Republican Plan to Raise the Minimum Wage Is Self-Defeating
(Bloomberg Opinion) -- Raising the federal minimum wage to $15 per hour has been one of the most important goals of the progressive left, and President Joe Biden has included the “Fight for $15” in his $1.9 trillion stimulus proposal. Now two Republican senators, Tom Cotton of Arkansas and Mitt Romney of Utah, have put forward their own proposal to raise the wage floor, to $10 per hour.
A major advantage of the Republican plan is that it would delay its minimum wage increase until after the pandemic is in the rear-view mirror, raising the wage by 75 cents in the first year after the Covid-19 emergency has passed. In contrast, the Raise the Wage Act, supported by Biden, would kick in three months after it is signed into law. So if it’s passed next month, it would begin gradually raising the minimum wage in June.
The U.S. economy will boom in 2021, but the labor market will still be weak throughout the year. Research shows that minimum wage increases in weak labor markets result in greater job losses. Romney and Cotton’s patience is appropriate.
In 2025, when the wage floor would hit $10 under the Republican plan, the cost of employing a minimum-wage worker would have risen by 38% from the current $7.25 wage floor. The Democratic plan would boost that cost by 107%.
Because its increase would be so much smaller, the Cotton-Romney plan would lead to more modest job losses. In its analysis this month of the Raise the Wage Act, the nonpartisan Congressional Budget Office found it would reduce employment by 1.4 million jobs. That’s far from modest.
Both plans would index the wage floor to inflation once it reached its maximum value ($10 for Cotton-Romney and $15 for Raise the Wage), causing the minimum wage to automatically rise over time. The Democratic plan would base its automatic increases on the growth of median hourly wages. The Republican plan would use a measure tracking the rise in consumer prices.
The Republican plan would result in more modest increases. From 2009 to 2019, while the economy was expanding, median wages grew by about 2.1% per year, while the price index used by the Cotton-Romney plan grew at an annual rate of 1.5%.
Still, I wouldn’t index the minimum wage to inflation at all. My research with economist Peter Brummund finds that employers are more willing to shrink their workforces when the minimum wage grows automatically with inflation. Typically, Congress or state governments raise the wage floor in nominal terms, so that the increase is gradually eaten away by rising prices. Employers likely think of this as a temporary increase in the price of labor.
But inflation indexing makes increases permanent. Employers might be more willing to permanently shrink their workforces in the face of ever-higher labor costs. Brummund and I find that employment losses are around three times larger when minimum wage increases are indexed to inflation.
Cotton and Romney likely think that by putting minimum wage increases on autopilot, they would mitigate the political hit Republicans take by having to oppose Democrats’ frequent attempts to raise the wage floor. They are mistaken.
Raising the mandatory wage will always be popular among voters and workers. Democrats would simply lobby to increase the minimum wage above what the inflation-adjustment formula dictates. Republicans would still be on the losing side of a popular issue — and to add insult to injury, wage increases would occur from a larger base.
The Republican plan couples raising the minimum wage with the mandatory use of E-Verify, a computer system run by the Department of Homeland Security that verifies whether employees are eligible to work in the U.S. This is a politically interesting pairing, combining what proponents would describe as a pro-worker policy with one designed to ensure that the benefits of the U.S. labor market only accrue to those legally authorized to take advantage of them.
The U.S. has immigration and employment laws, and they should be followed and enforced. But I would rather see a modest minimum wage increase paired with policies that would improve employment and skills.
The downside of the minimum wage is that it reduces job opportunities. Investments in training programs could help to turn a $7.25-per-hour worker into a $9.50-per-hour worker, allowing more workers to benefit from the higher wage floor. And increasing earnings subsidies would boost employment by drawing more people into the workforce.
The minimum wage represents a tradeoff. Is it worth reducing employment opportunities for the least skilled, least experienced and most vulnerable workers in the economy to boost the incomes of working- and middle-class households? I don’t think it is. There are better and worse ways to raise the wage floor, and these competing plans help point a way forward.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
©2021 Bloomberg L.P.