The federal minimum wage in the United States has remained stagnant at $7.25 per hour since 2009. The more than decade-long period represents the longest stretch without an increase since the Fair Labor Standards Act was passed in 1938—and it’s looking now like it will be longer still.
A plan to include a phased-in increase to a $15 per hour federal minimum wage in the Biden administration’s proposed $1.9 trillion COVID-19 relief package appears destined to fail. When President Biden met with a group of mayors and governors last week, he told them to be prepared for a legislative defeat.
At least in the near term, it seems the impetus to enact higher minimum wages will remain upon individual states.
In Nevada, this is already underway. A plan to increase the minimum wage to $12 per hour by 2024 was approved during the 2019 session of the Nevada Legislature and signed into law by Governor Steve Sisolak.
In July of last year, the minimum wage increased to $9 per hour, at least for some workers. That’s because the state currently has a tiered system. Employers who offer their employees insurance don’t have to pay the same rate as those that do not. They’re able to pay $1 per hour less, meaning Nevadans whose jobs offer insurance need only be paid $8 per hour.
This too could change, however. The tiered system would go away if Assembly Joint Resolution 10, which was passed on largely party lines by Democrats last session, is approved by legislators again in 2021 and by voters in 2022. As yet, the measure has not been reintroduced in the legislature—but, with a continuing Democratic majority, it would likely succeed were it to be.
One might not immediately assume that the push to raise the minimum wage would be a partisan issue. However, pushback against it comes mostly from conservatives who claim that more than doubling the current federal minimum wage could have a destabilizing effect on the U.S. economy and lead to a surge in the prices of virtually all goods and services. But is this really case?
Economic realities and possibilities
The cost-push fallacy
Elliott Parker, a professor and chair of the Economics Department at the University of Nevada, Reno, said it’s not the case that a higher minimum wage would result in exorbitant increases in prices of goods and services, at least not across the board.
“I think there’s not much evidence that the price of things in general would rise,” Parker said. “There may be certain things. For example, if you’re paying for someone to clean your house—Merry Maid or whatever you call those services—and the minimum wage rises, then that will probably go up in price.”
He said the notion that the cost of everything would rise is linked to a myth about inflation called “cost-push” that was prevalent up until half a century ago. The idea is that a rise in wages means a necessary rise in costs. But this is not a reality, and cost-push inflation as a theory has long been ridiculed by economists for its flaws.
The cost of producing goods and services obviously increases as wages do, but most businesses will be in a position of needing to cut costs elsewhere rather than attempting to pass them on to consumers. A general increase in prices across the board would necessitate that the real supply of money be increased.
Parker said since the 1970s, economists have tried to think more of inflation as a monetary phenomenon.
“I’m trying to think about how to explain that easily,” he said. “I’m not sure I can—but it’s related to how much people want to hold money, how much people want to spend money and how much money” is created through the Federal Reserve and U.S. banking system.
“Now, can it change some relative prices? Not average prices so much, but relative prices—that is goods that use relatively more unskilled, minimum wage labor—will become relatively more expensive compared to other things,” Parker said. “But when Walmart raised the minimum wage they pay, when Trader Joe’s does it or when Costco does it, it doesn’t seem to have had a huge effect on the average prices of their goods.”
Productivity and inflation
Parker said the minimal impact higher wages have on prices of goods is primarily for two reasons. The first is that minimum wage doesn’t necessarily account for a large share of those companies’ costs. The second is that workers who earn higher wages tend to be at least a bit more productive, helping to offset the higher cost of labor.
“The classic example of that is Henry Ford, who certainly was no bleeding heart. [Ford] started paying his workers back in the ’20s significantly higher wages because he found that lower wages were associated with higher turnover and less skilled workers,” Parker said. “So, if he could get his workers to stay and be more loyal by paying them better, then he could keep them longer—and he wouldn’t have to spend so much time trying to train them or deal with their mistakes.”
While cost-push inflation may not be a valid concern, overall inflation is nonetheless something that needs to be taken into account when considering the minimum wage. Its effects on the cost of things impacts low-wage workers particularly hard.
“The minimum wage keeps being undermined by inflation, right?” Parker said. “And the inflation rate has not been very high in the last decade or more, but it’s still enough over time that the real value of the minimum wage becomes lower and lower.”
“From the point of view of the employer, they don’t have incentive to [pay higher wages] unless you make them.”
According to Parker, the minimum wage in 1968 represents the peak of minimum wage purchasing power. Were the minimum wage raised to $15 per hour between now and 2026, that would place it somewhere in ballpark of the 1968 peak—bearing in mind that $15 per hour would likely be closer to the equivalent value of $13 an hour as a result of inflation of the five-year phasing in. It could be worth even less than that if inflation increased sharply during that time—and some have theorized that it may.
“Some people worry that the relief bills will create inflation in part because you’ve got this pent-up savings that people have that they’ll start spending,” Parker said. “Others are more skeptical of that because of how it’s being distributed. It’s not necessarily going to lead to a sustained jump up in demand. What we’re primarily going to see are people who already had the income who are going to be buying more things that they wouldn’t have.”
Parker said if a person were to look at a graph detailing expected inflation over the coming years, you’d see it’s expected to be about 1.1% this year and perhaps 2.1% next.
“And many economists think a healthier inflation rate for the economy is closer to 3% per year,” he said. “We actually have some room for inflation, and, ironically, if that inflation were to increase somewhat then it would make a minimum wage like $15 an hour less onerous.”
Potential job losses
Another argument that’s been made against raising the minimum wage too steeply too quickly is that it could result in low-wage workers losing their jobs if companies who cannot afford to pay them decide to scale back their operations and cut positions. Like the idea that all goods and services would shoot up in price, there are also flaws with this assumption.
