Editor’s note: This op-ed is by Paul Cillo, the president of the Public Assets Institute, a nonpartisan, nonprofit fiscal policy think tank based in Montpelier.
While stagnant wages and sluggish job growth continue to cloud the post-recession recovery, there’s a bright spot for Vermont: Approximately 11,000 of the state’s lowest-paid workers got a raise on Jan. 1, as the state’s minimum wage increased by 14 cents to $8.60.
Thanks to a law signed by Gov. Jim Douglas in 2005, the state’s minimum wage automatically adjusts every year to keep pace with the rising cost of living – this key policy reform, known as “indexing,” has already been adopted by nine other states as well. As a result, the wages paid to those Vermonters who wake up each morning to do the hard work of cleaning office buildings, serving food, and providing care for the elderly will not gradually erode each year as the cost of basic expenses like food, gasoline and utilities continues to rise.
According to an analysis from the nonpartisan Economic Policy Institute, Vermont’s minimum wage increase this year will boost the average affected worker’s pay by $240 per year, generating over $1.4 million in new consumer spending.
As the country debates how best to create jobs and accelerate the economic recovery, our elected officials in Washington could learn from the example that Vermont has set in addressing the urgent problems of America’s low-wage economy. After more than three years since the official end of the Great Recession, average wages are actually declining in real terms, even as workers throughout the U.S. put in longer hours to help make ends meet. As a result, workers with less disposable income are holding back on spending, depriving local businesses of the sales revenue they need to expand their operations. In a country where consumer spending makes up 70 percent of the total economy, stagnant wages spell limited growth and a continued weak recovery.
By contrast, the modestly higher wages received by low-paid workers in Vermont this year will go right back into the economy, generating economic growth as these workers put food on their tables and raise their families. According to an analysis from the nonpartisan Economic Policy Institute, Vermont’s minimum wage increase this year will boost the average affected worker’s pay by $240 per year, generating over $1.4 million in new consumer spending.
While the value of higher wages for Vermont’s low-paid workers remains clear, those who oppose any increase in the minimum wage still claim that higher wages will only slow job growth or burden local businesses. These concerns find no support from the facts: Indeed, businesses that pay fair wages to their employees ultimately benefit from reduced turnover and higher worker productivity, as their employees are spared from the struggle of balancing multiple jobs in order to make ends meet.
In fact, the real strain on economic growth in today’s economy stems from the decision made by many national fast food chains and big box retailers to inflate their profits by paying rock-bottom wages, siphoning money out of local communities and impoverishing the customer base needed to sustain economic growth.
And yet, while this year’s 14 cent minimum wage increase will mean a lot to workers that are struggling just to get by, the truth is that Vermont’s minimum wage remains well below the level needed to ensure that full-time work provides a path out of poverty. Contrary to myth, over 71 percent of workers benefiting from Vermont’s minimum wage increase this year are adults over the age of 20. Sixty-five percent of these workers are putting in more than 20 hours per week, and 42 percent have at least some college education. When large numbers of skilled adult workers find themselves relying on the minimum wage to make ends meet, then a national response is required in order to preserve the American Dream of upward economic mobility.
Congress has only acted three times in the last 30 years to raise the federal minimum wage. It’s time for a new level of leadership. It’s time for Congress to learn from Vermont’s example by raising and indexing the minimum wage.
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There is no way that anyone can climb out of poverty on $8.60 an hour! There is no way that this can provide food security, or anything other than a barebones survival. And while it is great that VT has increased the minimum it is totally inadequate. This wage is not being earned by kids working their way through school, this is adults desperately trying to survive and raise their families.
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What a cruel joke……..wages are going up for a waitress by 7 cents while the FICA tax is going up over 30%!
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Capitalism loves its low-wage workers. Buy low, sell high.
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Mr. Cillo,
It’s undeniable that living on $8.60 an hour is exceedingly difficult, but economic reality also is undeniable: the higher the minimum wage goes, the more low-skilled workers will be priced out of the market. Your own argument mentions this: “Indeed, businesses that pay fair wages to their employees ultimately benefit from reduced turnover and higher worker productivity.”
By definition, higher productivity means fewer employees perform more work. So the higher the minimum wage, the fewer workers are hired, and the more work employers will get from them.
I’m not arguing against the higher minimum wage, but I think it’s important to note that in economics, there are no solutions, only trade-offs.
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Mr Kheiry,
Your argument seems to be predicated on the idea that their are a fixed number of jobs in the economy, or at least a fixed number of jobs for low skilled workers.
I would argue that this is not always the case. If the economy were always a zero sum game, it would mean growth was simply impossible and the number of available jobs simply could not be increased, I would say this has been proven false repeatedly over.
And even if it were true, is our goal really to maximize the number of people employed, even if this means a large number of those who have work will not be able to actually subsist (let alone live) on their wages?
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Mr. Stevens,
The number of jobs certainly is fluid, but raising the minimum wage actually reduces that fluidity through the mechanisms that Mr. Cillo noted: less turnover and higher productivity (in the form of fewer workers performing more work). And although the number of jobs can and does grow if the economic conditions are right, making labor more expensive isn’t one of those conditions.
Regarding your question about what our goal should be, if our goal is to make sure people earn no less than a certain amount, then we know for a fact we’re preventing some people from working at all. I don’t think that’s very attractive “collateral damage”; better to let people work for what they are willing to be paid so that they can at least have a job, gain experience, and maintain dignity, even while our society’s safety net helps fill in gaps in their ability to afford necessities, and while they gain experience to move on to higher-paying positions.
