Economic Effects of Enacting the Raise the Wage Act on Small Businesses and the U.S. Economy Michael J. Chow Auber Annual Fall Conference October 14th, 2019 The Minimum Wage in the United States: Some History FDR and the Fair Labor Standards Act Fair Labor Standards Act of 1938 (FLSA) Banned oppressive child labor Established a minimum wage of $0.25/hour Set a maximum work week of 44 hours/week Signed into law despite a history of judicial opposition to wage-hour and child-labor laws Hammer v. Dagenhart (child labor) Adkins v. Childrens Hospital (womens min wage) Formal federal mandate Private Sector Support: Henry Ford and Efficiency Wages Informal support from industry leaders to raise wages independent of any government mandate. Henry Ford and efficiency wages Rationale: workers ought to be more productive if paid more and firms would encounter labor shortages less frequently. Good for workers and for business. Pre-dates the FLSA by 2+ decades Ford introduced the five-dollar day in 1914 Current State of U.S. Minimum Wage Laws
Federal minimum wage provisions are contained in the FLSA. Federal minimum currently set to $7.25 per hour effective July 24, 2009. States can (and frequently do) have their own minimum wage laws. Municipalities are increasingly establishing their own minimum wages. Current State of U.S. Minimum Wage Laws State laws may mandate a minimum wage that exceeds the federal minimum wage. Employers must comply with both federal and state minimum wage laws. Current U.S. Minimum Wage Laws Evolution of American Public Opinion on the Minimum Wage in Recent Years What Do Americans Think about Raising the Minimum Wage (2019)? % who say they _____ raising the federal minimum wage to $15 an hour Strongly Favor 41% Somewhat Favor Somewhat Oppose Strongly Oppose 26%
18% 15% Source: PEW Research Center *Survey conduced April 29 through May 13, 2019. N = 10,170 What Do Americans Voters Think about Raising the Minimum Wage (2019)? The federal minimum wage should be Raised to $15 Raised but to an amount less than $15 Stay the same Be reduced or eliminated Source: Hill-HarrixX poll, January 2019 55% 27% 14% 5% What Do Americans Think about Raising the Minimum Wage (2016)? Would you favor or oppose raising the minimum wage to $15 an hour? Favor Oppose Not Sure 48% 38% 13%
Source: YouGov/Huffington Post, April 8-10, 2016. N = 1,000. What Do Americans Think about Raising the Minimum Wage (2016)? Some people say raising the minimum wage will help workers by giving them more income. Others say it will hurt workers because businesses will hire fewer people. What do you think? It will help workers It will hurt workers Not sure 53% 34% 13% Source: YouGov/Huffington Post, April 8-10, 2016. N = 1,000. What Do Americans Think about Raising the Minimum Wage? (2016) Would you favor or oppose raising the minimum wage to? $10.10/hr (Harkin/Miller/Obama): $12.00/hr (Clinton): $15.00/hr (Sanders): Source: YouGov poll, April 8-10, 2016 Favor Oppose
Not sure 66% 26% 8% Favor Oppose Not sure 59% 33% 9% Favor Oppose Not sure 48% 38% 13%
What Do Americans Think about Raising the Minimum Wage? (2014) Some people say raising the minimum wage will help workers by giving them more income. Others say it will hurt workers because businesses will hire fewer people. What do you think? It will help workers It will hurt workers 39% 44% Not sure 18% Source: YouGov poll, September 4-8, 2014. N = 999 What Do Americans Think about Raising the Minimum Wage? (2015) 38% of respondents had close friends or family who currently worked for the minimum wage. 74% had worked for the minimum wage before Would you favor or oppose raising the minimum wage to? Favor Oppose Not sure $9 an hour
47% 39% 14% $10.10 an hour 54% 35% 12% $15 an hour 48% 42% 11% $20 an hour 24% 59% 17% Source: YouGov poll, July 23-27, 2015
