Minimum Wage in a Pandemic, in 4 Graphs

As the economy free falls into a sharp recession [1], many low-income workers have been deemed “essential” during the pandemic [2], which effectively obligates work—notably without any additional federally mandated hazard pay [3]. This basic contrast, along with conversations regarding the presumed distortions of unemployment benefits [4], has dominated much of the public discourse around wages during the crisis. As a result, it is common to overlook that another long-standing area of policy is simultaneously deepening that issue. Namely, that the federal minimum wage is just historically low.

Despite public support [5], minimum wage proposals are generally politically polarizing. In 2019, HR 582, the Raise The Wage Act, passed the House of Representatives mostly along party lines, with a total of 9 defectors from either party [6]. That bill has been read twice in the Senate but has not moved to a floor vote in over a year.

Due to inflation and the infrequency of legislation, the real minimum wage has slowly declined for decades. Over that same time, the issue has compounded as the minimum wage has trended away from labor productivity, meaning that low-income workers have been effectively paid less while producing more. The relationship between wages and the productivity of labor is a basic theory of labor economics [7], and this empirical divergence puts significant strain on the theory.

There remain active debates regarding the role of market concentration on low wage work and the extent to which productivity gains are informed by capital improvements, labor improvements, or some combination. But regardless of the drivers or the metrics, or whether minimum wage is measured in real terms by adjusting for inflation or in relation to productivity, the trends are concerning. Research forecasts that if these trends continue even with ambitious increases in the minimum wage, the sizable gap is likely to continue.

A year prior to the pandemic, after more than a decade of legislative neglect, the minimum wage had reemerged in the public discourse following the midterm elections in 2018 with a wave of state proposals and a newly passed House bill—complete with a Congressional Budget Office [8] (CBO) scoring. Since then, the national discussion of a higher minimum wage has been backgrounded by other issues.

The CBO is ardently non-partisan, which makes revisiting those projections particularly clarifying during a pandemic recession. The estimates conclude that basic maintenance of the wage floor could be really helpful by increasing the wages of a considerable portion of the workforce with an established policy. In the report, the CBO emphasized the relationship between the percent wage increase and the percentage of workers who would be affected, both directly and indirectly. The report scored 3 new proposals, specifically a $10, $12, and $15 minimum wage. Those estimates were highlighted, along with previous scores, to provide a degree of scale.

While many within the public argue that raising the minimum wage would drastically increase unemployment, the research suggests that the employment effects are fairly marginal. Survey data shows that most top economist agree that the benefits of raising minimum wage outweigh the consequences, with only 16% of economists disagreeing [9]. This is because most proposals reflect fairly moderate increases and comfortably fit within a normal range. In fact, Nobel prize winning behavioral economist, Richard Thaler, summarized the academic debate in a Booth Survey [10] stating that “…the evidence suggests the effect on employment is between small and zero.” Many labor economists argue over that distinction, but Thaler’s summary is largely reflected in the macroeconomic statistics.

A fuller literature review of the empirical work on the effects of the minimum wage on employment shows that the findings often switch signs, from negative [11], to positive [12], and back to negative [13], in part because the effects are so close to zero. With the exception of some dissenting studies [14], the economic academy has somewhat settled on the employment effects of minimum wage being very weakly negative.

This relationship was reiterated in mid-2019, when the CBO scored a range of minimum wage proposals. That scoring concluded that the median estimates for all of proposals showed fairly marginal effects on unemployment. Specifically, the median estimates were between 0% and 0.8% change in unemployment to the workforce, most likely affecting businesses with tight profit margins that rely primarily on low-wage labor. Those estimates should hold regardless of a recession or a pandemic. In fact, increasing the minimum wage during a recession is fairly common.

Minimum wage legislation generally schedules increases across multiple years. More significant increases typically will have longer timelines. Importantly, inflation actively regresses on the gains in real time, and most federal proposals are not indexed to inflation. As a result, as a proposal reaches the end of the wage schedule, the final value will be lower than the original proposed wage. The effect of inflation on the wage schedule is very evident in the CBO projections. However, the CBO forecast shows that the most ambitious proposal maintains purchasing power better than other proposals over time, mostly because of a longer wage schedule.

The academic disagreements around the minimum wage have downstream implications for how policy professionals consider the issue, and by extension how policymakers decide on it. Research recently published in the World Bank Economic Review found that when presented with data on wage floor policies, policy professionals consistently evaluated the results in a subjective manner, showing a repeated bias against minimum wage proposals [15]. This creates an additional layer of political difficulty with any proposal.

This policy should not be thought of as a substitute to other solutions, but rather as a complement. With very little congressional work, the minimum wage can start to ameliorate the issues at the lower end of the income distribution, provide needed relief for those working without hazard pay, and mitigate some of the alleged distortions from unemployment benefits. A minimum wage increase will not fix the pandemic or the recession, but it can provide needed income for the poor.

