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Below is a complimentary Demography Unplugged research note written on 1/4/21 by Hedgeye Demography analyst Neil Howe. Click here to learn more and subscribe.

Coming Soon? → $15 Minimum Wage - 1 5 2021 11 46 00 AM

President-elect Joe Biden's promise to raise the minimum wage has public opinion blowing his way: In Florida, a $15 minimum wage initiative was recently approved by 61% of the voters, adding to a growing list of successful efforts to raise the minimum wage at state and local levels around the country. (Brookings Institution

NH: The federal minimum wage is now $7.25/hour. It was last raised in 2009 as the result of legislation signed by President G.W. Bush in 2007. You can expect that $7.25 to get pushed higher soon--and probably a lot higher--no matter who wins in Georgia on Tuesday.

Probable winners: Most low-wage workers, the Biden Presidency, and large firms in the restaurant, hospitality, and retail space. Probable losers: Small price-taking firms in the same space that rely heavily on unskilled part-time help, affluent households, and many Republicans who still champion federalism.

Let's start with a little background. During the Reagan and Bush Sr. years, the real (or CPI-adjusted) federal minimum wage was allowed to fall. Ever since, it has been periodically adjusted to keep up with inflation--but nothing more than that. As a result, the real wage floor is roughly back where it was in during the Truman Presidency and considerably below where it was from the mid-1950s through the mid-1980s. 

Coming Soon? → $15 Minimum Wage - Jan4 1

Keep in mind that real family incomes were a lot lower back when when General Douglas Macarthur was landing troops at Inchon. In 1950, a full-time minimum-wage worker earned about 41% of the median family income. Today, such a worker earns about 17% of the median. 

Over the last decade, starting in the dark wake of the Great Recession, public support for a sizable increase in the minimum wage has steadily risen. In 2013, President Obama pledged he wanted to raise it to $9.00. In 2016 he raised his goal to $10.10. (See "Waging War Over the Minimum Wage.") But, as happened to so many of his later initiatives, Obama came away with nothing. President Trump said he too wanted a higher minimum wage, but he believed that states should take the initiative, not the federal government. "Alabama is different from New York, New York is different from Vermont, every state is different," he said.

In increasing numbers, that's just what states are doing. As of last month (December), 29 states have a state minimum wage higher than the federal minimum--up from only 18 states at the beginning of 2019. Nine states, including CA, CT, IL, MA, NJ, and (now) FL, have enacted laws that will raise their state minimums to $15/hour within the next few years. Some 26 cities and counties have separately raised their minimums higher than their states. Many of them (including New York City, Seattle, St. Paul, and San Jose) are already at or above $15.

Sure, just about every state and local government taking the lead in hiking its minimum wage is reliably Democratic and boasts above-average per-capita incomes. In most of the new $15/hour "superstar cities," average incomes and rents are so high that workers with earnings below the national average can barely afford to live there. (See "Biggest Metros Spawning Greatest Inequality.") Many of the priciest metros are in California, where (according to Census" Supplemental Poverty Measure) a full-time job at the federal minimum wage would still leave a two-person household below the poverty line.

That's what makes the recent Florida hike so striking--and possibly a harbinger of what's to come. No one could call Florida a bluezone state. Florida has two GOP senators and a GOP governor, and it just voted for Trump's re-election by 3 percentage points. But on that same day it voted by 61% to 39% to hike the minimum to $15 by 2026.

Surveys point to the same trend. Already by July of 2019, Pew reported that two-thirds of Americans supported rising the federal minimum wage to $15. Democratic-leaning voters overwhelmingly supported the idea, 86% to 14%. Republican-leaning voters were split, leaning slightly against by 57% to 43%. Pew did not publish data by age, but another survey taken about the same time suggested that support was roughly the same across all age groups.

