John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributed the following column.
Legend has it that President Truman asked his staff to bring him a one-armed economist. He was tired of economic advisors saying “on the one hand… but on the other hand….”
On the one hand, minimum wage workers do not make enough to live on. On the other hand, increasing the minimum wage will reduce jobs.
President Truman could just as well been speaking of the minimum wage when he addressed the opening session of the United Nations:
We must build a new world, a far better world – one in which the eternal dignity of man is respected.
I could argue for increasing the minimum wage based on dignity, or a “living wage,” or fairness. Instead, I will argue for it based on economics.
The Fair Labor Standards Act of 1938 established minimum wages. In 1978, Congress established a uniform minimum wage.
The minimum wage was $4.25 per hour in 1978. If we adjusted for inflation, it would now be $9.50.
The federal minimum wage is currently $7.25. In Massachusetts, it is $8.00.
Close to one hundred thousand people in Massachusetts earn about $8.00 per hour. Half of them have some college education and three out of five are female.
A full-time minimum-wage worker earns $16,000 per year. The median cost for rent and utilities in the City of Lowell is over $11,000 per year.
The Department of Housing and Urban Development classifies a family of three in the Lowell area as low income if they earn less than $40,850. A single mom making the minimum wage would have to work almost 100 hours per week to earn that much.
The minimum wage is a price floor. Basic supply and demand analysis says that a price floor will create a surplus, in this case of workers.
On the one hand, a minimum analysis argues that increasing the minimum wage will cause people to lose their job. On the other hand, a careful analysis says maybe not.
Increasing the minimum wage might be the most effective stimulus we could give to the economy. If very low-income workers earn a little more money, they will spend it.
If people are spending more money, there will be more revenue for employers. There will be more demand for workers.
Still, some claim that employers will cut back on staff. Some may, and some may raise prices, but enlightened business owners will realize higher pay can be good for business.
Henry Ford paid his workers more than he had to. He realized that “efficiency wages” would stimulate hard work and loyalty.
An expression I heard on my first job after high school puts it a little more crudely: “If you pay peanuts you get monkeys.”
Professor Gregory Mankiw from Harvard was chair of the Council on Economic Advisers for President George W. Bush and advised presidential candidate Mitt Romney. He also wrote a popular textbook on economics.
Mankiw explains the theory on one hand and the other. He concludes with studies of real examples in the United States where increases in the minimum wage resulted in an increase in employment.
A 2008 study by the London School of Economics and Political Science supported those findings. They tied the results to efficiency wages.
The two most recent increases in the Massachusetts minimum wage happened to coincide with recessions. The Massachusetts Budget and Policy Center observes that low wage sectors lost fewer jobs and recovered faster than higher wage sectors.
Massachusetts has not increased the minimum wage since 2008. The legislature is currently considering a gradual increase from $8 to $11.
The Economic Policy Institute analyzed the likely impact if the Massachusetts minimum wage was increased to $10.00. They estimated that almost six hundred thousand workers would get a pay increase and the stimulus would create 4,500 jobs.
The Massachusetts state director of the National Federation of Independent Business claims that raising the minimum wage will make us an outlier. Massachusetts already is an outlier, but not with respect to the minimum wage.
The minimum wage is higher in Connecticut and Vermont. Rhode Island just increased their minimum wage to $8.
Massachusetts is an outlier in cost of living. According to Payscale.com, someone earning $20,000 in Kalamazoo Michigan would need to make $31,538 in Boston.
According to the Census Bureau, the cost of living in Massachusetts is 21 percent above the national average. The Commonwealth’s minimum wage is only 10 percent above.
President Obama has proposed gradually increasing the national minimum wage to $9.00. On a percentage basis, the total increase would be the same as the 2010 increase in pay of large company CEOs who now make an average of $9.7 million per year.
The United States is facing a social cliff of inequality. A recent Federal Reserve study found that the decline in the inflation-adjusted value of the minimum wage was a significant contributor to income inequality.
Congress should increase the national minimum wage, but nothing is likely to happen any time soon. Massachusetts should not wait.
There should be exceptions for teenagers working summer jobs. There must be an exception for student internships.
Massachusetts’ competitive advantage is our workforce. Paying low-paid workers a little bit more will be good for the economy, and promote the common wealth.