In many ways the pandemic has shifted the normal political process, encouraging a degree of policy innovation as a means to combat the recession [16]. But as policymakers reach for new tools in these uncertain times, those policymakers should also consider the value of old tools. With unemployment at record levels, an eviction crisis looming [17], and congressional gridlock mounting around any additional stimulus [18], there is a deep demand for solutions, particularly for low-income households. The minimum wage can be a polarizing policy topic, but it is worth noting that the vast majority of the economic literature suggests that most current proposals, or marginal increases, are net positive. And most importantly, unlike most other proposals, this policy benefits from a considerable legislative head start.

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Note: The views expressed by commentary authors do not necessarily reflect the views of Chicago Policy Review.

Mark Sheppard is a research assistant at the University of Chicago, Harris School of Public Policy and the Director of Communications for the Chicago Policy Review. Visualizations created by Mark Sheppard.

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References

[1] U.S. Bureau of Labor Statistics. 2020. “Employment Situation Summary.” Economic News Release. Published August 7, 2020. www.bls.gov/news.release/empsit.nr0.htm

[2] McNicholas, Celine, and Margaret Poydock. 2020. “Who are essential workers? A comprehensive look at their wages, demographics, and unionization rates.” Economic Policy Institute. Posted May 19, 2020. www.epi.org/blog/who-are-essential-workers-a-comprehensive-look-at-their-wages-demographics-and-unionization-rates/

[3] Kinder, Molly. 2020. “Essential but undervalued: Millions of health care workers aren’t getting the pay or respect they deserve in the COVID-19 pandemic.” Brookings. Published May 28, 2020. www.brookings.edu/research/essential-but-undervalued-millions-of-health-care-workers-arent-getting-the-pay-or-respect-they-deserve-in-the-covid-19-pandemic/

[4] Ganong, Peter, Pascal Noel, and Joseph S. Vavra. “US Unemployment Insurance Replacement Rates During the Pandemic.” Becker Friedman Institute. Published May 14 2020. bfi.uchicago.edu/working-paper/2020-62/

[5] Davis, Leslie, and Hannah Hartig. “Two-Thirds of Americans Favor Raising Federal Minimum Wage to $15 an Hour.” Pew Research Center. Last modified July 30, 2020. www.pewresearch.org/fact-tank/2019/07/30/two-thirds-of-americans-favor-raising-federal-minimum-wage-to-15-an-hour/

[6] Congress. “HR 582 – 116th Congress (2019-2020): Raise the Wage Act.” Accessed August 22, 2020. www.congress.gov/bill/116th-congress/house-bill/582

[7] Wikipedia. n.d. “Marginal revenue productivity theory of wages.” Accessed August 22, 2020. en.wikipedia.org/wiki/Marginal_revenue_productivity_theory_of_wages

[8] Congressional Budget Office. “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage.” Published July 8, 2019. www.cbo.gov/publication/55410

[9] IGM Forum. “Minimum Wage.” Published February 26, 2013. www.igmchicago.org/surveys/minimum-wage/

[10] IGM Forum. “Minimum Wage.” Published February 26, 2013. www.igmchicago.org/surveys/minimum-wage/

[11] Brown, Charles, Curtis Gilroy, and Andrew Kohen. 1982. “The Effect of the Minimum Wage on Employment and Unemployment: A Survey.” Journal of Economic Literature 20, no. 2 (June): 487-528. doi.org/10.3386/w0846

[12] Card, David, and Alan B. Krueger. 1994. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” American Economic Review 84, no. 4 (September): 772-793. https://ideas.repec.org/a/aea/aecrev/v84y1994i4p772-93.html

[13] Neumark, D., et al. “Revisiting the Minimum Wage-Employment Debate: Throwing Out the Baby with the Bathwater?” NBER, 16 Jan. 2013, www.nber.org/papers/w18681.

[14] Scheiber, Noam. “They Said Seattle’s Higher Base Pay Would Hurt Workers. Why Did They Flip?” The New York Times, The New York Times, 22 Oct. 2018, www.nytimes.com/2018/10/22/business/economy/seattle-minimum-wage-study.html.

[15] Banuri, Sheheryar, et al. “Biased Policy Professionals.” OUP Academic, Oxford University Press, 10 July 2019, academic.oup.com/wber/article/33/2/310/5530388#.XUmcsBGtkV4.twitter.

[16] Haberman, Maggie, et al. “Sidestepping Congress, Trump Signs Executive Measures for Pandemic Relief.” The New York Times, The New York Times, 8 Aug. 2020, www.nytimes.com/2020/08/08/us/politics/trump-stimulus-bill-coronavirus.html.

[17] Dougherty, Conor. “Millions of Evictions Are a Sharper Threat as Government Support Ends.” The New York Times, The New York Times, 7 Aug. 2020, www.nytimes.com/2020/08/07/business/economy/housing-economy-eviction-renters.html.

[18] Cochrane, Emily, and Jim Tankersley. “White House and Congress Remain Far From Any Stimulus Deal.” The New York Times, The New York Times, 6 Aug. 2020, www.nytimes.com/2020/08/05/us/politics/congress-coronavirus-stimulus.html.