“There have been many studies done and some of the best, what they do is look for natural experiments where, for example, a town that straddles two states might have an increased minimum wage in one and not in the other,” he said. “Most of the time, those studies find that the minimum wage has little to no effect on employment. That is, it doesn’t lead to a lot fewer lower income workers being hired. And that’s reassuring. It’s benefiting lower income workers without costing them jobs, and that would be ideal.”
Another concern for people, and one that might be legitimate to some degree, is the idea that higher wages would lead businesses to invest more in capital investment.
“As you know, in our tax system we tend to tax labor and subsidize investment,” Parker said. “For example, you get lower tax rates for capital investments, etc. Capital gains tend to be taxed at lower rates—whereas labor, you tend to have not only income tax, but you have payroll taxes. So many have argued that our tax structure already incentivizes investment, and that investment can be to use automation to replace less-skilled workers.”
An example of this is self-checkout stands in grocery stores, he said.
“And there’s also a difference between regions, you know? It’s easier for a place like San Francisco, Seattle, D.C. to have a $15 per hour minimum wage—but in rural West Virginia, it may be somewhat more difficult,” Parker said, adding that it could make sense to have the federal minimum wage be dependent to some degree on the relative costs of living in different parts of the country.
Parker said he’s pleased that it is expected when the federal minimum wage is eventually raised that a regular cost-of-living adjustment will be built into it to prevent the kind of stagnation we’ve seen with minimum wage for the last decade.
Decreased reliance on social services
A potential benefit—outside of the humanitarian aspect of paying people enough to live on—is that an increased minimum wage might help states and the federal government save money on the types of welfare programs needed by many minimum wage workers just to make ends meet.
“This is why people say that some larger employers that pay minimum wage are essentially living off of government welfare because they’re letting the government pay for the food stamps and other services that their employees use,” Parker said.
But a lot of employers—whether they’re big corporations that pay poorly because they can or small businesses that pay the best they can—are unlikely to adopt the Henry Ford model of their own volition.
“From the point of view of the employer, they don’t have incentive to do that unless you make them,” Parker said. “From the point of view of society, it might be worth it.”
Ann Silver, CEO of the Reno + Sparks Chamber of Commerce, wants to see the minimum wage increase—but she’s not sure forcing the hand of businesses would be a good move while the economy recovers from the effects of the COVID-19 pandemic.
Timing is everything
“The Reno-Sparks Chamber did not—did not—oppose an increase in minimum wage last session,” Silver said of the legislation to raise Nevada’s minimum wage that passed in 2019. “What we did propose was a different methodology for increasing it. It was two years ago, but at the time, when the economy was strong, our proposal was to front-load the increase. When times were good, and people were doing well, was a good time for businesses to supplement the minimum wage. As it turns out, we may have been right—because, obviously, with the pressure on smaller businesses now during COVID, it’s a tough conversation to have.”
The Reno + Sparks Chamber of Commerce represents 2,000 business members, and Silver said it’s been her organization’s experience that few employers in the region are able to get away with offering minimum wage in the first place.
“It’s very difficult to recruit and retain employees—unless you’re perhaps a kid working in the summer, and you don’t worry about rent or buying food or paying for your car insurance,” she said. “Anybody else could not live on our minimum wage, even though it was increased this last year.
Silver said anyone with any amount of empathy cannot argue with the idea that all workers should earn a wage that’s sufficient to live on, but the chamber doesn’t think mandating a large increase right now would be wise.
“In the spirit of free enterprise and market competition, the Chamber does not believe in mandating a $15 per hour wage because it would impact so many smaller businesses—and larger ones as well, depending on their workforce,” she said. “So, there’s the ideal, which is hard to argue with—that people should make more money, and people should have enough to live on. And I would never suggest that enough is enough.”
Silver said she’s aware of people’s economic needs, especially as the costs of living from housing to food to childcare go up. She’s also aware that higher minimum wages would help to correct racial, social and educational disparities in the community.
Competing with unemployment benefits
Many businesses in the community are currently seeking employees, Silver said. Some are struggling to find them.
“And the reason many can’t find employees now is not because of wage rates,” she said. “It’s because of enhanced unemployment benefits—which are needed for many people to avoid starvation, eviction, kids going hungry—but have depressed the job market.”
A fair number of people may actually be earning more on unemployment that’s enhanced with federal dollars than they would were they to take a job. Some are also weighing the costs of returning to work, like needing to pay for childcare and transportation.
“I know people who were making $14 an hour, and when they were suddenly able to make the equivalent of $22 an hour, there was a great deal of joy in collecting unemployment—which would not normally be something we would think of as a good thing,” Silver said. “The stigma of collecting unemployment has drifted away and been replaced with a sense of ‘I deserve it. It’s what I need to live.’ So, it presents this incredible conundrum as we struggle at the same time with enhancing minimum wage, which undoubtedly would be wonderful for a significant swath of society.”
But who bears the brunt of those costs? Silver thinks for small businesses—and perhaps some large ones, too—it might be too much to ask right now. She worries that a $15 minimum wage might result in businesses needing to lay workers off, sending them back into the unemployment system.
“The best I can say is that an open marketplace is what we believe in,” Silver said. “Will it ultimately address the larger concern this country has about wage inequality, gender inequality, racial inequality? I don’t know. I don’t know. I hope I live long enough to see that all occur. But Biden’s $15 an hour, if you take it at a micro level down and take any small business—say under 50 employees—here in town, that business owner is going to say, ‘In my dreams. I’d love to pay $15 an hour, but I’ll have to sacrifice three jobs, three people, to do that.’”