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1 for Workers, Employers, and Communities August 9, 2018 Webinar Q&A The Self-Sufficiency Research Clearinghouse (SSRC) sponsored a webinar, Understanding the Minimum Wage: Implications, on August 9, 2018, 2:00-3:30pm EDT. The webinar focused on how changes in the minimum wage affect individuals, families, employers and the economy. Today, the U.S. economy continues to grow and the unemployment rate remains low. Wage growth, however, remains slow for much of the labor force. The federal minimum wage has remained at $7.25 an hour since The combination of job growth and wage stagnation has led many localities to increase their minimum wage. Economists and research experts presented on what we know about minimum wage increases and their effects on workers, low-income families, employers, and state/local economies. This document is the Q&A from for Workers, Employers, and Communities. View additional Webinar materials. Questions and Answers What are the estimated impacts of state and federal minimum wage and overtime pay violations? Dr. Lou Nadeau: We looked at the appropriate data and approach we could use to estimate the impacts of state and federal minimum wage and overtime pay violations. Being an exploratory effort, we took California and New York, a couple of good states to work with considering the size of those two states. The idea was to develop this methodology in a way that can be applied to other states. A full-time, full-year employee currently earning the minimum wage at the time still $7.25 an hour earns about $15,000 per year. Any sort of violations of the minimum wage requirements where you re getting paid less than the minimum wage, that is going to certainly impact you. If you are only making $15,000 you should only be making $15,000 and if you are actually making less, that is quite an impact. We also know that many people who work a minimum wage don t even have fulltime jobs. But beyond that, failure to comply with the Fair Labor Standards Act (FLSA) requirements for minimum wage can lead to increased poverty, there s a loss of payroll taxes that federal and state governments do not get; but also those individuals who are working and not being paid to the compliant minimum wage may have some increased need for social programs. We re going to talk about the amount of money that gets lost, we re going to talk about the number of minimum wage violations, we re going to talk about the lost income from those, and we re going to talk about the implications of those in terms of impacts on poverty, payroll taxes, and increased need for social programs. The project really has three main steps. First, we needed to estimate the extent of wage violations in the United States, and for this we used two data sets. You ll see throughout this when I present numbers a number based on the Current Population Survey (CPS) and you ll see a number based on the Survey of Income and Program Participation (SIPP). The next step is to estimate the amount of the lost income that stems from the violations. 1

2 And finally, to estimate those economic impacts we re looking at poverty rate, increase in poverty, increase in tax, or lost tax revenues, and then the increased need for program participation. The idea here with program participation is that if someone is being paid in violation of the Fair Labor Standards Act s requirements for minimum wage, then they re going to have increased need for social programs such as school lunches and such, or SNAP (Supplemental Nutrition Assistance Program) or WIC (Women, Infants, and Children) benefits. Someone has to pay for that, and it ends up being other taxpayers. First step was to determine when those violations occurred among the respondents in the data. We have respondent level data. We re going to compare the wages reported by those respondents to the applicable minimum wage, and we re going to take into account exemptions. The Fair Labor Standards Act doesn t necessarily provide a minimum wage for each and every occupation in the United States, or overtime requirements for each and every occupation in the United States. There are some key exemptions. Tipped employees are sometimes exempt. Executive, administrative, and professional workers are in that exempt category. There is also payment, allows for payment of subminimum wages in certain instances such as student learners or apprentices and certain workers with disabilities. Once we had determined the instance of violations, accounting for exemptions, the next step would be to estimate the amount of lost income. And as you can imagine, the key piece here is we need to calculate the difference between what someone was paid hourly in actuality versus what the compliant hourly wage should have been, so the $7.25 an hour. And multiply that by the hours that that worker worked. How many hours were they paid in violation? This has to be based on the usual hours worked by that respondent so we re not just multiplying by the number of, a fulltime employee at 40 hours. We can annualize that number based on how many hours that person worked in their week, number of weeks, number of years or months to get to an annual value for each individual in the data. Finally, we needed to look at economic impacts. So here since we are using the Survey of Income and Program Participation, the SIPP data, we have information on who participated in which types of programs and can make those estimates. The lost income that someone suffers from minimum wage violation, that results in increased poverty, and it results in lost tax revenues for federal and state governments, but also it requires the need for additional participation in programs such as school lunch and school breakfast, the SNAP program, and WIC. In our report we attempted to make estimates for as many different social programs as were available in the SIPP data. And what you will see here we are going to focus on school breakfast, school lunch, the SNAP program, and WIC, primarily because it was - we are dealing with samples and we are dealing with a subset of that sample when we talk about violations that occurred. As we narrow down our data, we have fewer and fewer individuals on which to make a reliable estimate. Said these are the areas where we felt like we could make reliable estimates in terms of program participation, although you will find in the report estimates for all the programs we looked at, with the caveat that we didn t think some were as valid as others. As I said, we used CPS and SIPP for this. The key here is they are large nationally representative datasets. As you remember, as you might remember when I discussed this earlier, the idea here was to develop a 2