Coming Soon? → $15 Minimum Wage - Jan4 2

Since the pandemic and the lockdowns, as public sympathy has risen over the plight of low-income "essential workers," the pro-hike majority has almost certainly grown larger. According to a USA Today/Public Agenda survey, the share favoring a minimum wage high enough to "keep people over the poverty line" rose by about 10 points between February and August of 2020. And the jump among Republicans and Independents (+14%) was twice the size as the jump among Democrats (+7%).

Coming Soon? → $15 Minimum Wage - Jan4 3

Understandably, Biden's first priority in 2021 will be fighting the pandemic and accelerating the vaccine rollout. But after that, he's likely to push a few simple "populist" initiatives with broad public support--and you can bet that a higher federal minimum wage will be near the top of his list (along with selective tax hikes on the rich, a phased "Medicare buy in," and some sort of broad antitrust initiative).

Team Biden understands, correctly IMO, what its progressive allies do not: that American voters have recently migrated to the left more in the realm of economic policy than on cultural issues. (See "Public Leaning Much More to the Left.") By putting an aggressive House-passed minimum-wage hike before the Senate, Biden figures he wins no matter how the GOP plays it: Either Majority Leader Mitch McConnell gives way to Biden, or he goes on record as thwarting the will of a large share, perhaps even a majority, of his own party's voters.

So much for the likelihood of raising the minimum wage. What about the effects?

Here too the consensus of economists has shifted in a favorable direction. A couple of decades ago, it is fair to say that most economists believed that any advantage gained by raising wages at the bottom end would likely be undermined by sizeable job losses. More recently, this consensus--flowing straight from classical microeconomic models in which each job's wage tracks its marginal product--has not found much backing in empirical studies. Most of the analyses of the many recent minimum wage hikes in cities and counties, for example, do not show any significant employment loss.

From all the new evidence, many economists are concluding that the classical assumptions may not be valid. Why not? One possible reason is that hiking the minimum wage, by changing the composition of spending by income bracket, may itself enlarge demand (say, for takeout food) in the affected industry. Another is that higher wages could elicit higher productivity and higher retention, essentially recouping for employers what they lose in higher costs (economists call this the "efficiency wage").

While both the demand-shift and efficiency wage arguments have been around for a long time, one little-known idea attracting a lot of new attention is the possibility of that many large employers practice "monopsony pricing." In a local market, just one or two employers may exert such large control over the "going wage" for a particular job type that they may deliberately pay a wage much lower than their workers' marginal product in order to enlarge profit margins--even while reducing output.

You can think of monopsony as basically "monopoly in reverse." Yes, competition among workers for a higher wage tends to undermine monopsony practices, but such competition may be difficult when workers face high relocation costs and cannot easily find out exactly what other workers are making from similar work. When monopsony is present, it is possible that a higher minimum wage can actually result in more employment since firms can no longer extract economic rent through reduced output.

A major 2019 CBO analysis of the impact of a large increase in the federal minimum wage (in steps to $15 by 2025) , while fairly orthodox in its approach, reflects some of this new thinking. The report's best estimate is that (by 2025) total employment would decline by 1.3 million workers (-0.8%), but that 27.3 million workers (+11.4%) would directly or indirectly see higher earnings. Total national income would decline very slightly (by -0.1%). But CBO acknowledges that its estimates are uncertain--and that employment could rise.

One conclusion is certain: The distributional consequences of a minimum wage hike would be highly progressive. According to the CBO, families below the poverty line would see incomes increase by 5.2% and those between one and three times the poverty line would see incomes increase by 3.5%. Only families above six times the poverty would see an income decline of -0.3%, mainly from lost capital income.

Coming Soon? → $15 Minimum Wage - Jan4 4

Coming Soon? → $15 Minimum Wage - Jan4 5

Which workers would be most affected by raising the minimum wage? Demographically, yes, they tend to be young, female, nonwhite, and part-time--but maybe not as much as is widely believed. If we only look at Americans currently at or below the minimum wage of $7.25/hour, BLS tells us that 57% are 25 or older, 33% are male, 73% are white, and 76% are full time. Low-wage workers turn older and more male, of course, as we start looking at those making $8 or $9 or $10 per hour.