What Do Americans Think about Raising the Minimum Wage? (2015) What effect do you think raising the minimum wage to $15 an hour would have on unemployment? Increase No effect Decrease 43% 21% 18% Not sure 18% Source: YouGov poll, July 23-27, 2015 Minimum Wage Pledges in the Current Political Climate (as of 10/11/19) *Michael Bennet supports a $12/hr min wage **Andrew Yang advocates for leaving min wage up to the states; supports a UBI of $1,000/month Candidate Michael Bennet Joe Biden Cory Booker Steve Bullock Pete Buttigieg Julian Castro
Bill de Blasio John Delaney Tulsi Gabbard Kirsten Gillibrand Kamala Harris John Hickenlooper Jay Inslee Amy Klobuchar Seth Moulton Beto O'Rourke Tim Ryan Bernie Sanders Joe Sestak Tom Steyer Elizabeth Warren Marianne Williamson Andrew Yang Fifth Debate Qualified No Yes Yes No Yes No, Donors Only Dropped Out No No, Donors Only Dropped Out Yes Dropped Out Dropped Out
No, Donors Only Dropped Out No, Donors Only No Yes No Yes Yes No No, Donors Only Federal $15/hr Wage Against Supports Supports Supports Supports Supports Supports Supports Supports Supports Supports Supports Supports Supports Supports Supports Supports Supports Supports Supports
Supports Supports Against Questions on Theory: Are Firms Behaving Irrationally? Firms are profit maximizing. If the benefits of increasing wages exceed the costs, i.e., if any productivity gains from increasing wages exceeds the higher cost of labor to firms ( ), then firms would do this. Efficiency wage theory, attract better workers, Can imagine under certain theoretical conditions, always, yielding . Clearly, reality does not bear this out. Questions on Theory: Are Firms Behaving Rationally But Contributing to Market Failure? Similarly, assume firms are profit maximizing. If the benefits of increasing wages exceed the costs, i.e., if there are welfare gains from increasing wages (due to greater consumption by workers, which leads to more sales and profits), then firms would do this. Higher profits hire more workers raise wages higher profits Ignores inflationary effects. Prices are not long run sticky. The Raise the Wage Act of 2019 Raise the Wage Act of 2019 Staggered increase in the federal minimum wage from $7.25/ hr to $15.00/hr over 6-year period spanning 2019 to 2024
After 2024, federal minimum wage increases according to broader wage inflation (indexed to median hourly wage of all employees) Eliminates the federal tipped wage according to another wage schedule of staggered increases until the tipped wage equals the federal minimum wage Raise the Wage Act of 2019: Wage Schedules Minimum Wage Schedule 2019 2020 2021 2022 2023 2024 2025 and beyond $8.55/hr $9.85/hr $11.15/hr $12.45/hr $13.75/hr
$15.00/hr f($15/hr, wage inf) *All minimum wage increases take place on July 1st of respective years. **Assume nominal wage inflation of 2.4% per year (annualized rate of increase of hourly median wage from 2001 to 2017) Tipped wages increase from the current level of $2.13/hour to $3.60/hour in 2019 and, for each succeeding year, by the lesser of either $1.50/hour or the difference between the tipped wage and the federal minimum wage. Assuming wage inflation does not spiral beyond a certain rate, tipped wages catch up to the minimum wage and are de facto eliminated. FICA taxes also increase for employers: 7.65% of wages (6.2 p.p. for OASDI; 1.45 p.p. for Medicare ) Business Size Insight Module (Proprietary Version of REMI Model) Allows for disaggregation of select results by firm size 13 Regions: CA, FL, IL, MD, MI, MN, NJ, NY, OH, PA, TX, WA, Rest of U.S. Modeled all 50 states. Yields direct inputs to CA,,WA. For Rest of U.S., summed up costs for remaining 38 states and applied to residual region. Example Wage Differentials Due to Minimum Wage Increase Assumed Fed Min Wage Schedule Alabama Status Quo Effective Min Wage
Assumed Effective Min Wage Washington 2019 $7.90/hr $7.25/hr $7.90/hr New Hourly Employer Cost per Min Wage Worker $0.65/hr Status Quo Effective Min Wage Assumed Effective Min Wage $12.00/hr $12.00/hr