3 methodology that could be recreated for other states, could be recreated outside of the Department of Labor, that could be done by states themselves. An idea here was: let s develop a methodology that is not based on proprietary data or based on some sort of primary data collection. It would be based on something that someone else could recreate at a state level or regional level and look at minimum wage violations or overtime violations. The fact that they are publicly available and nationally representative works to kind of meet that requirement. Both datasets provide the information that we need. We have demographics, we have individual and family income, we have tax information, and program participation information. Although there is some CPS, it is primarily from the SIPP data that we use that program participation information. What is the prevalence of violations? I know a lot of these tables are going to look like this, they re taken directly from the report and I will summarize them for you. For California, we found around 334,000 to 370,000 violations per week from the of minimum wage violations, minimum wage violations per week. It s about 372,000 per week in California using CPS, and 334,000 per month in the SIPP for California using the SIPP data. Violation rates, we found there s a little less than a 3% violation rate among all jobs. When you look at the violation rate thinking of among low wage, nonexempt occupations, we re finding about one in 10 jobs had some form of minimum wage violation in the data that we were looking at. We found both California and New York estimate that approximately 3.5% of jobs subjected to the minimum wage requirements involved some sort of violation. The lost income per week, that s about $10 million in New York and $22 million in California. There s about $113 million in federal income taxes that are lost, and $238 million in federal payroll taxes that are lost. Those are a couple of numbers that I don t think I really detailed out in this presentation but appear in the report. There are $14 million in state tax revenues that are lost, and $8 million in New York. And, once again, school breakfast and lunch benefits, $15.5 million per year in California, and $7.7 million in New York. What do these violations look like? Who are they concentrated among in terms of occupation types? Dr. Nadeau: A good percentage of the violations we found in the data were among service industries. There were some among sales, but the other category is where another good chunk was that included a whole different slew of different industries. What did those who violated, or those who were working in violation, what do they look like? Dr. Nadeau: They tend to be younger workers in terms of age, mostly in the 16 to 24 age category you can see. Although women tend to have more violations than men percentage wise, we found that those results were not statistically significant. When we look at educational attainment, not surprisingly those who had no degree had definitely more violations than those who had some form of high school degree or above. And that kind of went up with violation rates went down with education to some degree. And finally, there wasn t much difference between for race and Hispanic origin among the respondents to the surveys, although we did find in New York those who are of Hispanic origin tended to have higher violations 3

4 4 SSRC Webinar Transcript rate than those not of Hispanic origin. The next step was to estimate the amount of lost income from the violations. What we saw our estimates from California was anywhere between $22.5 to $28.7 million per week of lost income for minimum wage violations. And for New York it was $10.2 to $20.1 million per week for minimum wage violations. That s extrapolating from the sample to the population in each state. When we take it down to a per worker basis and look at the amount of income that these people worked, so let us look at California and the CPS data. An average worker who suffered a violation lost about $63.00 per week. That represented about half of his or her income for that week and you can see the other numbers there in California. In the SIPP data we found it was about $86.00 per week, and that represented about 71% of their income. So certainly, these are not fulltime workers, so losing those wages because of minimum wage violations can have a significant impact on people. How do wage violations result in increased poverty? Dr. Nadeau: Our next step was to take those lost, that amount of lost income and look at it from the perspective of poverty. And here we are going to concentrate on the numbers of families where we found a violation, extrapolated out to the population. In California in the CPS data we found about 300,000 families would suffer from some sort of minimum wage violation. And about 7,000 of those would be a result in some sort of increased would be put into kind of poverty status because of that violation, representing about 23% of families in the state that would be so 22%, looking at a 23% increase from if there was full compliance with the minimum wage. Noncompliance with the minimum wage increased poverty in California using CPS data by about 23%. In terms of payroll taxes, those 300,000 families in California suffer about an average annual we lose about $560,000 per week from lost payroll taxes, representing an 8% decrease in payroll taxes for both state and federal payroll taxes. What are the impacts of wage violations on program participation? Dr. Nadeau: From workers who had violations, who were working in violation of the minimum wage law, to suffer a minimum wage violation, sorry, a number of those would have to utilize school lunches and school breakfasts for their children. So we found, of course, just in the SIPP data where these types of estimates are available that about $10 million in California, $10 million in additional school lunches were provided because of the minimum wage violations in California, and about $5.5 million in school breakfasts were provided in California due to the minimum wage violations. In New York, the numbers were $4.8 million in school lunches and $3 million in school breakfasts. So those minimum wage violations certainly have impact on the bottom line of state agencies, and state and federal agencies need to provide these programs to those who are working and have violations of minimum wage law. Finally, with SNAP what we found was there was about 29% increase in the number of families eligible for SNAP based on these violations. It led to overall, in California, our estimate was that it s about an $858 hundred thousand increase in the amount of SNAP benefits that needed to be provided, and in New York it

