Frank Manzo IV is the Policy Director of the Illinois Economic Policy Institute (ILEPI). Visit ILEPI at www.illinoisepi.org or follow ILEPI on Twitter @illinoisEPI.
For a PDF one-page (double-sided) version of this post, click: http://www.scribd.com/doc/216145979/Minimum-Wage-Maximum-Benefit-March-17-2014.
With the support of more than two-thirds of the American public and six-hundred labor economists, raising the minimum wage should be an economic priority in 2014.
Raises in the minimum wage have been found to have virtually no impact on employment. Although classical economics predicts that minimum wages lead to unemployment, economic research predominately finds that a 10 percent increase in the minimum wage reduces employment by 2 percent at most, but may have no effect.
There are many reasons why the minimum wage appears to have zero effect on employment. Explanations include that a higher “efficiency wage” encourages employees to work harder, that job separations and turnover costs are reduced since employers are more diligent in their hiring, that the minimum wage stimulates the economy through increased consumer demand, that firms have other “channels of adjustment” such as price increases, and that the policy incentivizes teenagers to invest in more schooling. One major reason, however, is that some employers respond to the minimum wage hike by engaging in wage theft or by ignoring the change. From 2003 to 2012, an average of 3.38 million workers earned less than the minimum wage each year across the nation (2.8 percent of the workforce).
Industries that disproportionately pay minimum wages have earned billions of dollars in increased profits, owner incomes, and capital investments since 2010. Nationwide, these “capital” items increased by 28.7 percent in agriculture, 6.0 percent in retail, and 11.4 percent in food and accommodation services from 2010 to 2012. In these three industries, total capital was $477.6 billion in 2012, a gain of $57.5 billion in three years. At the same time, the minimum wage has declined in value after adjusting for inflation.
An analysis of the minimum wage’s impact on labor market outcomes finds substantial positive earnings benefits and minimal to no negative employment effects. A 10 percent increase in the minimum wage is found to raise the average worker’s hourly wage by 2.7 percent and reduce total employment by between 0 and just 0.5 percentage points. A minimum wage increase would lift the wages of those who need it most: female workers, minority workers, less-educated workers, students, and the involuntarily part-time. Additionally, if “sub-minimum wage earners” were actually paid the adult minimum wage in their state from 2003 to 2012, the national economy would have stimulated between 79,700 to 167,760 job-years and up to $2.78 billion in new annual economic output.
Raising Illinois’ minimum wage to $10.00 would:
• Increase labor income by $1.9 to $2.3 billion for intended beneficiaries and by $5.4 to $7.2 billion for all workers;
• Cause either a small drop or small gain in employment (between -70,000 and 32,000 jobs);
• Have no impact or a small impact on weekly hours worked (between -0.7 and 0.0 hours per worker);
• Lift 60,000 to 108,000 Illinois residents above the poverty line;
• Generate $141.2 to $192.2 million in new annual state income tax revenue; and
• Further raise total labor income by up to $414.2 million annually if sub-minimum wage workers are paid the new minimum wage.\
Policy Implications and Recommendations:
In Illinois, the minimum wage should be: expanded to cover employers with 2 or more employees, raised to $10.00 per hour (including for tipped workers), indexed to the chained-Consumer Price Index, set at $1.00 below the adult rate for workers under 18 years old, and paired with an expansion of the state’s Earned Income Tax Credit. The “first 90 days” subminimum should also be eliminated. On the enforcement side, punitive damages for not paying the minimum wage should be increased, the number of minimum wage investigators in Illinois should be doubled, and unionization should be promoted and worker center collaborations expanded to reduce minimum wage theft.
While there has recently been much public debate on the merits of raising the minimum wage, a joint Illinois Economic Policy Institute (ILEPI) and University of Illinois Labor Education Program (LEP) report finds a substantial simulative impact of the increase on average wages and at worst a small negative effect or at best a minimal positive impact on employment. Ultimately, a minimum wage increase would reduce income inequality, increase consumer demand, and grow the Illinois economy.
For more, the full report is available at: http://www.ler.illinois.edu/labor/images/MinimumWageMaximumBenefit_3%209%202014.pdf.
See also: Paper: Raise State Minimum Wage to Stimulate Illinois Economy.