"Raising the minimum wage tends to be more popular with the
general public than economists." – Christina Romer
It's rarely a good time to be a
low-skilled worker. Right now, here in the land of the evaporating American
Dream, it's a downright terrible time.
Low-wage, low-skill workers are at the
bottom of the proverbial 99% heap of us. Who are low-wage workers? The roughly 21
million workers who earn between the minimum wage and $10 an hour are
largely young, lesser educated and without children. Low-wage workers represent
13.5% of the US laborforce.
In September, the Census Bureau reported that
real (inflation-adjusted) median household income in 2012 was $51,017. Unlike
previous years, this income level didn't fall from 2011 (a small help), but
it's no higher than it was 30 years ago and 9% lower that it was in 1999 (a
larger problem). The bleakest part of this Census report was that since the
economy began recovering from the Great Recession in 2009, 95% of the economic
gains have gone to the richest 1% of people. The bottom 75% of income-earners
(roughly, families who earn less than $89,000/yr) are
making considerably less than they had been, due to higher unemployment and
stagnated wages.
In other words, economic inequality is
still very much alive and growing in the US and making low-wage workers' lives
that much more challenging. The US Gini Index[1]
in 2010 was 46.9%. In 1990, it was 42.8%. Most recently, the US Gini Index was
ranked 89
nations below (meaning more unequal than) Sweden's which was 23.0% and
the world's lowest.
What can be done about this?
Economists are of several minds with regard to possible solutions[2].
President Obama proposed in February
that the Federal minimum wage be increased to $9/hr (by the end of 2015) and
tying it to the cost-of-living. For liberal economists the minimum wage should have
been raised some time ago, but better late than never. The current Federal
minimum wage is $7.25/hr and has been unchanged since 2009. Consumer prices
have increased 8.4% since 2009.
A higher minimum wage level would
increase the income of low-skilled, entry-level workers who hold minimum-wage
jobs. The current Federal minimum wage's annualized income is $15,080. The 2013
federal poverty
level for a single person is $11,490/yr for a family of 2 people, it is
$15,510.
The chart below characterizes these
workers by age, education and employment. As you can see, 57% of low-wage
workers have a high-school degree or less; just 3 types of employers account
for two-thirds of all low-wage
workers in the US.
OK, with this discussion about burgers
and fast-food, it's time for a one-question quiz: which city in our great
nation has the highest concentration of fast-food restaurants? See this
footnote for the answer.[3]
Would raising the minimum wage be an
effective remedy for the real dilemma facing low-skill workers, including
burger-flippers? It's possible, but unlikely to have much effect for 3 reasons.
First, the federal minimum wage isn't
going to change. Unsurprisingly, the Congress hasn't considered or acted on the
President's proposal. It has much bigger burgers to fry. Republicans, perhaps
following their affiliated economists, traditionally have serious problems with
any increase in minimum wage. Conservative, "market-driven"
economists state that a higher minimum wage will result in workers either
losing their jobs or, as businesses adjust, hiring fewer, higher-cost,
low-skill workers.
Unless you're Rip Van Winkle, you're
all too aware the Republicans control the House of Representatives, so any
House bill to raise the minimum wage is dead before arrival. And from their
decidedly other-worldly perspective, the extreme Republicans (ExReps) who now
seem to rule the House despite their small numbers (talk about minority rule), are
more focused on drastically cutting funding for food stamps, defunding the entire Federal government (by not
passing a "clean" authorization bill by October 1st) and
not raising the public debt limit.
Because the ExReps will do nothing to
change the Federal minimum wage, state and local authorities are acting.
Eighteen states and the District of Columbia have higher minimum wages than
$7.25/hr. California Governor Jerry Brown just signed a bill to raise the CA
minimum wage to $10/hr by 2016; that would be the highest State minimum wage in
the nation. In June, the City of Berkeley began considering the establishment
of a city "living wage" modeled on San Francisco's living wage that
is now $10.55/hr, the highest in the US. Being Berkeley, it's not if the City Council passes such a rule,
but when.
States have revised their minimum wage
laws, but it's a piecemeal action that can only help low-wage workers living in
those jurisdictions. Localities, like Berkeley, can do the same thing on a more
micro scale. A potential consequence is that if the minimum wage increase is
large enough (California's change represents a 25% increase over several years),
firms in those areas may decide to lay off now-higher cost workers or not hire
as many in the future. Or firms can hire workers in other locations not subject
to the new wage. Some businesses have long complained that doing business in
California is more expensive than other states. A new, higher CA minimum wage will
exacerbate this. Employers like hotels, restaurants and retail sales – who employ
a disproportionate number of low-wage workers – may be more incented to hire in
areas that aren't subject to the higher wage requirements.
Second, unemployment still remains a
significant concern for workers, especially young, low-skilled workers. Teenage
unemployment is now 22.7%, more than 3 times as high as current overall
unemployment of 7.3%. Youth unemployment (16-24 year olds) is 16.3%;
unemployment for 25-35 year olds is 25.8%. These unemployment rates have been
lowered marginally over the past year, not because more young people have found
jobs, but rather because people have dropped out of the labor market and are no
longer actively looking for work. This withdrawal from the labor market is
reflected in the labor force participation rate (LPR). For youth, the LPR is
now a depressing 60.5%; the LPR for all workers over 16 is a grim 63.2%, the
lowest rate since 1978.