5 was about $2.8 million increase in SNAP benefits that needed to be provided due to minimum wage violations. Once again, these are estimates based on the sample in the CPS, and extrapolated to the whole population. What factors play into the conversation about changing the minimum wage? Dr. Gregory Acs: You re going to raise the hourly earnings of some workers; that s the whole point of raising the minimum wage. As a result of higher wages in the labor market, you are going to draw some people in who think, I can earn more money and now I m going to try to work. On the other hand, firms are going to see that their labor costs are going up, and they are going to respond to that either by shifting their labor mix, hiring a couple more high wage workers and letting go of a bunch of lower wage workers, investing more in capital equipment rather than workers, for example kiosks to order at restaurants rather than cashiers. And as a result, some individuals who were hoping to see their earnings go up with an increase in the minimum wage, they may have a reduction in hours or even have job losses. When incomes are changing, that is going to change the eligibility and the use of public assistance programs, and also affect the use of various tax credits. When you re thinking about what are the factors that are going to impact the minimum wage, first thing is the market position of the employers. Employers have to compete for workers. They also have to compete for consumers. And depending on how strong their market position is, adding worker costs they may be able to absorb or pass on, or may not be. That is going to affect the impact, the size of the impact of any particular change to the minimum wage. In addition, how big of an increase are we talking about? So right now the federal minimum wage is $7.25 an hour. If we raise it to $7.26 an hour, that is not going to have much of an effect. On the other hand, if we take it up to $40.00 an hour, that is going to have profound effects. So the size of the increase is also an important consideration. Also, the distribution of wages in the economy is going to matter. So if very few workers are working at or near the new minimum wage, or at or near the proposed minimum wage, that proposed raise in the minimum wage is not going to have that huge of an effect. If there are a lot of workers clustered in that range, you are going to have much larger effects. To the extent that it affects poverty and things like that, that is going to depend on the family incomes of minimum wage workers. If they are primary earners or sole earners, that is going to have a significant effect. If, on the other hand, they are teenagers in middle class families, you are not going to have much of an effect on poverty. So it depends on that distribution as well. And then finally, it really depends on how responsive employers are to changes in the minimum wage, and that is the subject of a bunch of research. Can you give some examples of simulations for forecasting changes in the minimum wage? Dr. Acs: I have two examples of simulations for forecasting for changes in minimum wage. The first one is a study by the Congressional Budget Office (CBO) done in 2014, looking at the effects of raising the federal 5

6 minimum wage. I am not an author of that study. And then the second one is an Urban Institute study of the potential effects of raising the minimum wage in the District of Columbia, and I am an author of that one. So first let s go with CBO. With the 2014 study, CBO is asked to look at the potential effects of raising the federal minimum wage from $7.25 an hour to $10.10 an hour. They were asked to look at the potential effects on employment, poverty, and the federal budget. They started with data from the Current Population Survey from 2013 reflecting hours worked. They were not focused on workers yet, they were taking the total aggregate number of hours worked in the economy. They then, step 2, because the policy was going to take effect in 2016, they aged the data forward assuming a certain amount of inflation and wage growth. Step 3, then they had to decide what workers would be affected, and they looked at workers who were covered by the Fair Labor Standards Act, and so they excluded non-tipped workers, and they focused on workers between the current minimum wage, $7.25 an hour, and the proposed minimum wage of $10.10 an hour. In addition, they allowed for ripple effects or upward effects. If you have someone who is working at $10.10 an hour already, and you raise everyone s wage who is below $10.10 up to $10.10, chances are you re going to want to raise that $10.10 an hour worker s wages a little bit. They had it bubble up, and essentially how much of the bubble up, how much of the ripple effect depended on what the prevailing minimum wage was at the time. In states that had the federal minimum wage as the prevailing minimum wage, they had wage effects occur all the way from $10.10 up to $11.53 an hour, because a lot of people were getting their wages bumped up. For those who were in a locality where the minimum wage was $9.00 an hour, for example, they only bumped up wages up to $10.65 an hour. A little bit complicated but not that bad. So that s how they those were the affected workers above the minimum wage. Step 5. They had to decide how big the employment effect was, and for this they looked at the extensive literature on the employment effects of raises to the minimum wage. And they landed on elasticity of -0.1, which basically means that a 10% increase in wages is associated with a 1% decrease in employment. That was the elasticity they applied to teenage workers, and for adult workers they applied a smaller elasticity that a 10% increase in earnings reduces employment by 0.33%. Now, how big any given worker s wage increase was depended on the worker s current wage rate. A worker who was making $9.00 an hour who had their wages raised to the new minimum, or just above the new minimum, that s a smaller increase than the increase from say if someone has $7.25 getting lifted all the way up to $ Only workers below the new minimum wage who started out below the new minimum wage could potentially have a reduction in hours by assumption in the model. If you were already getting paid above the minimum wage, the assumption was you would get a raise and they wouldn t reduce your hours at all. Step 6 then is to compute the changes in income resulting from the wage increase. And then step 7 was to look at this new distribution across families in income and look at what happened to taxes, transfers, and 6

