Raising the Minimum Wage Isn’t Bad Economics

By Connie Kwong

Source: MSNBC

Source: MSNBC

It’s common knowledge that California is an expensive state to live in, and the affluence of areas like the Bay Area, Los Angeles, and other coastal regions is well-known. At the same time, the state is home to the highest poverty rate in the United States. Depending on the method of gauging poverty, between 16 and 23.4 percent of California residents live in poverty, which is well above the national rate of 14.9 percent.

Numerous ideas have been introduced on how to best tackle poverty, but one of the most prevalent solutions proposed is raising the minimum wage. The fact that California has such a high cost of living makes the dynamics of the minimum wage debate especially interesting, because this debate is constantly oversimplified and misrepresented as a conflict between workers and the forces of supply and demand in the labor market. Efforts to raise the minimum wage in cities like San Francisco, Oakland, Los Angeles, and Sacramento demonstrate that while the nature of economic inequality may vary between different parts of California, the ultimate justification for raising the minimum wage is to promote economic growth in a more equitable and sustainable manner.

What economics can and can’t tell us

The most oft-cited argument against raising the minimum wage is that it violates “basic economic principles.” Higher wages raise the price of labor, and while this will increase the supply of labor (the number of workers willing to work) it becomes costly for employers to pay workers, reducing the demand for labor, and causing higher unemployment among low-skilled workers. Another major concern is that raising the minimum wage will result in inflation as businesses raise prices to offset the costs of higher wages.

These are indisputably legitimate concerns regarding the condition of the economy. And while this is technically a correct demonstration of a typical economic supply and demand model, we need to remember that no one contests that all economic models are simplified versions of the world. We can use models to explain the costs and benefits of resource allocation, but we also have to remember that not all models are accurate, and they can become outdated in the presence of new information and research. That’s especially true in the labor market, which doesn’t operate like other markets because of how greatly embedded it is in human actions and livelihoods. In other words, we cannot evaluate the effects of raising the minimum wage simply by where it places us on the supply and demand curves in a graph describing the labor market, because there are social externalities that can’t be numerically quantified.

But that doesn’t mean that we can’t use economics to help make the case for raising the minimum wage. For instance, studies conducted by economists published by the UC Berkeley Institute for Research on Labor and Employment, the Industrial and Labor Relations Review, and the Industrial Relations Research Association cited empirical evidence showing that raising the minimum wage had little to no negative effects on employment. Another report published by the Center for American Progress pointed out that raising the minimum wage could help boost government savings by reducing SNAP expenditures.

Moreover, a survey of leading economists from prestigious American universities conducted by the Initiative on Global Markets at the University of Chicago’s Booth School of Business found that nearly half of the economists surveyed (47%) agreed that the benefits of raising the minimum wage substantially outweighed the costs. In fact, only 11% explicitly disagreed with raising the minimum wage. Although the remaining 35% were uncertain or had no opinion, this demonstrates that there should be more research efforts to observe the impact of raising the minimum wage for working class Americans. So the absence of a majority consensus among economists on this issue does not necessarily negate the positive impacts of raising the minimum wage; especially when we consider that economic data tells us that while American labor productivity has more than doubled in the last 40 years, wage growth has been stagnant, with the real value of the minimum wage remaining flat or declining.

Davis too

On October 30, 2014, I attended a public forum discussion hosted by the Raise the Wage Davis campaign at the Mary L. Stephens Davis Branch of the Yolo County Library. The goal of Raise the Wage Davis is to put forward measures that would gradually raise the minimum wage to $15 for the city of Davis, Calif. They hope to collect 7,000 petition signatures in time for the initiative to be placed on the November 2016 ballot. The keynote presentation for the event was given by Dr. Chris Benner, a professor of geography and community and regional development at UC Davis.

During the presentation, Dr. Benner pointed to similar initiatives taking place in Seattle and Salt Lake City that have achieved milestone successes. In Seattle, for example, the community-oriented problem-solving strategy known as the “Seattle process” helped unite different actors in the Seattle economy in favor of raising the minimum wage to promote equitable economic growth. Dr. Benner also pointed out that unemployment as a result of wage increases is typically more of a short-run effect, and that because unemployment and high turnover are structural problems that are augmented by the ups and downs of the business cycle, increased infrastructure in the labor market such as job placement programs would be better solutions to addressing the issue. Additionally, he echoed several prominent arguments that economists, sociologists, and political scientists alike have made in favor of raising the minimum wage. With higher wages, workers have more money to spend on goods and services in the economy. Businesses experience lower worker turnovers, which reduces training and hiring costs and also boosts productivity. Raising the minimum wage would also likely result in minimal increases to small businesses’ operating costs.

One crucial takeaway point from Dr. Benner’s presentation especially resonated with me. Income inequality hurts the economy as a whole, but we cannot rely on legislators in gridlocked Washington, D.C. to pass the reforms for us. And that’s especially true for California, a large, diverse state that is simultaneously home to the world’s eighth-largest economy and one of the highest poverty rates in the nation. Dr. Benner emphasized that grassroots efforts like Raise the Wage Davis play a critical role in inspiring change. A small, rural city like Davis does not necessarily face the same economic conditions as large cities like San Francisco, Oakland, Los Angeles, and Sacramento, which are respectively different from each other as well. But the fact that all these cities are home to active minimum wage increase movements demonstrates a common theme: raising the minimum wage will not solve poverty entirely, but it is an important and necessary first step to addressing economic inequality.

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