Seattle’s desire to hike the minimum wage to $15 hour is ostensibly an effort to increase spending and simultaneously reduce wage disparity. But this is a “Groundhog Day” debate.
During the depths of the Great Depression, President Franklin Roosevelt warned, “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country.”
While FDR’s statement seems harsh, the free enterprise system was at the breaking point with unemployment rates of 50 percent in urban areas — and this was long before the present safety net of public assistance programs. In 1938, Congress enacted the Fair Labor Standards Act, and one of its key provisions was a minimum wage initially set at 25 cents an hour, or $4.13 in today’s dollars.
Now, in the aftermath of the much milder recent Great Recession, those who feel the strain of having less are increasingly blaming those who have more. In fact, a recent Pew Foundation survey discovered that the strife between rich and poor is greater than between black and white, native-born and immigrant. This underlying friction is due to gradual shifts in income.
From the end of World War II until the mid-1980s, the top 10 percent of income earners garnered 33 percent of U.S. total income as compared to today’s 50 percent-and-rising.
This shift is the result of a 50 percent decline in the higher-paying goods-producing sector, combined with the fact that all employment growth has occurred in the lower-paying service sector. And as the United States became more reliant on foreign goods — including energy — the wage and salary share of GDP fell from 50 percent to the low 40s.
The service sector expansion also has been polarized into either routine low-paying part-time jobs or into high-paying intellect-based positions in medicine, management, finance, technology and government. This polarization was exacerbated because economic growth has been slowing for decades due to high debt levels and resultant low savings and investment rates.
As a consequence of these macro changes, the average real earnings for U.S. workers has declined more than 10 percent since 1971. Effectively all of the growth in household income has been the result of increased female workforce participation, a phenomenon that peaked last decade. Since then, overall family incomes have dropped nearly 10 percent.
In reviewing U.S. data and focusing on the minimum federal wage divided by the average U.S. wage since 1970, the minimum wage has averaged 38.6 percent of the average wage, with a low of 30.7 percent in 2006 and a high of 45.7 percent in 1979.
If the minimum were hypothetically increased from $7.25 to $15 hour, it would be 69.4 percent of the U.S. average wage. Conversely, an increase in the U.S. minimum wage to $9 or $10 an hour would raise the relative percent to 41.7 percent or 46.3 percent respectively, basically back into the historical range.
Note: Washington state’s minimum wage is currently $9.32 vs. $9.95 in Canada and 61 cents in Mexico.
Moreover, a hypothetical bump to $15 an hour nationally would affect as much as 30 percent of total U.S. employment and approximately 17.5 percent of occupations. The impact would be major salary compaction at the least, with employees making as much as mangers.
In the case of Seattle — using the same methodology as the recent CBO report on the federal minimum wage — a $15 minimum wage would likely reduce baseline employment in affected sectors by nearly 3 percent over three years. Impacted sectors include food service, nursing aides, groundskeepers, child-care workers, clerks, laundry workers, etc.
Increased labor costs would lead to as much as a 50 percent reduction in profitability, requiring surviving small businesses to hire not just fewer but also more mature and skilled workers. Not even mentioned in this debate is what might happen to high school dropout rates if the minimum wage shot up to the average wage for high school graduates.
We are not arguing against increasing the minimum wage, but suggesting discretion in a tight labor market with unusually high teenage unemployment and many struggling small businesses — particularly inner-city ones.
Bruce Finnie is a consulting economist and holds emeritus status at Pacific Lutheran University. Linda Gibson is a professor of management at PLU.