7 macro-economic effects. SSRC Webinar Transcript CBO projected that employment will fall by about 500,000 workers, that is about 0.3%. But that 16.5 million workers would see their incomes rise, and that 900,000 families, people or individuals, would be lifted out of poverty. The real incomes of poor families would rise by about $15 billion. For near-poor families it would rise by about $12 billion. The real incomes of higher income families, those with incomes above six times the poverty line however we go down is a function of decreased economic activity. Netting it out on the federal budget, CBO found that over a 10-year window it would not have much effect at all. This is an example of how you can forecast the potential impacts of minimum wage at the federal level. Next, I want to talk about how we have these special issues that come up when you re looking at changes in minimum wage at the local level. The Urban Institute back in 2013 was asked by the mayor of the District of Columbia to help them think through the potential impacts of raising the minimum wage in DC, which at the time was $8.25 an hour up to a proposed level of $11.50 an hour by Now, because the client was a local government, what they really cared about was people who lived and worked in the District of Columbia. There are people who are low wage workers in DC who do not live in DC. They would commute in from neighboring jurisdictions. And there are people who live in DC who work outside of the DC jurisdiction. The focus was only on those who both live and work in DC, and the question was to assess the employment and the incomes of those workers, how a change in minimum wage would affect them and what would happen to participation in public assistance programs and tax credits targeted at lower income families. Our strategy was to start with a representative sample of low wage workers in the DC area, which we drew from the American Community Survey. Take that population and project it forward to Adjust for the under-reporting of income using the Department of Health and Human Services micro-simulation model, TRIM (Transfer Income Model), which we develop and host at the Urban Institute. Transfer income is notoriously under-reported in survey data, but because we know how much people, how much the government is actually spending on public assistance programs, we can look at people who do not report getting benefits, who really look like they re getting benefits, and just add it up so that the total in the data reflects the administrative data total. We adjust for under-reporting, and then we simulate the effects of raising the minimum wage. So more specifically, we took three years of data from the American Community Survey to get a large enough sample. We decided to focus on workers between $5.50 an hour and $13.50 an hour, and that is a broader range than $8.25 to $ Let me take that in pieces to explain the decision. For those between $5.50 an hour and $8.25 an hour, the old minimum wage, we figured with the data there was probably some misreporting, under-reporting, and that that they may have overstated a number of hours, or understated their earnings over the weekly periods when we computed the wage. We wanted to bring those workers into the sample; we didn t want to disregard those workers. Their wages would go up along with the rise in minimum wage. They wouldn t go all the way up to the new minimum wage, we didn t want to overstate the effect, but they would get the minimum wage increment. 7

8 On the high end, the $11.50 to $13.50 group, we included in the analysis for our ripple effect figuring that if the minimum wage was going up, those making at just about the new minimum wage currently would see an adjustment to their salary. Those are the, our affected population, low wage workers with wages slightly lower and slightly higher than the old and new minimum wage. All told, we found that there would be 41,000 low wage workers would be affected by DC s change in the minimum wage. First question always is, are these workers, you know, in low income families? And in DC that is generally true. While only about 20% live in families that are below the poverty line, over half are in families with incomes below twice the poverty line. These are mostly lower income families. Next, we wanted to look at the age of these workers. When we think of minimum wage workers a lot of times they are teenagers, and that may be true in other jurisdictions, but in DC it s really not the case. Only 4% of the workers we found who would be affected by the minimum wage change were under 20. The bulk, 60%, were prime-age workers between the ages of 25 and 54. Next, we looked at the education levels, and these are less, by and large, less educated workers, about half of a high school degree or less education. And then we also wanted to know what their family circumstances were. And over two-thirds were unmarried and had no kids living with them at the time. We also looked at the occupations and industries for these workers, and they were mostly in service and retail industries, and they worked in food preparation, maintenance, and other support occupations, and they were disproportionately in the private sector. You know, the federal government has a public-sector employee which pays better than the minimum wage. Looking at the effect of the minimum wage, or potential effect of the minimum wage rise in DC. We, like CBO, assumed an elasticity of -0.1, a 10% rise in wages leads to