Michael A. MacDowell: The impact of the minimum wage increase

There are many challenges President-elect Joe Biden will face.

One will be how to carry out his pledge made in his first campaign speech to raise the national minimum wage from $7.25 an hour to $15 an hour. Many states already have minimum wage laws that exceed the federal rate. Pennsylvania’s minimum wage is $7.25 an hour the same as 16 other states. In 2021, more than 20 states will raise their minimum wage. Pennsylvania is not among them.

For years, economists and policy makers on both sides of the minimum wage issue have argued over the ultimate impact of minimum wage increases on employment.

Some say that low-income workers must depend on government fiat to raise their wage levels because the preponderance of low-income workers tend to “bid down” starting wages. This in turn gives new employees little bargaining power and hence their wages stagnate at relatively low levels.

While bargaining power is a consideration, many maintain lower-paid workers will be hurt by significant increases in the minimum wage. Their reasoning is that low-income earners are negatively impacted by a significant increase in the minimum wage because their jobs are most easily displaced by advances in technology.

With the rapid advances in artificial intelligence and robotics, the probability that both low-income employees, as well as some higher-paid workers, will suffer job loss.

Take for instance the use of robot hamburger “flippers” at fast-food restaurants replacing short order cooks or the relatively higher paid, such as long distance truck drivers, replaced by autonomous operated vehicles.

A major 2019 Bookings Institution study predicted that 36 million U.S. jobs will be replaced by artificial intelligence within the next 10 years. This, now two-year old study, was released before the U.S and the world economy experienced the pandemic related recession which has cut economic growth and job creation substantially. The substitution of what economists call “capital,” or goods that produce other goods such as mechanical robots, or algorithms — the basis for AI, will only become more prevalent in a recession. It will be exacerbated by a slow recovery and the reduced desire to hire because of increasing wage rates.

Some say that a higher minimum wage will address wage discrimination evidenced by the relatively low wages minorities receive.

But the opposite may be true. An increase in the wages for lower-paid minorities diminishes the difference between their salaries and that of higher paid non-minorities. This reduces the relative labor cost of an employer who chooses to discriminate. That’s because the wage difference between what a lower-paid minority receives and what higher salaried non-minorities gets, decreases when a minimum wage is put into place.

Over the years, economists have undertaken studies to determine what the effect of minimum wage is on unemployment, particularly on low-income workers. The results of these studies vary depending upon the amount of the legislated wage increase, the length of time over which the increase is awarded and the level of overall unemployment.

As you might expect, the smaller the increase in the minimum wage the less unemployment occurs and further, if the minimum wage is put into place over a longer period. To address this eventuality some states such as Florida intend to raise their minimum wage over a series of years rather than all at once. Regardless, it will no doubt lead to some unemployment and certainly higher prices at stores or restaurants.

President-elect Biden’s planned move to increase in the federal minimum wage seems to reflect the opinion of most Americans. Polls show that voting citizens seem the opinions of people here and across the country. The question simply is how much and when.

The timing of a minimum wage increase now is problematic because the effects of the COVID-19 recession will be felt for many years to come. Further an immediate increase in the federal minimum wage from $7.25 an hour to $15 an hour, (or 46.6%) would be catastrophic on small businesses, those most likely to employ minimum wage earners. Hopefully, clear heads will prevail and the costs and benefits of any change in the federal minimum wage will be weighed carefully against its potential benefits and cost.