Susan Milligan, Senior Writer for US News, published an article titled, “Raising Minimum Wage Hasn’t Hurt States.” In her article, she makes the case that an increased minimum wage has not had the detrimental effect some critics may claim by examining effects in states where the minimum wage has been raised. Full disclosure, I founded TN 1st specifically to dive deeper into issues such as this. US News Best States is our source for objective measurements. In establishing TN 1st, Susan and I corresponded and she was extremely helpful in connecting me with a point of contact at US News. It is with utmost respect for her and her work that I will soon be offering a different point of view. Hence the title data vs relationships.
Susan’s primary metric for making her point is by stating, “The states with the three highest minimum wages — California, Massachusetts, and Washington— also rank first, second and third, respectively, in U.S. News’ Best States rankings for the best business environment.” My issue with this statement is the business environment category measures entrepreneurship, patent creation, low tax burden, top company headquarters, and venture capital. A better category to use is employment rankings which measures job growth, labor force participation, and low unemployment rate. In this category, California, Massachusetts, and Washington are 26th, 9th, and 20th. Utah holds the top spot with Tennessee 12th. Looking at the growth rankings (GDP growth, growth of young people, and net migration), California is 14th and Massachusetts is 19th. Washington holds the top spot and Tennessee is 10th (and 5th in growth of young population).
Later in the article, Arindrajit Dube, a professor at the University of Massachusetts — Amherst, who conducted research on the effect of minimum wage, stated, “What we found was these policies have the intended consequence of raising wages at the bottom” and they “have some degree of spillover beyond the minimum wage.” He continued by saying, “At the same time, there’s no overall evidence we found that the number of low-wage jobs are actually reduced,” he adds. “We did not find there was any adverse impact on employment.” Susan states, “The one exception, he says, was in low-wage manufacturing jobs — but notes that those workers tended to find jobs elsewhere.”
This statement above is critical and should not be glossed over. The researcher found a decrease in low-wage manufacturing jobs. Manufacturing is critical for our nation and especially for states such as Tennessee. Low-wage manufacturing jobs lead to skill development which leads to higher wages and innovation in advanced manufacturing. Where are the workers finding jobs elsewhere? Please don’t tell me in the service sector. The article does not say.
Referencing a conversation with Heidi Shierholz of the Economic Policy Institute, Susan writes, “While the public impression of a minimum wage employee might be a teenager working at a fast-food restaurant, Shierholz says, many older adults work for the minimum as well. There are more people 55 and older earning minimum wage than those 19 or younger, she notes, and the average age of a minimum-wage employee is 35.” While technically factual, this statement is disingenuous. Minimum wage occurs at the extremes of the population curve. Making this statement is akin to saying 4 yr olds are 3 1/2 ft tall and 64 yr olds are 5 1/2 ft tall, so the average height is 4 1/2 ft tall. The average 35 yr old employee is not making minimum wage.
Bureau of Labor and Statistics reports on minimum wage data and they report only 2.3% of hourly workers make minimum wage. Now this is hourly workers. Consider that the workforce is approximately 160 million people and the 1.8 million making at or below minimum wage is just over 1% of the workforce. So approximately 1 person out of 100 are earning at or below minimum wage. 72% of the employees in the BLS report earn below the minimum wage which indicates employees who work for tips. Since tipped employees must earn at least the minimum wage, the actual number of workers making minimum wage is likely closer to 1/2% of the total workforce.
As a professional Human Resources practitioner, artificially increasing wages is fraught with peril. First, you introduce wage compression which is a significant demotivator for your more highly skilled employees. Second, artificially higher wages will inflate the prices of goods and services. Third, increased labor rates make automation and technology solutions more attractive as the cost of implementation and the cost of labor merge.
A pragmatic example of how a minimum wage adversely impacts employee wages comes from my experience as an HR Director for an automotive parts manufacturer. The plant was a Union facility and wages were dictated by contract, similar to minimum wage laws. In my example, the Union contract actually prevented me from offering market rates because the negotiated rates, based on the seniority structure, were lower than the market rates. The business impact was that I was not able to hire more talented candidates at hirer wages since the contract prohibited paying above the stated rates.
Wage growth is trending up and the free market is working. As labor and talent become more scare, employers will compete on wages which benefits both employees and the employers by helping align skills to positions. A whole other article could be written on the psychological impact of a minimum wage and how it affects the psyche of those earning the minimum. At this point, suffice it to say that we should look to the data to help us guide sound policy decision-making and where we have a choice, let’s trust market forces over those who advance policy without thorough consideration of the 2nd and 3rd order effects.