a 1% decline in employment. If we apply this across the board to all ages, all workers, we found that among the affected workers, employment would decrease by 1.2%. If we assume this effect was restricted to those who were under age 25, obviously fewer workers so a smaller effect; about 0.3%. Another way to think about it is even if we got the elasticity wrong, even if the effect is twice as big as what we thought so that a 10% rise in the minimum wage would be associated with a 2% decline in employment, even doubling the assumed effect, we would still see that less than 1,000 workers would have lost their jobs in DC in our simulation. Next, looking at income and earnings effects, we see that earned income would go up a bit. For those below the poverty line it s about an $840 increase in earned income. For those with earnings, or income between one and twice the poverty line, the earnings increase would be somewhat bigger, it would be a little over $1,800; that s because they work more hours. However, while earnings are going up, income is going up by a lot less, and that is because these folks are getting some public benefits and some tax credits that are decreasing as their earnings go up. So for example, among the poor while annual earnings may go up by $840, annual incomes are only going up by $450. 8

9 Turning next to specific programs. You can see that both the caseloads and the benefits paid out in SNAP, in LIHEAP (Low Income Home Energy Assistance Program), in housing subsidies, child care, WIC, family assistance, SSI, all go down by a little bit. Finally, looking at tax credits, we see that the value or the receipt of the federal and local, the DC EITC, goes down. Basically workers who are low wage workers who are affected by the minimum wage increase, when their earnings went up, they were in the phase-out range for the Earned Income Tax Credit (EITC), so they were getting less money in the Earned Income Tax Credit than they used to. On the other hand, they were getting more money from the Child Tax Credit largely because the Child Tax Credit starts, at least historically, started phasing in later, not with the first dollar of earnings, and it phases out way later than the Earned Income Tax Credit. Some of the loss from the EITC is offset by the increase in the Child Tax Credit. Either way, these are not big numbers. Going through and reviewing some key points from the DC study. Of all the low wage workers in DC, people who are working in DC, who live in DC and work in DC, only two out of five both live and work in DC. We re only focusing on those who are working in DC and whose taxes and benefits are coming from DC. Not people who are coming into DC and not people who are going out from DC to work. So only two out of five of all the low wage workers in DC both live and work in DC. Over half of those affected workers however do live in low income families. And one out of five live with the children they are supporting. Next, looking at employment. Our findings suggest that the employment effects are not going to be that big. And the reason that they re not going to be that big is that there are not that many workers in the affected range given the whole size of the city. Regarding income, you know, the income boost, half the families who are affected do get some income support. Averaged out, earnings go up by about $1,500. But because they are taxed away through the loss of benefits and the loss of tax credits, that results to only about a $1,000 increase in income. And the income gains are bigger for higher income families because they weren t getting tax credits and they weren t getting public assistance program support to begin with. You do worry about things like are businesses going to relocate? Are prices going to go up? We looked at public benefits, we don t see a huge change. We don t think private benefits are a huge issue in that paying higher wages means you contribute less to health insurance, because most of these workers weren t getting private health insurance to begin with. Business relocation, not likely to happen because of the unique nature of DC. You still want to be at a hotel near the monuments. How good are these prediction models? Dr. Acs: The CBO study we really can t do a validation because we didn t raise the federal minimum wage. The DC study, the minimum wage increase actually passed before we finished the study, much to the mayor s chagrin. But we are also in the context of a really hot economy here, and so establishing the proper counter factual and understanding what would the world have looked like had we not raised the minimum wage Maryland raised its minimum wage with the neighboring jurisdiction as well. We really, we did not go back 9

10 and do an assessment of how good our predictions were, and it would be really challenging to do given how many things changed. There has been other research that has looked at the relationship between minimum wage changes and public benefit receipt, and the costs of public benefits and public benefit costs. And the results are somewhat mixed, with some finding some reductions and others finding no appreciable change. I think that is worth continuing to look at. Prediction models are really useful ways to think about policy outcomes, potential policy outcomes in a structured way. Of course, you think about all the things that might be changing and all the factors that affect it, and to make reasonable assumptions to get reasonable predictions when you are looking out the windshield to go forward. In the case of minimum wage, what really is going to matter if you are trying to predict the possible effects of minimum wage are the size of the potential wage increase the bigger the increase, the more likely you are going to get big effects. How wages are distributed at present if there are a lot of workers between the old and the proposed minimum wage, you re going to get bigger effects. And how able are employers to relocate or change their production technologies? Some industries are easier to change and move, some industries much harder and it depends on where the workers are working. Can you describe the current context in the United States? Dr. David Neumark: The U.S. is moving into a regime of quite high minimum wages. The federal minimum wage has not changed since 2009, it is still $7.25, but we now have 29 states that have a minimum