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An academic paper concerning the minimum wage in Pennsylvania.
The Minimum Wage Increase in Pennsylvania: An Analysis By Paul Lang The Minimum Wage Argument in America The proletariat will never rise above the bourgeoisie –says the Marxist/Socialist – without a level playing field. In less extreme terms, blue collar champions argue that the working class will not improve in their economic circumstances without more economic opportunity. The first step towards economic opportunity, argue these champions of the underprivileged, is to raise the minimum wage. On the other side of the argument, divided by think-tanks, endless floor debates, bloggers, and CNN and Fox News, are the Neo-Con/Republicans who argue that only free markets should dictate wages. Thus, they opine, any interference in the market will result in a negative impact in other areas that, at best, render unnatural tinkering of the invisible hand neutral. Rejecting claims of cold-heartedness towards the poor, they look towards ―market solutions‖ where the government stays out of their lives, their markets, and their pockets in order to make everyone better. The “Solution” Opposing sides of the argument do not like to concede other outcomes or statistics that contradict their desired result. Most are wedded to an ideology and/or political party where disagreement means the loss of their personal job or the loss of their political support. But, between these gaps of doublespeak, certain patterns emerge. The minimum wage, when set high enough, will help provide more purchasing power for working adults. It will provide the quickest route to improving worker‘s pay, rather than a circuitous solution such as tax breaks. A minimum wage increase will, most likely, cause some job loss at the margins. It will, most likely, raise prices on certain goods for a period of time. The extent of the job losses and price increases are debatable, but it appears that the job losses and price increases may be short-term and are offset by the benefits gained through the minimum wage increase. The morality of such a debate is left up to the individual, but many do find such arguments more compelling than any gain/loss offset on a balance sheet, a price-quantity graph, or on their own wallet. In Pennsylvania, such debate rages on. It is election year and politicians like to announce their legislative accomplishments while out on the ―stump‖. Pennsylvania, in its blend of rural, urban, and suburban communities, lends itself to a different analysis of a minimum wage increase due to available studies of the minimum wage increase in New Jersey. In analyzing the various arguments, it emerges that, despite drawbacks, Pennsylvania will ultimately benefit from a minimum wage increase. The Minimum Wage in America The current minimum wage in America stands at $5.15. In the beginning of American history, minimum wages were initially determined on a state-by-state basis.1 The first movement for a minimum wage occurred in 1933 as part of the National Recovery Act.2 In 1935, however, the Supreme Court declared the National Recovery Act unconstitutional and the minimum wage was abolished.3 Undeterred by the ruling, legislators continued their legislative agenda and the first federal minimum wage was established in response to the Great Depression in 1938 pursuant to the Fair Labor 1 2 Oren M. Levin-Waldman, The Case of the Minimum Wage: Competing Policy Models 7 (2001). Willis J. Nordlund, The Quest for a Living Wage: The History of the Federal Minimum Wage Program 30 (1997). 3 Id. Standards Act.4 Since 1938, the minimum wage was increased by federal legislation an additional 10 times.5 The last raise, to $5.15, occurred in 1997. The provisions for the minimum wage are contained in the Fair Labor Standards Act (FLSA).6 Currently, there are 18 states and the District of Columbia who have raised the minimum wage beyond the federal minimum.7 In addition, minimum wage ballot initiatives are moving forward in seven states. 8 The minimum wage debate even reached the 2004 Presidential campaign. During the third Presidential Debate, John Kerry mentioned that ―The minimum wage is the lowest minimum wage value it has been in our nation in 50 years. If we raise the minimum wage, which I will do over several years to $7 an hour, 9.2 million women who are trying to raise their families would earn another $3,800 a year.‖9 President Bush countered, ―Actually, Mitch McConnell had a minimum-wage plan that I supported that would have increased the minimum wage. But let me talk about what's really important for the worker you're referring to. And that's to make sure the education system works. It's to make sure we raise standards.‖10 11 Regardless of political posturing and bi-partisan debate, it is essential to examine 4 5 Id. at 31. U.S. Department of Labor Minimum Wage Chart, http://www.dol.gov/esa/minwage/chart.htm. 6 Id. 7 Connecticut, Wisconsin, New York, Minnesota, New Jersey, Maryland, Florida, Massachusetts, Maine, Vermont, Rhode Island, California, Oregon, Washington, Alaska, Hawaii, Delaware and Illinois. Id. 8 H. Luke Shaefer, State wage referendums, N.Y. Times, Jan. 3, 2006. available at http://select.nytimes.com/gst/abstract.html?res=F20C14FB34540C7A8CDDA80894DE404482. 