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.
On May 20, 2014, ILEPI Policy Director Frank Manzo IV was a panelist on WTTW’s Chicago Tonight with Ted Dabrowski discussing the pros and cons of raising the minimum wage in Illinois. Manzo supported raising the minimum wage to $10.00 per hour while Dabrowski has endorsed abolishing Illinois’ minimum wage altogether. Here is a link to the segment, and below is additional information on the effects of raising the minimum wage in Illinois.
Should we raise the minimum wage to $10 an hour?
The Illinois economy is still recovering from the Great Recession. The unemployment rate is about one and a half percentage points lower today than it was one year ago. But the recovery has seen an ongoing rise in income inequality in the labor market. To partially offset the income gap– independent of any action (or nonaction) at the federal level– Illinois should raise the minimum wage to $10 an hour.
In 2012, 1 million of the state’s 6 million workers earned less than $10 an hour. Of these one million low-wage earners, 57 percent were female, 45 percent were nonwhite, and 60 percent worked full-time (35 hours a week or more). In a study co-authored with the University of Illinois, ILEPI found that raising the minimum wage to $10 would increase worker income by $2 billion for these low-wage workers and lift 60,000 to 100,000 Illinois residents above the poverty line, reducing reliance on government programs and lowering costs to taxpayers. These workers would then spend that new income back in the economy, resulting in $7 billion in new economic output, and either a very small drop or a very small gain in employment. Thus, in Illinois, a state where the cost of living is higher than the national average, a raise to $10 would be beneficial to the economy. See the full report here [pdf].
Why does the minimum wage have a stimulative impact? What about economic theory which says it reduces jobs?
We know that reality is, unfortunately, far more complex than economic theory. Research shows little to no discernible impact of the minimum wage on employment. Most estimates on the supposed reduction in jobs are between zero percent and less than a fraction of a percent— it would be a false representation of economic research to suggest otherwise. We also know that poorer Americans spend higher shares of their incomes in the economy than richer Americans. One 2009 study by the Federal Reserve Bank of Chicago found that “spending increases substantially after a minimum wage hike.” For every $1 increase in the minimum wage, families with a minimum wage earner raise spending by $744 to $869 per year.
Isn’t the minimum wage a job killer for small businesses?
First, a 2013 Gallup poll found that half of all small business owners support raising the minimum wage and a 2013 Small Business Majority poll found over two-thirds of small business owners in support. That is what they say. What do they do? Three-quarters of fast food establishments report that they did not have to cut employees, shifts, or benefits as a result of a minimum wage hike.
It is also important to note that the $8.25 current minimum wage only applies to employers with 4 or more employees, so some fraction of Illinois small businesses are already excluded from minimum wage requirements. Additionally, the Illinois Small Business Job Creation Tax Credit is a $2,500 credit for each new job which pays at least $10 an hour for businesses with 50 or fewer employees that currently exists. It will expire in 2016, but should be extended well beyond. With a $10 minimum wage, this would effectively serve as a tax credit for every new job.
When considering the cost of paying a worker $1.75 more an hour, one must also think about the benefits. Time and again, a higher minimum wage has been found to reduce employee turnover and job separations, which lowers hiring and training costs. It also makes employers more diligent in their hiring and increases spending by poorer workers. All of these benefits result in higher demand for the products and services that small businesses provide, offsetting “job-killing” aspects of the minimum wage. That’s what the research shows.
Why not $20 an hour? Why not $100 an hour?
The minimum wage is just that: a minimum. It is intended to reduce the number of Illinois residents below the poverty line. Of course, there is a limit to raising the minimum wage such that costs exceed benefits. But this slippery slope logical fallacy just ignores the evidence that a $10 minimum wage would be beneficial to the Illinois economy. A $15 minimum could be good or bad; unfortunately, research is slim at this level. $10 an hour, however, is clearly not the backbreaking threshold level, since it would lift tens of thousands of Illinois residents above the poverty line and grow the economy by $7 billion.
Won’t prices only go up?
Maybe, but it is not the certainty that some economists believe. Evidence that the minimum wage causes price inflation is slim at best. Instead, employers have other “channels of adjustment” that are used in response to a higher minimum wage. They may compress wages among those at the top and those at the bottom or they may accept lower profits. But also they benefit from reduced turnover costs and from happier and more productive workers.
Doesn’t this really only affect teenage workers?
No. Nationwide from 2003 to 2012, 60.5 percent of those earning less than $10 an hour were 25 years or older. Another 2012 study found that roughly 80 percent are at least 20 years old.
Are there other potential policies to alleviate poverty?
Yes. There are three main policies that the Illinois Economic Policy Institute supports to alleviate poverty, aside from the minimum wage. First, the Earned Income Tax Credit is an excellent program that tends to incentive work and benefit the working class. This program could be expanded. Second, the Illinois Small Business Job Creation Tax Credit, referenced above, should be extended. Finally, we need to invest more in Illinois. The two key components of this are infrastructure investment– which grows our economy and attracts businesses– and human investment through education. The costs of education need to be addressed, and more students need to be graduating from high school, trade schools, and colleges and universities. That is the best bet for growing the economy and reducing poverty.
Brass tacks: What is the impact of raising Illinois’ minimum wage to $10?
A 21.2-percent minimum wage hike in Illinois would [PDF]:
- 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);
- Generate $141.2 to $192.2 million in new annual state income tax revenue.
What are ILEPI’s policy recommendations?
In Illinois, the minimum wage should be:
- Expanded to cover employers with 2 or more employees;
- Raised to $10.00 per hour;
- Indexed to the chained-Consumer Price Index;
- Set at $1.00 below the new adult rate for workers under 18 years old;
- Paired with an expansion of the state’s Earned Income Tax Credit; and
- Apply in the first 90 days of employment.
What is the moral of the story?
Economics is an amoral discipline that makes no judgments on justice. If you think that people always succeed if they work hard, then you might not support the minimum wage. On the other hand, if you think that getting ahead requires at least a little bit of help from others or little bit of luck combined with hard work and dedication, then you should support raising the minimum wage to $10 an hour. Two-thirds of the American public and over 600 economists, including 7 Nobel laureates, support raising the minimum wage. It would affect one million Illinois workers, increase worker incomes, lift 60,000 to 100,000 of our families and neighbors out of poverty, reduce reliance on taxpayer-funded programs, and grow our economy.
Once again, here is the link to the Chicago Tonight segment.
See also: Paper: Raise State Minimum Wage to Stimulate Economy.