wage above the federal level. The average difference is around 30%. We now have quite a few cities who have joined the parade, implementing their own minimum wage laws. There s obviously a serious federal debate of the $15.00 minimum wage, and that was part of the Democratic party platform in the last election and almost surely will be in the next one. What s driving the policy change? Dr. Neumark: The middle has moved away from the bottom, or the bottom has fell away from the middle, depending on your perspective. But in relative terms they are the same. And what you will see is the fact that no economist disputes, that inequality has risen. It rose a lot over the 70s and 80, hasn t changed as much in recent years, but this is part of what has made life tougher for low wage workers, and thus to some extent helped prompt the interest in minimum wages. The second key fact that probably drives this debate is the relative stubbornness of our poverty rate. The economy keeps growing aside from the business cycle, and the poverty rate is pretty stubborn. There s some dispute about that measurement. The CEA (Council of Economic Advisors) just put out a study, but this is the official poverty statistic. And keep in mind the U.S. uses an absolute poverty measure, so a grown economy with no changes in inequality would by definition reduce poverty. This is a function of the rise in inequality. The third thing is that the federal minimum wage, which is becoming less relevant because of all the state minimum wages. The federal minimum wage is lower in real terms than it used to be. This is just the real value of the minimum wage going back to We don t index the minimum wage in this country, we just 10

11 raise it every once in a while, and that s what all the upward spikes are. The last one in 2007, 2008, and 2009 when we raised the federal minimum wage. And when we are not doing that, inflation is eating away at it and, of course, inflation eats away at more of it when inflation is high, which is the explanation of the sharp decline in the early part of the graph. The federal minimum wage really hasn t declined a lot in real terms in the last 20 years, aside from the saw tooth pattern, but it s definitely lower than it was back in the mid 70s by a substantial amount. I think these facts are probably the three key points people talk about when they say we should raise the minimum wage. One, it has not kept up with inflation. Two, coupled with other changes, and a lot of things are behind this, but we have greater inequality and part of it is that the minimum wage has not kept up. And three is that we still have quite a bit of poverty, whatever your exact view on the most recent evidence is. Does a declining real minimum wage, that is a fact, imply that we should raise it? So this is a quote from the Obama Administration back when it was trying to raise the minimum wage. Since it was first established in 1938, the minimum wage was eroded substantially over several prolonged periods because of inflation. The proposal to raise it, etc., etc., would restore the real value of what it was. The minimum income floor for many at least is more generous than it used to be. Earnings for a fulltime, full year worker has declined because the minimum wage has declined. But without having the EITC, if we didn t have it at the beginning of this, or we just added it at the beginning of this sample period in this graph, the EITC, as many of you know, has grown dramatically and is now a big and generous part of our social safety net. Although it is contingent on work, of course, the minimum wage is as well. If we do the graph here for a single earner with two children, the combined effect of the minimum wage plus the EITC has made our minimum income floor, if you want to call it that, actually more generous than it used to be. Just saying the real minimum wage has declined isn t enough of an argument to say that s why it should go up, because we have other policies now. If we had two policies, A and B, and we decided B is better and we let A get less generous, you might say that makes sense. But whatever you think of this story, remember the minimum wage is by no means the only thing that affects the take home pay of a worker. The EITC has become a huge part of that. Will a higher minimum wage counter the rise in inequality? The point is a huge part of the action in terms of inequality is what s happened at the top relative to everybody else. That s a real problem for many people, it s a real policy issue. The minimum wage has nothing to do with what people at the 99th percentile make relative to most of the rest of us. In that sense the minimum wage may or may not be a good idea. It at best nibbles at the edges of the inequality problem. It is not a way to get back to the kind of wage inequality earnings wage equality or earnings equality we used to have. What do we actually know about the minimum wage? These are the two key empirical assertions that I think are used to make the case for the minimum wage. One is a higher minimum wage will help low wage workers. The second is a higher minimum wage will reduce 11

12 12 SSRC Webinar Transcript poverty, or help poor or low-income families. What does economic theory tell us about the effects of the minimum wage? In general, we think when things become more expensive, in almost all cases people use less of it. When gas goes up, people cut back on their driving. Think back to the huge price increases during the 2008 election. We tax cigarettes in the hopes that it will discourage people from smoking, and it does, it may do at least for young people. Turning things around, we subsidize things to get people to do more of them, like subsidizing green energy. We think you make something more expensive, people use less of it, and vice versa. That seems a reasonable way to think about it. And this is clearly a potential unintended consequence of higher minimum wages. No one who thinks we should raise the minimum wage wants people to lose their job, but we have to worry about whether this happens. Now, the world is actually a little more complicated when we talk about labor. The minimum wage goes up, that raises the price of low skill labor. Firms will then reduce the use of low skill labor, and increase the use of other inputs; maybe more machines; maybe shifting to somewhat higher skilled workers. That inevitably