From a market perspective, this
combination of historically above-normal unemployment rates and historically
below-normal labor force participation rates means there are many low-skill
workers who are potentially available now for employment who aren't working at
all (or as much as they want). Unlike more competitive labor markets for
skilled- and highly-skilled-employees, low-skilled labor is not in short
supply. The world's supply of low-skilled workers is rapidly growing, even in
the US.
Although burger-flippers need to know how to operate several
restaurant appliances, and service employees need to know how to operate a cash
register and interact properly with customers, these skills are not rocket
science. Restaurants' training efforts easily cover these job requirements. Low-skill
labor's wages are dwindling in large part because low-skill labor is widely
available and quite substitutable with other, unemployed workers. It's a
buyer's market.
Beyond burger-flippers and in this age
of globalization, low-skill wages for manufacturing ultimately aren't set in Oakland
any more than in Milwaukee or Little Rock, they're influenced by international
forces. [See my "Maddie and the Machine" blog.] There
are a lot of Bangladeshis who are willing to work for a lot less than $7.25/hr. [The current minimum wage in Bangladesh
is $38 a month, which is $0.24/hr.]
Thus, there isn't any strong market
force pushing US low-skill wages upward. These current labor market conditions
make it unlikely that the SEIU's goal of having burger-flippers receive $15/hr
will be met. But what if burger-flippers were to earn$10 or even $15/hr; what
might happen?
This question leads to the last reason
for questioning how much effect a higher minimum wage might now have for
low-wage workers. This reason is more strategic and involves technological substitution
of capital (in the form of new machines) for labor. It is a centuries-old, continuing
process that made an indelible, irreversible mark during the Industrial Revolution.[4]
For much of our history, the US was
labor-poor. That is, although the nation enjoyed impressive natural resources,
labor was relatively scarce. One can easily argue that seminal technological
inventions like the cotton gin (1793) and mechanical reaper (1834) were introduced
to improve labor productivity, given that workers were relatively scarce. New
technologies like these and many others eventually reduced the need for many
low-skilled laborers in many industries. Over time manufacturing, agriculture and
other business activities became less labor-intensive and more
capital-intensive. Fortunately, technological change, combined with robust economic
growth, also created other opportunities for displaced workers. That's not
today's situation; GDP grew less than 2% this year.
During the past 20 years, textile and
apparel manufacturers in the US have suffered enormously as markets were lost
to lower-cost foreign producers – due in part to far cheaper foreign labor
costs, those Bangladeshis, for example. Since 1990, US apparel manufacturers have
lost 81% of their capacity and 85% of
their jobs. However, a few US textile-apparel manufacturers now have made a
come-back – by employing far more technology (e.g., capital and machines) and
far fewer workers. Like other industries, modern manufacturing has become much
more capital-intensive, thereby requiring higher-skilled workers.
If the recent labor actions at
fast-food establishments were to surprisingly succeed in significantly raising
wages, I wonder that after a few years, well-capitalized employers (in 2012, MacDonald's
Corp had $27.5 billion revenues; Burger King had $1.97 billion in revenues)
would start using robots instead of higher-cost human beings in their
restaurants. Big Macs and Whoppers could be made and served by ever-smiling McDrobots that don't need to get paid.
Do fast-food consumers want low prices
or are they willing to pay more to keep receiving their orders from real humans
whose wages may be increased by government fiat? In the realm of 99 cent meals,
price probably dominates. It wouldn't surprise me if fast-food firms have
explored automated possibilities. Such capital-based automation would echo
similar strategies that have already been implemented by many firms like
automobile, mobile phone, computer and steel manufacturers to name just a few.
So what are low-skilled workers to do?
These workers' living needs are increasingly unattainable with their
minimum-wage earnings. Raising the minimum wage by statute at a time of
elevated unemployment seems warranted but may not be effective. Should federal and
state governments improve and broaden their worker training programs to better prepare
these low-skill people for productive, remunerative jobs? Yes. Training/re-training
programs could help, but don't always have strong performance records. Should
more money be spent on vocationally-oriented education? Yes. However, more federally-funded
programs for training and education is going to happen no sooner than when the federal
minimum wage is raised. That is to say, not until the House gets a Democratic
majority. Don't hold your breath.
I believe the most fruitful way to
help low-skill workers is to get the US economy growing again emphasizing labor-intensive
infrastructure investment and more
equitably sharing the benefits of such increased investment. The ExReps are
unlikely to buy into the equitable sharing part of this. But if they somehow step
out of their twilight-zone reverie for a moment – admittedly a very long shot –
perhaps when Ted's not Cruzing on Green Eggs and Ham, they might belatedly see
the wisdom of enacting much-needed fiscal stimulus aimed at middle-class,
low-skill workers that would benefit their constituents and the rest of us. Otherwise,
we may be buying our future burgers from a smiley-faced McDrobot automaton.
[1] The Gini Index measures income distribution
inequality, where a higher percentage
represents more inequality. A
completely unequal income distribution would be represented as a Gini Index of 100%
(all income would be earned by 1 individual). Thus, a lower Gini Index is considered generally better because it indicates
less income inequality.
[2] Being of "several minds" isn't an uncommon condition for
economists and prompted George Bernard Shaw to note, “If all economists were
laid end to end, they would not reach a conclusion."
[3] And the envelope please: it's Las Vegas. Five points if you
guessed correctly.
[4] There was no definitive start date for the Industrial Revolution; many
historians suggest it began in the late-18th Century. A Farewell
to Alms by Gregory Clark offers a fascinating, insightful assessment of
this revolution's economic and social causes and effects.
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