mitch McConnell. The Republican is facing a well-funded primary challenge from the far right, and has chosen to prove his conservative mettle by denouncing a minimum-wage increase as the "last thing we should do."

Noting that 250,000 Kentucky women would benefit from a raise to $10.10 an hour, Grimes has countered that voting for a minimum-wage increase would be her first priority. In early polling, the untested Democrat has leapt to a four point advantage over Kentucky's 30-year incumbent.

The political battle lines have been drawn. But is $10.10 really the best that America can do by its poorest workers? The experience of other advanced democracies suggests that the minimum wage could rise far higher still. In Australia, the minimum wage is now greater than US$16 an hour, yet the unemployment rate Down Under – 5.8 percent – is significantly lower than our own.

Nationwide, there is one high-profile campaign to push the minimum wage significantly above $10.10. Ironically, this leadership is coming from the conservative end of the spectrum. Ron Unz, a Republican multimillionaire from Silicon Valley, is advancing a ballot measure to hike California's minimum wage to $12 an hour.

Unz is best known as a foe of illegal immigration, and he says he was initially attracted to the minimum wage as a means to put U.S. citizens back to work in the kinds of jobs Americans supposedly won't do anymore. But Unz has since embraced livable wages on the economic merits alone – arguing that no American should be forced to subsidize the labor costs of profitable corporations. Unz has especially harsh words for those, like Florida's freshman senator, who would increase the Earned Income Tax Credit instead of forcing Walmart to pay honest wages. "Why should all taxpayers pay for massive, hidden government subsidies?" he asks. "But that's what Marco Rubio and fellow Republicans are calling for: an increase in welfare spending!"

In the past, conservative opposition to higher minimum wages was premised on the fear that they would drive an increase in joblessness, creating greater dependency on the welfare state, Unz says. But now that hard economic data prove the opposite case – that higher hourly wages don't kill job growth and simultaneously reduce reliance on Uncle Sugar – Unz believes there's no reason this policy shouldn't unite both bleeding-heart liberals and Mitt Romney conservatives, who fret about the freeloading of the 47 percent of Americans who don't pay income taxes.

"There are a lot of conservative reasons," Unz says, "to increase the minimum wage."

This story is from the March 13th, 2014 issue of Rolling Stone.

From The Archives Issue 1204: March 13, 2014