The Journal Gazette
Sunday, February 21, 2021 1:00 am

Pros, cons of $15 minimum wage

Economists say it would lift many people out of poverty

PAUL WISEMAN | Associated Press

WASHINGTON – President Joe Biden's effort to raise the federal minimum wage to $15 an hour could provide a welcome opportunity for someone like Cristian Cardona, a 21-year-old fast food worker. Cardona would love to earn enough to afford to move out of his parents' house in Orlando, Florida, and maybe scrape together money for college.

More than 1,000 miles away in Detroit, Nya Marshall worries that a $15 minimum wage would drive up her labor costs and perhaps force her to close her 2-year-old restaurant, already under strain from the viral pandemic.

Between Cardona's hope and Marshall's fear lies a roiling public debate, one with enormous consequences for U.S. workers and businesses. Will the Biden administration succeed in enacting a much higher federal minimum wage – and should it? Economists have argued the merits of minimum wage increases for years.

“The mother of all economic debates” is how economists Michael Feroli and Daniel Silver of JPMorgan Chase describe it.

The administration has cast its campaign to raise the minimum as a way to lift up millions of the working poor, reduce America's vast financial inequality and help boost the economy.

“No American should work full time and live in poverty,” said Rosemary Boeglin, a White House spokeswoman. “Research has shown that raising the minimum wage reduces poverty and has positive economic benefits for workers, their families, their communities, and local businesses where they spend those additional dollars.”

Yet just this month, the nonpartisan Congressional Budget Office estimated that while raising the minimum wage to $15 by 2025 would increase pay for 17 million people and pull 900,000 out of poverty, it would also end 1.4 million jobs. The reasoning is that employers would cut jobs to make up for their higher labor costs.

The fate of Biden's minimum wage proposal remains hazy. Facing resistance in Congress, the president has acknowledged that he will likely have to omit the measure from the $1.9 trillion COVID-19 financial relief package he is proposing and re-introduce it later as a separate bill.

For years, there was almost no debate at all about a minimum wage. Classical economists had standard advice on imposing or raising minimum wages: Don't. Piling higher labor costs on employers, the thinking went, would force them to cut jobs and end up hurting the very low-wage workers the minimum wage was intended to help.

But groundbreaking research in the 1990s suggested that the Econ 101 version was simplistic at best. Now there is growing confidence among economists – far from a consensus – that lawmakers can mandate sharp increases in the minimum wage without killing large numbers of jobs.

Assessing Biden's $15 plan, for instance, economists at Morgan Stanley have concluded that “the impact to employment, positive or negative, would be minimal, while the social benefits to lifting real wages of lower-income earners and millions out of poverty are substantial.''

Raising the minimum wage, they said, would also help narrow the chronic economic gap between white Americans on the one hand and Black and Hispanic Americans on the other.

The federal government introduced a minimum wage to a Depression-scarred country in 1938. Congress has not raised the minimum in more than 11 years – the longest gap between increases. Twenty-nine states and Washington, D.C., have adopted minimum wages above the federal $7.25.

The United States lags behind other developed countries in the size of its minimum wage. In 2018, the U.S. minimum amounted to 33% of the nation's median earnings – dead last among 31 countries in the Organization for Economic Cooperation and Development. By contrast, Canada's minimum wage came to 51% of median income, France's 62%.

Biden's plan would shake things up entirely. He proposes gradually raising the wage to $15 an hour by 2025, starting with a jump to $9.50 this year. Thereafter, it would be indexed to grow at the same rate as the U.S. median wage – the point at which half earn more and half earn less.

Speaking with analysts last month, McDonald's CEO Chris Kempczinski said the fast-food giant would “do just fine'' as long as the wage increase applied to everybody.

Yet by more than doubling the federal minimum wage over a few years, Biden's plan would enter uncharted territory. Feroli and Silver of JPMorgan note that most minimum wage increases amount to 5% to 15%. A doubling of the minimum could potentially exert a more harmful effect on jobs than research has suggested.

Arindrajit Dube, a leading minimum wage researcher, concedes that Biden runs the risk of raising the minimum wage too high, too fast. Yet he argues that the gradual phase-in would allow policymakers to monitor how the job market is reacting – and to delay further scheduled wage increases if employers responded to higher costs by cutting jobs.

Critics argue that now isn't the time for a hefty increase. Many of the businesses most likely to pay the minimum – restaurants, hotels, movie theaters – have been hardest hit by the pandemic and the lockdowns and other steps meant to contain it.

Consider Marshall's Detroit restaurant, Ivy Kitchen + Cocktails, already devastated by the coronavirus. Revenue is down 85%. She fears that higher labor costs could deliver the final blow.

“We're not making money; 2020 was a complete loss,” Marshall said. “To impose such a wage increase on us right now would not be a good idea, and a lot of us would just shut down. ... Our doors are barely open.”

Then again, the pandemic has also exposed how difficult life is at the bottom of the income ladder.

In Orlando, Cardona makes $11 an hour as a manager at a McDonald's. Unable to afford a place of his own, he lives with his parents. His plans to save for college are on hold – indefinitely.

A bump up to $15 an hour “would definitely be a very nice boost; $11 is still not a living wage,” Cardona said.

He also said many of his co-workers are single mothers or older adults, struggling to pay rent, afford utility bills, buy groceries.

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