is going to raise the cost of production, because otherwise they would have chosen that way of producing stuff before. And that s going to raise prices. And for some goods, consumers will be sensitive to that and they ll demand less of whatever it is for which the price has gone up. Both of these effects act to, at least in theory, reduce employment of low skilled workers. Employers substitute away from them and try to find other ways to do whatever they do. And because prices have gone up, the demand for products produced by low wage workers will tend to fall. That is the theory, not the evidence. What does the evidence say? There s earlier research where we just back in the period when we pretty much just had a national minimum wage and we looked at what s called time series data, like what happens to youth employment over time as the minimum wage changes. This research leads to estimates of elasticity. The kinds of general view from that earlier research - this research ended in the 1990s - was that elasticity was about -0.1 to -0.2, which means a 10% increase in the minimum wage reduces employment, very importantly, of strongly affected groups by 1-2%. Not of all workers. Most workers in the U.S. are not affected by the minimum wage because the minimum wage isn t that high, although that could change if it goes higher. Typically, the research is looking at teenagers because teenagers are very low skill and very low wage. Some research looks at other very low skill groups, high school dropouts for example. But this is all about what happens to low skill workers. That research is not viewed as that compelling because it s hard to estimate the effects of the minimum wage. There s a word we throw around all the time in policy research called the counterfactual. We change a policy and we want to ask the question, what would have happened had we not changed the policy? And it s the comparison between what did happen and what would ve happened that tells us what the policy did. Now, that s very hard to do in national data. If you want to do the mental exercise, during the Great Recession we passed the American Reinvestment and Recovery Act, the ARRA. And people argued, well, did

13 it help? Did it make the recession more mild than it would have been? Well, the problem is we do not know what would have happened otherwise. So in that case we can only use a model. But in the case of minimum wages we have this great feature of the United States, at least from a research perspective, that we have a lot of variations in minimum wages across states and now cities. And that gives us a better comparison. I can think about, you know, some states raised the minimum, I can identify other states with kind of similar economic conditions, etc., that did not raise the minimum, and then a comparison between them gives us more reliable information. Here is just an example of what I call the U.S. economics laboratory. This is the number of states with a minimum wage above the federal level over time, and you can see until the late 80s almost non-effectively. But since then the number of states with higher minimum wages has gone up a lot, and as I said before it is now near [audio breaks up], and in fact the average percent differences are pretty big. We have a lot of interesting and useful variation here that helps us sort this out, or at least try. I am going to go in three steps here. One I already did which was the old time-series evidence. Now I am going to talk briefly about a review that my coauthor, Bill Wascher, and I did in 2007, and then I ll talk about some new evidence since then, because the debate keeps going. In 2007, Wascher and I did an extensive survey of essentially everything we could find in the last 15 or so years, written in English so we could read it. And there were over 100 studies; about two-thirds of them find negative effects. That is an empirical fact. The next fact is a bit more subjective; 85% of the studies we viewed as more credible find negative effects. One can differ on what study one views as credible, but we lay out the arguments. And then a very important point that I will come back to later; the disemployment effects look larger when you look at the least skilled workers. The studies that more sharply zoom in on those workers whose wages are actually pushed up by the minimum are more likely to find some job loss. There s a new set of studies. This debate has gone on unabated since our survey and book. I cite two papers here that have kind of criticized the approach we ve used, and essentially there s a lot of technical details here. But the key point is that they argue that the only way to get validate estimates of what minimum wages do to jobs is to look at geographic areas very close to each other; states very near each other, or in some analyses, counties in different states with different wages, different minimum wages, but on opposite sides of the border. What happens when they do that? When you use that what I call close controls approach, you tend to find no effect on employment. Those estimates tend to be near zero. There s one exception. These studies tend to give you no effect of minimum wages on employment. But then, at the same time that these studies have come out, there s another set of studies that take a different approach to the same problem. They are wrestling seriously with the issues that have come to the fore on the most recent research on minimum wages, but they re doing it in a different way. One of them is to look at the lowest wage workers in the state relative to workers who make a little bit more who are not affected by the minimum wage, but they are probably affected by whatever else is going on in the state that affects low wage workers. And when you do those kinds of comparisons, that s the Clemens and Wither paper, you get a really big negative. Note that there is a there. Greg was using numbers of kind of

