Deciphering the Minimum Wage Debate

Fisher Investments  |

President Obama’s recent State of the Union address likely sounded akin to any of his 2008 and 2012 campaign speeches for most folks: Support growth, create new jobs, boost investment, encourage green energy, promote free trade—all perfectly noble, seemingly good aims. (Whether they come to fruition and the shape they take remain to be seen.) One proposal though, has been particularly polarizing: Raising the minimum wage from $7.25 an hour to $9.00 an hour, with ongoing increases for inflation.

The minimum wage debate is highly political and a sensitive subject for many folks. However, my intent here isn’t to comment on whether an increase is good or bad or to enter the fray, but only to discuss the possible economic impact.

The minimum wage debate isn’t terribly new. The merits of a minimum wage have been debated by economists, politicians and the Supreme Court since it was created in 1938. It’s very likely one of the most studied issues in the dismal science. (Economists overall agree government meddling with market prices creates unintended consequences.) Still, most folks would likely concur raising the minimum wage in the past hasn’t foreshadowed total economic calamity or market disaster historically. Nor has it been financial panacea for those earning the minimum wage. (If it were, why not raise the minimum wage to $15.00 or $50.00? We don’t because there are myriad economic consequences.) But if a $9.00 minimum wage does become a reality in the immediate future, the market and economic impact this time is likely no different.

That minimum wage changes haven’t historically led to great overall economic impact likely suggests an important point—the federal minimum wage doesn’t impact many people relative to the size of the economy. At least not historically. Some states have minimum wages higher than the federal standard, others lower. (When federal and state law have different minimum wage rates, the higher standard applies.)  So, of the 50 states, 22 have the same rate as the federal government, 4 have minimum wages below that of the federal government, 5 have no minimum wage laws at all and 19 have minimum wages higher than the federal threshold. (For those wondering why the $9.00 figure was picked, an increase at that level would impact all but Washington State, which has a minimum wage of $9.19.)

So who will the increase impact? As of 2011, there were only  3,829,000 workers aged 16 years and older paid at or below the federal minimum wage; or 5.2% of total hourly workers. Of these, nearly 50% were aged 16-24 years old and many skewed to the younger end of the distribution—23.5% were 16 to 19 years old. What’s more, most folks impacted by the minimum wage were part-time workers. Which helps explain why the lion’s share of minimum wage workers worked in food preparation or serving-related occupations (43.2%). However, it’s important to note, for many in the restaurant and food service industry, the $7.25 federal minimum wage doesn’t apply. Those folks are typically held to the $2.13 an hour plus tips and commissions standard. Employers are responsible for making up any difference between the hourly wage plus tips that fall below the $7.25 rate. (Under Obama’s proposal, wages for these folks would rise too—the first such raise in nearly 20 years.) The overall impact of increasing wages on this group as a percent of the overall ~$15 trillion US economy isn’t likely to be huge. None of this is to understate the importance of these workers to the economy. Point is, they’re far from the “masses” that could impact the economy in a hugely negative or positive way.

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And that’s if the change doesn’t impact employer behavior at all. It likely will. It’s conceivable employers might take action to mitigate the impact on their bottom line. Some firms could certainly eat the additional costs, particularly if minimum wage workers are a small part of their total operating costs, or if these workers reliably graduate into higher ranks and are a feeder source of more specialized labor later. But that may not be a palatable choice for margin-sensitive businesses. Those firms may lay folks off or cut employee hours and attempt to extract productivity gains to meet previous output. (A number of studies question whether job losses are significant after minimum wage hikes. I’d note, none are conclusive.) Then too, companies could cut costs elsewhere—reducing non-monetary compensation or benefits like training, free or discounted uniforms, meals, reimbursements, etc.

Similar to the lack of conclusive evidence showing a higher minimum wage results in greater job losses, there’s equally little evidence to support the notion a higher minimum wage can help boost consumption and growth. To illustrate, imagine some companies elect to pass along higher costs to consumers. Of course, those higher prices would feed back into a higher cost of living for consumers—minimum wage workers included—potentially making the increase somewhat self-defeating.

Now, it’s not likely any of these scenarios come to pass immediately upon the minimum wage being raised to $9.00. Rather, history shows the economy adjusts more gradually, which mitigates the arguments against the raise somewhat. Another factor lending some validation to a raise—since its creation in 1938, the minimum wage has been increased 28 times. However, the real dollar value has varied (often greatly) over time. For example, in 2009 dollars, the minimum wage in the mid-1960’s hit nearly $10.00 per hour. Today, the $7.25 minimum wage has slipped back to its real value in 1998. Moving it up to $9.00 by 2015 would restore the minimum wage to its 1979 in real terms—but still leave it lower than most rich OECD countries. But arbitrary benchmarks alone aren’t much of a reason to raise (or, heck, not raise) the minimum wage.

I’m an unabashed capitalist and fan of free markets, so I’d rather the government refrain from monkeying with prices—doing so can turn properly functioning markets into a bit of a zoo. However, there’s little conclusive evidence to show the market or economic impact of raising the minimum wage historically has been devastating either. Rather, capitalism’s dynamism allows the economy and market to adjust over time. Setting aside more micro arguments and debates over societal impact, there’s little reason to believe a higher minimum wage will much impact market direction either way.

By Naj Srinivas, Fisher Investments

This article constitutes the views, opinions, analyses and commentary of the author as of February 2013 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.

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