New Hourly Employer Cost per Min Wage Worker $0.00/hr 2020 $9.20 $7.25 $9.20 $1.95 $13.50 $13.50 $0.00 2021 $10.50 $7.25 $10.50 $3.25
$15.15 $15.92 $0.77 2028 $16.30 $7.25 $16.30 $9.05 $15.40 $16.30 $0.90 *Effective minimum wage in any year t is the average of the minimum wage at the end of year t-1 and the minimum wage at the end of year t, due to the wage increases occurring on July 1st Example Wage Differentials Due to Tipped Wage Increase (New Jersey) 2019 Status Quo Tipped Wage
$11.22 2027 $2.13 $14.85 $12.72 2028 $2.13 $16.05 $13.92 2029 $2.13 $16.69 $14.56 Modeling Additional Labor Costs Multiply wage differentials by number of minimum wage workers (or sub minimum wage workers), by region Consideration of spillover effects to prevent wage compression. Research suggests spillover effects are not long delayed. We
assume simultaneous spillover effects. Modeling Additional Labor Costs BLS OES 2017 data for hourly wage (all occupations): 10th percentile: $9.60/hr 25th percentile: $11.91/hr Median: $18.12/hr We assume spillover effects occur for wage earners earning up to the 15th percentile. REMI Policy Variables For producers: Increased Wage Labor Cost policy variable For workers (consumers): Increased Compensation Rate variable, which provides for automatic feedback in increased consumption due to higher income Lower income earners more likely bound by budget constraints. When constraints loosen, they are more apt to consume than save. BSIM Results: Employment U.S. Jobs Lost (Employment Difference from Baseline) by 2029 Due to the Raise the Wage Act, by Employee Size of Firm 0 Jobs Lost (Employment Difference from Baseline) -200,000 1-4 Employees
100.0% BSIM Results: Production Cumulative Real Ouput Lost (Billions of 2009 $s) Cumulative Real Output Lost from 2019 to 2029 Due to the Raise the Wage Act, by Employee-Size-of-Firm $0 -$500 1-4 Employees 5-9 Employees 10-19 Employees -115.72 -115.41 -138.47 20-99 Employees 100-499 Employees 500 + Employees -354.32 -315.68 <20 Employees
<100 Employees <500 Employees All Firms -369.59 -723.91 -$1,000 -1020.34 -1039.59 -$1,500 -$2,000 -2059.93 -$2,500 Employee-Size-of-Firm Category Other BSIM Results Small businesses (employer firms with <500 employees) would be disproportionately impacted by the minimum wage increase. 57% of job losses 51% of cumulative real output lost
In 2029, there would be 615,000 fewer individuals participating in the labor force. Also in 2029, disposable personal income would be more than $103 billion lower than the baseline forecast. Benchmarking CBO Analysis of Raise the Wage Act (July 2019) Examined how increasing the federal minimum wage to $10, $12, or $15 per hour by 2025 would affect employment and family income In an average week in 2025, the $15 option would: Boost wages of 17 million workers who would otherwise earn less than $15/hr Boost wages of another 10 million workers otherwise earning slightly more than $15/hr But at cost of 1.3 million other workers who would become jobless (median estimate) The debate continues Dueling Views in Emeryville, CA I just didnt see how I was going to survive it. --Marcos Quezada, owner of Patatas Neighborhood Kitchen who eliminated his dinner shift and laid off 6 of his 10 workers There is a tipping point. We may have the highest minimum wage, but I dont think the people in Emeryville will feel like paying the highest prices in the country. --Erick Hansen, owner of Moomies who is deciding whether to raise sandwich prices by as much as $1.50 or lay off 1 of his 3 employees
If I didnt have it, I would have to cut back. --Sheena Luu, barista at Polaris Caf This will help me save more for college. --Maria Anguiana, waitress at Rudys Cant Fail Cafe Thank You! Contact Information Michael J. Chow Lead Data Analyst/Economist NFIB Research Center [email protected]
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