14 and suggesting maybe -0.2 as an upper bound. Some of these studies, if you go down this table, actually in fact most of them actually find bigger estimates than the earlier research used to find, bigger adverse effects. What do we conclude? Here is I think where you get a lot of room for all different kinds of arguments. One thing people say is the evidence is all over the map, we can t tell so let s just assume there s no effect. That seems like a bad idea. There are some earlier papers, there are some recent papers that do not find any job loss of minimum wages. This is the minority of studies for sure. It hinges on restrictions that are to some extent untested, and to some extent not supported in other work that s been done. And there s a continual flow of studies, in my view they are better studies, but one might form their own view. But regardless, there is a continual flow of studies that address similar issues to the recent research and finds disemployment effects. You might as a consumer of this research have your own opinion as to which research you believe or don t believe. But one thing we ve got to be aware of: when someone says there s no evidence that minimum wage reduces employment, that s patently untrue. There are a lot of studies that do. There is evidence out there that points to job loss from minimum wages, and there s quite a bit of it. And I think that is an important fact that often gets obscured in the debate. Does a higher minimum wage help low wage workers? Two out of three like a minimum wage hike. Some workers get a raise; others lose their jobs. And they do present some tradeoffs. This doesn t say, nor does what I am going to say next, imply that minimum wages are a good idea or a bad idea. I think the research says clearly there are some tradeoffs. It s not a free lunch. Some workers gain, some workers lose. Policymakers therefore have to do what we hired them for, which is to make the tough choices weighing those costs and benefits. Does a higher minimum wage reduce poverty? I think this is the question that policymakers need to grapple with. Just because someone loses their job for minimum wage doesn t mean it s a bad idea. You could think of a lot of government regulations that might have some benefits that will still lead to some people losing their jobs. If we ever pass comprehensive climate change policy, oil refineries are going to put people out of work. Does that mean it s a bad thing? Well, probably not if we like climate change policies. We have to sort of think about the goals of the policy and does it achieve them given that there are some winners and some losers. Here s these two quotes that sort of make the case that a very sensible criterion on which to assess minimum wages is how they affect poverty. Ted Kennedy, perennial sponsor of minimum wage legislation when he was alive called it the best antipoverty program. 85% of low wage workers are in families whose income-to-needs is less than one, that is they are poor. And as we go down the rows of the table we re going to higher income families. And the last row is three or above, these are families that earn more than three times the poverty line, which think of, I have not checked the number recently, but around for a family of four in the mid-fifties or maybe the high fifties. Minimum wages must help low income families because, look, all those low wage workers are in poor 14

15 families. I m playing with you a little bit, but the problem, these data are from And if you actually expand it out to the future, you see this dramatic change. Extremely good targeting where low wage workers are in low income families, and hence the minimum wage would help a lot of low income families, that falls apart as we move forward in time. In 2012, it falls to 12%. 40% of low wage workers are in families more than three times the poverty line, which is about median income. What has changed over time? Why has this happened? It s happened for I would say a bunch of reasons, but there are two main reasons. One is there are more additional workers in families. Greg talked about the teenagers who might earn the minimum wage who aren t the primary earners. A lot of minimum wage workers are disproportionately teens, and a lot of those teens are not in poor families, they are in higher income families. Secondly, it s more possible because we have a safety net for people not to work at all. If you look at the working age population in the U.S., more than half of families headed by a working age person had zero workers. The problem of poverty is partly low wages, but it s much more no work, and in that sense minimum wages do not target the poor very well. It s really hard to find the net effect of the minimum wage on poverty in the United States in one direction or the other. What about reducing government expenditures? Some people say, maybe not much changes but we re going to shift the support of kind of low income families from the government to employers. Maybe income doesn t change much. Greg actually showed that income rises less than earnings, but maybe benefits expenditure falls a lot, and he sort of alluded to this. The fact is you really can t find any clear evidence of that. A recent comprehensive study of all these categories, Medicaid, free and reduced-price lunch, etc., finds no clear evidence of a reduction in receipt of these benefits, except for SNAP. And SNAP is a little unusual because it has some work requirements built in, so one possible reason SNAP receipt falls is because some people can t find jobs and can t meet the work requirements. We don t know that yet, but there certainly is not clear evidence that we are doing this major shift of supporting kind of low wage workers and low-income families from the government to employers by raising the minimum wage. The central challenge is how do we increase incomes of low income families without discouraging work? And the minimum wage has two problems here. One is it discourages work a bit because it discourages employers from hiring low skilled people. The second is it doesn t really target families very well. We want the law to say thou shalt not be poor; that is a hard law to write. We write a law instead that says thou shalt not pay low wages; that is an easier law to write and enforce, but it doesn t do that much for poor families is the problem. Is there something better than raising the minimum wage? The EITC has also become a very popular policy. I mentioned before that it has grown massively at the federal level. There is also a lot of growth at the state level. Not quite but nearly the same number of states now supplement the federal EITC. The EITC is the closest thing we have discovered to magic dust. For those who don t work, most of you do, but it pays nothing if you don t work. But if you do work, it subsidizes what 15