Bloomberg News

States Act on Minimum Wage as Republicans Toss Obama Plan

February 14, 2013

President Barack Obama’s proposal to increase the U.S. minimum wage by 24 percent faces long odds in Congress, where Republicans took aim at it minutes after the State of the Union address. That might not matter: beyond Capitol Hill, some states took action long ago.

Nineteen states and the District of Columbia already require employers to pay more than the $7.25 an hour required by federal law, according to the U.S. Labor Department. At least eight more, including New York and New Jersey, are considering legislation to join them. On Jan. 1, Washington state, home to the highest minimum wage in the nation, raised its floor to $9.19, more than the $9 an hour proposed by Obama.

The patchwork of laws has offered new insight into the effect of higher wages on jobs. Some economists are challenging the traditional precept that as the price of something goes up, demand goes down, at least when it comes to labor.

“We’ve had this natural experiment where states that have raised their minimum wage border states that haven’t,” said Jack Temple, a policy analyst at the National Employment Law Project, a non-profit worker advocacy group. “Businesses have adjusted without losing employment.”

Temple and others point to two studies that challenge the conventional wisdom that higher wages lead to fewer jobs. The first, a 1994 study by Alan Krueger, now Obama’s chairman of the Council of Economic Advisors, and David Card, director of the Labor Studies Program at the National Bureau of Economic Research, compared fast food eateries in New Jersey and Pennsylvania after New Jersey raised its hourly minimum wage from $4.25 to $5.05 in 1992.

Low Wages

“The increase in the minimum wage increased employment,” the two found. For low-wage workers, job prospects actually improved in New Jersey, they concluded.

That finding was buttressed in 2010, when a group of economists used a similar approach to compare restaurant workers in neighboring states with different wage limits. The study, authored by a group that included Michael Reich, director for the Institute for Research on Labor and Employment at the University of California, Berkeley, concluded that minimum wage increases did not reduce employment.

The findings are at odds with other work, most notably from David Neumark, director of the University of California’s Center for Economics and Public Policy in Irvine, who has studied the question with Federal Reserve economist William Wascher.

Their 2007 review of academic studies found that “almost all point to negative employment effects.”

Higher Price

“It’s the law of demand,” said William Dunkelberg, chief economist at the National Federation of Independent Business, a lobbying group for small employers. “The higher the price of anything, the less will be taken. That applies to labor.”

In his speech Feb. 12 to a joint session of Congress, Obama proposed raising the hourly federal minimum wage to $9 from $7.25 by the end of 2015. That would return the wage to its highest inflation-adjusted value since 1981, under Republican President Ronald Reagan, according to the White House.

Echoing Dunkelberg, House Speaker John Boehner dismissed the idea yesterday.

“When you raise the price of employment, guess what happens? You get less of it,” the Ohio Republican told reporters. “Why do we want to make it harder for small employers to hire people?”

‘Laundry List’

In the Senate, John Thune of South Dakota, a member of the chamber’s Republican leadership, called Obama’s speech a “go- through-the-motions laundry list.”

Democratic Senator Tom Harkin of Iowa, who leads the Health, Education, Labor and Pensions Committee, and Representative George Miller of California, the top Democrat on the House Education and Labor Committee, said they’re moving ahead and will seek an even greater increase, to $10.10 an hour.

Twenty-one percent of job losses during the recession were in lower-wage occupations, according to the National Employment Law Project. During the recovery, those hires outpaced gains in higher-paying occupations, accounting for 58 percent of new positions since February 2010.

Washington’s minimum wage, which is indexed to rise and fall with inflation, has been above $9 an hour since January 2012. Last year the state had a 1.8 percent increase in non-farm payrolls, more than the 1.6 percent growth in total U.S. jobs. Unemployment is lower, too, at 7.6 percent, compared to 7.9 percent nationally.

Less Competitive

The Washington Restaurant Association says the law makes the state less competitive and points to Census Bureau data that shows that Washington food outlets employ three fewer workers per establishment than the national average.

“The business community has learned to adapt,” said Heather Donahoe, public relations manager for the Olympia-based trade group. “So many of our operators have learned to do more with less.”

That includes Dwayne Northrop, chief executive officer of Garlic Jim’s Famous Gourmet Pizza based in Mill Creek, which has 22 franchise outlets in the state. He said the higher wage carries hidden costs.

“The customers are seeing it in slower service. The job market is seeing it because there are fewer jobs available,” Northrop said in a telephone interview. At the same time, his franchisees have had little room to raise prices since 2007.

The hardest hit, though, are the state’s young workers, Northrop said.

“All the kids answering the phones and tossing pizzas are high school kids and most of the kids delivering the pizzas are college kids,” he said. “We’re actually providing less opportunity for entry-level people.”

To contact the reporters on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

To contact the editor on this story: Kevin Costelloe in Washington at kcostelloe@bloomberg.net


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