President Obama's proposal last night to raise the Federal Minimum Wage to $9 (from $7.25) is sure to rekindle the perennial debate about whether such an increase will stall hiring for low-skilled workers, or whether small businesses will be able to sustain their payrolls with higher wage requirements.
The federal rate would increase in stages until 2015. After that, additional raises would be pegged to inflation. Administration officials believe this will increase pay for at least 15 million Americans, and possibly more, as those earning just over minimum wage would also likely see a bump.
Many liberal groups like the National Employment Law Project praised the move. Spokeswoman Christine Owens told The New York Times “A higher minimum wage is key to getting the economy back on track for working people and the middle class." The White House further argued that the $1.75 increase in the minimum wage would be enough to offset nearly 10 to 20 percent of the increase in income inequality since 1980. That would be good, since according to an analysis by the Economic Policy Institute, between 1980 and 2008, the top 10 percent of earners captured 98 percent of all income gains.
Not surprisingly, conservatives like House Speaker John Boehner dismissed the idea, stating at a news conference, “When you raise the price of employment, guess what happens? You get less of it."
But it turns out that is not true—as we know from looking at a variety of states that have raised their minimum wages over the past 15 years to levels above the federal minimum.
In 2004, the Fiscal Policy Institute looked at what had actually happened in states where the minimum wage went up. The title of the report says it all: "States with Minimum Wages above the Federal Level Have Had Faster Small Business and Retail Job Growth." The report states:
In examining state-level small business job growth, the best government data available permits a comparison of 1998 and 2003; the latter is the most recent year for which the data are available. For the 10 states and the District of Columbia that had set their minimum wages above the federal level for most of this period, indicators of economic performance were consistently better than for the other 40 states where the federal minimum wage of $5.15 an hour prevailed
In some cases, it's possible to directly compare towns or cities that are part of the same regional economy, but are separated by state borders and have different minimum wages. As The New York Times reported in 2007:
Just eight miles separate this town on the Washington side of the state border from Post Falls on the Idaho side. But the towns are nearly $3 an hour apart in the required minimum wage. Washington pays the highest in the nation, just under $8 an hour, and Idaho has among the lowest, matching 21 states that have not raised the hourly wage beyond the federal minimum of $5.15.
Nearly a decade ago, when voters in Washington approved a measure that would give the state's lowest-paid workers a raise nearly every year, many business leaders predicted that small towns on this side of the state line would suffer.
But instead of shriveling up, small-business owners in Washington say they have prospered far beyond their expectations. In fact, as a significant increase in the national minimum wage heads toward law, businesses here at the dividing line between two economies -- a real-life laboratory for the debate -- have found that raising prices to compensate for higher wages does not necessarily lead to losses in jobs and profits.
Obama's proposal may not get far in Congress, but higher minimum wages—which are hugely popular with most voters, by the way—keep moving forward in the states. Ten states rang in 2013 with new minimum wage hikes, estimated to boost pay for nearly a million workers. Washington State will once again have the highest minimum wage in the nation, at $9.19 per hour, after a raise of 15 cents for the new year. The nine other states getting a wage hike in 2013 are Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Rhode Island, and Vermont.
The raises in these ten states will be between 10 and 35 cents per hour. If their hours worked per week remain the same, this would add an extra $200 to $500 per year for minimum-wage earners, which for those earning $15,000 under the current minimum wage, could at least make a small dent in their yearly expenses. Of course, not all raises are as large as Washington State's or the proposed federal wage increase. In Rhode Island, the increase is from $7.40 to $7.75 per hour, over a dollar below the $9 proposal.
The raises come from built in state cost-of-living adjustments that account for inflation, a policy that many advocates for low-income workers, as well as some lawmakers, believe is the only way to make these increases viable over the long term, and which Obama's national plan includes.
One wrinkle in all this is that some scholars question whether the move is really as helpful for the poor as Obama and many advocates claim. David Neumark, of the University of California at Irvine, believes that "A lot of the benefits of minimum wages leak out to families way above the poverty line," as teens from higher-income households suddenly start competing for better paying low-skill jobs that used to go to poor people. His research was based on fast-food workers in New Jersey, a state that is considering raising its own minimum wage. Another researcher, Alan Krueger, also studied the effects of minimum wages on fast food workers in New Jersey, and found positive results for low-income families.
Obama first advocated an even higher increase of the minimum wage, to $9.50, though that plan was dropped amid the recession. Now that the United States is experiencing some recovery, albeit an often jobless one, now may be a better time to push for a hike. If the latest round of wage hikes in individual states goes well, it will strengthen the case for the President's proposal on a national level.
CEO pay, as the State of Union noted, has never been higher. It's time for the government to ensure that ordinary workers better share the fruits of whatever prosperity is being created.