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Mr. Kheiry
Two prominent economists have repeatedly demonstrated that increases in the minimum wage does not reduce the number of jobs.
http://www.nber.org/papers/w4509
http://press.princeton.edu/titles/5632.html
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Mr. Hoffer,
Dueling studies!
For those interested, a four-minute video explanation by a Duquesne University professor: http://www.libertarianism.org/media/around-web/does-minimum-wage-hurt-workers
An extensively footnoted study from Sept. of last year: http://www.downsizinggovernment.org/labor/negative-effects-minimum-wage-laws
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It seems to me that there really is nothing to discuss here. If you have been reading the series that Bethany Knight has written about NEK, you’ll know that we have already found the eutopian solution to the minimum wage issue:
Keep wages low. Import cheap illegal labour (don’t worry, the law will look the other way), and support all the existing population of displaced workers on Reach-up, Medicaid, Three-squares, etc.
The question goes beyond the issue of whether a business can afford higher-priced labour. Once a business has “dodged the ‘high-priced’ labour bullet,” and earned its money, its owners must pay tax on said earnings to pay for (among other things) all the benefits for the unemployed – not to mention the “administrative” and law “enforcement” costs related to illegal aliens. We must pay for locks and police to protect us from people in need who become desperate. We must also address the question around the ethics of providing such lousy pay and no benefits to people who are the bulwark of business – especially service sector business – of which there is so much in Vermont. That $240 raise will buy another five tanks of gas in a year- Wow! What a windfall!
But don’t let a little Kindergarten-level ethics and logic get in your way. We can’t afford to risk “pricing our labour out of the market,” so we have to leave it to those highly compassionate masters of business banking and war to decide all this for us. And if you have been paying attention, perhaps you have noticed; they have done just that.
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Mr. Farnham,
The decision to pay low wages is one imposed upon businesses by the vast majority of consumers, who logically purchase goods and services at the least cost to themselves.
If consumers and investors allocated their money on the basis of how well companies compensate their employees, you can be sure the world would align with your preferences, but very few people do so. Questioning the ethics of a majority of consumers is unlikely to change this reality; it’s better to acknowledge reality and work within its confines than to legislate based on what one wishes were true.
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Mr Kheiry,
When the masters of big business raise prices to suit their need and greed – we pay. But when people unite behind government to see that those of us working in those businesses receive a fair share of the price hike (because we cannot afford the cost of living otherwise), we are somehow acting against our best interests?
Sorry, Bud. Not buying it – especially from someone who’s been so involved in the petroleum business.
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Mr. Farnham,
My current employment is unrelated to my political views. I’ve been Libertarian since I was a journalist in the mid-’90s.
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Mr. Khiery,
Are you actually claiming that your links to libertarian propoganda sites are the equivalent to links to two of the most respected institutions on the planet?
While I agree their is conflicting data on this issue, if this was, in fact, a duel I’d say you have arrived unarmed.
It reminds me of people who point to lengthy evidence that increased access to contraceptives prevents unplanned pregnancy only to be countered with links from religious foundations with a stated moral opposition to contraceptives, as if the two were equivalent.
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Mr. Kheiry
It’s not much of a duel. The first link was not to a study at all but to someone talking exclusively about theory.
The second was interesting but hardly persuasive. First, it did not even cite the Card & Kreuger study, which is bizarre because it is unquestionably the most influential work in the field in the last decade. Second, the vast majority of studies cited were prior to Card & Kreuger so they could not address their findings. This does not surprise me, however, because this work is from the CATO Institute. Bottom line: Having lots of footnotes is not in itself a measure of the quality of the work.
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Come on Doug, be fair!
Your reference document also seems a little tainted with a political position. The authors go into a preamble on the passages on the NJ minimum wage by the Democrats and effort by Republicans to modify it without success. That entire section of their paper surly wasn’t required unless they were taking a political position.
Second there is a claim that employment increased by 13% in NJ when the minimum wage increase. Yet there is not explanation as to why employment went up. There was some speculation on the author’s part, but no supporting data. Could it be that some other factor was driving the increase in employment numbers and as such, masked any changes related to minimum wages? Without knowing this, it is questionable whether the minimum wage have any positive or negative influence on employment.
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Mr. Hoffer,
Way back in 1995: “After scrutinizing Card and Krueger’s studies and identifying methodological shortcomings, the authors conclude, ‘Artificial increases in the price of unskilled laborers inevitably lead to their reduced employment; the conventional wisdom remains intact.’”
The authors, in this case, were Donald Deere, Kevin M. Murphy, and Finis Welch from Texas A&M and U. of Chicago.
At any rate, regardless of the dueling researchers, I believe it’s morally wrong for the government to insert itself into the private transaction between an employer and someone selling his or her labor unless fraud or coercion are involved.
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…..morally wrong and an affront to liberty.
There are some factors not mentioned here. A short time ago, the minimum wage was $4.85 an hour. Inflation, which is not mandated by law, but fueled by the actions of government, is the primary factor for the doubling of the rate today. The Federal government is printing one trillion of fiat currency over the next 13 months necessitating another increase next year. As a business, I peg salaries to a percentage above the minimum wage. I am sure if you are a skilled, educated or talented independent or union worker, when the minimum wage goes up, you feel justified (and probably are) asking for more. I am sure there comes a point in many small businesses, especially in a down economy, that a business needs to cut hours or positions because they must.