Which industries and jobs would be most affected? Well, at the bottom end, the answer here is easy: the restaurant industry--in part because so many of these workers loopholed out of the minimum wage law by counting "tips" as wages. Only 1.9% of all workers are currently paid at or below the minimum wage, but that rises to 9.5% of all leisure and hospitality workers and 12.1% of everyone doing food preparation and service. Even including tips, poverty rates are nearly twice as high for these workers.

As we move higher, from $7.25 to $15.00, food prep workers are still dominant, but other jobs figure larger as well--not just in the leisure and hospitality industry, but also in retail, information services (perma-temp jobs), and in assorted personal care and service occupations.

A recent GAO report investigating the 12 million working adults receiving Medicaid and the 9 million receiving SNAP found that 70% of these workers were employed more than 35 hours per week. Compared with all private-sector workers, they were twice as likely to work for a small business (fewer than 25 workers) and were hugely concentrated in "restaurants and other eating places," which included sit-down restaurants, fast-food franchises, and pizza shops. Department and "big box" stores and grocery stores were also conspicuous among these "workers on welfare."

The restaurant and small business lobbies--the NRA and the NFIB--are leading the opposition to changing the federal law. But they must be sensing that the ground is already moving under their feet. For one thing, close to 40% of the economy is already located in states that are due to go up to near $15. For another, many of the biggest restaurant and retail players have already raised their wage well above the minimum and sense that a minimum wage hike could change the playing field to their advantage. McDonald's (MCD) and Walmart (WMT) both now support a higher minimum wage. Two years ago, Amazon (AMZN) already raised its company-wide U.S. minimum wage to $15.

The bottom line is that a much higher minimum wage is not only popular, it is already arriving. And though many of the large restaurant and retail firms will experience thinner profit margins as a result, they can still do OK even while keeping all the employees they have (see: monopsony, above). On the plus side, they can mow down many of their pesky small competitors for whom, yes, the wage they pay really is the marginal product of their workers.

For them--the small restaurant, the proverbial ma-and-pa store, the little personal-care start-up--a substantial and cross-the-board hike in the minimum wage really does mean hardship, often including lay offs and closing shop. This comes after a year that has already wrecked a large share of small businesses... though it was a magnificent year for the big boys. (See "The Inexorable Rise of Bigness.") 

Perversely, it was the same pandemic lockdown that proved so ruinous to the small firm owners that aroused so much public sympathy for many of the workers they hire. But the consequent turn in public policy is likely to hit those owners hard one more time. 

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ABOUT NEIL HOWE

Neil Howe is a renowned authority on generations and social change in America. An acclaimed bestselling author and speaker, he is the nation's leading thinker on today's generations—who they are, what motivates them, and how they will shape America's future.

A historian, economist, and demographer, Howe is also a recognized authority on global aging, long-term fiscal policy, and migration. He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.

Howe has written over a dozen books on generations, demographic change, and fiscal policy, many of them with William Strauss. Howe and Strauss' first book, Generations is a history of America told as a sequence of generational biographies. Vice President Al Gore called it "the most stimulating book on American history that I have ever read" and sent a copy to every member of Congress. Newt Gingrich called it "an intellectual tour de force." Of their book, The Fourth Turning, The Boston Globe wrote, "If Howe and Strauss are right, they will take their place among the great American prophets."

Howe and Strauss originally coined the term "Millennial Generation" in 1991, and wrote the pioneering book on this generation, Millennials Rising. His work has been featured frequently in the media, including USA Today, CNN, the New York Times, and CBS' 60 Minutes.

Previously, with Peter G. Peterson, Howe co-authored On Borrowed Time, a pioneering call for budgetary reform and The Graying of the Great Powers with Richard Jackson.

Howe received his B.A. at U.C. Berkeley and later earned graduate degrees in economics and history from Yale University.