9 Transcript of Presidential Debate Between Sen. John Kerry and Pres. George W. Bush, Tempe, Arizona, (Oct. 13, 2004) available at http://www.washingtonpost.com/wp-srv/politics/debatereferee/debate_1013.html. 10 Senator Mitch McConnell, it was rumored, was ―crafting‖ and later ―backing‖ a bill at the time of the debates that would raise the minimum wage to $6.25. Matt Quinn, Minimum Wage Debate on the Horizon, Inc. Magazine, June 17, 2004 available at http://www.inc.com/criticalnews/articles/200406/minwage.html and Kevin Drum, Political Animal, The Washington Monthly, October 14, 2004, available at http://www.washingtonmonthly.com/archives/individual/2004_10/004923.php. 11 Supra note 10. the arguments behind each side of the minimum wage debate. In addition, it is also important to examine the unique characteristics of Pennsylvania12 that will amplify the study of a minimum wage increase. Pennsylvania‘s minimum wage is $5.15 an hour. The Pennsylvania state minimum wage law does not contain current dollar minimums. Instead, the state adopts the Federal minimum wage rate by reference.13 Currently, the Governor of Pennsylvania, Ed Rendell, is urging the state legislature to increase the minimum wage to $6.25 an hour in 2006 and $7.15 by 2007.14 In Pennsylvania, approximately 423,000 Pennsylvanians earn between $5.15 and $7.14.15 The traditional economic view of a minimum wage increase includes a subsequent contraction in employment and and/or an increase in prices. This happens because, in a competitive market, the minimum wage is set above the market clearing wage where wage-takers move up the labor demand curve and employment declines.16 The reasons behind the decrease in employment involve higher per employee costs that, in aggregate, cause employers to compensate for higher wages with slower hiring or layoffs. In addition, in a competitive market, the sudden increase in wages will have to be passed on to consumers through higher prices in order to remain competitive in the marketplace. Opponents of the traditional economic view cite that ―abstract theoretical 12 13 The Greatest State in the Country. Supra note 6. 14 Tracie Mauriello, Rendell Pushes Minimum Wage Hike, Pittsburgh Post-Gazette, Jan. 20, 2006, available at http://www.post-gazette.com/pg/06020/641184.stm. 15 U.S. Department of Labor, Bureau of Labor Statistics, Employed Wage and Salary Worker Paid Hourly Rates With Earnings at and Around Prevailing Federal Minimum Wage by State, Annual Average, 2005, available at http://www.governor.state.pa.us/governor/lib/governor/BLS 423K in 2005.pdf. 16 Dale Belman & Paul Wolfson, It’s Bark is Worse than Its Bite: The Wage and Employment Effects of the Minimum Wage in the United States, Australian Economic Papers 143, 149 (1999). reasoning, rather than systematic empirical stud[ies],‖ paint a different picture for the outcome of a minimum wage increase.17 Battling Rhetoric and Common Ground As typical in academic debates, various studies on both sides of the issue critique data collection efforts, the sample size, type of sample, and various interpretations of the collected data. In general, however, there is agreement that ―no participant in the recent debate over the minimum wage has claimed that the minimum wage can never reduce employment, nor has anyone claimed that the minimum wage is always and everywhere an employment reducing phenomenon.‖18 Both sides of the argument also agree that a minimum wage increase will affect various industries differently. Traditionally, workers who are earning less than the proposed ―new‖ minimum wage are at risk for unemployment if the wage is increased. Thus, if an industry is comprised of a large number of these low-wage employees, ―the employment consequences should be readily detected.‖19 Finally, word choice or ―branding‖ of each side‘s argument creates the greatest ground for rhetorical debate between both sides. Proponents for a minimum wage increase use various ―morale‖ arguments and populist terms to control their argument. Opponents of the minimum wage increase cautiously counter such arguments while not losing the emotional debate regarding the issue. For example, the National Center for Policy Analysis derisively cites terms like ―Making Work Pay‖ and ―Giving America a Raise‖ and comments that such terms ―suggest that they [organizations who use such 17 David Card & Alan B.Krueger, Myth and Measurement: The New Economics of the Minimum Wage 156 (1995). 18 Supra note 17 at 151. 19 Id. at 151. rhetoric] are looking out for today‘s working poor men and women.‖20 In addition, the Cato Institute argues that they are fighting against the ―nonsense‖ of proponents of a minimum wage increase.21 While sounding the bell for reliance on traditional economics, the Cato Institute states ――Is How Much You Pay a Worker a Moral Issue?" asks [a] magazine cover. Well, moralizing can easily substitute for economics among elitists who don't really care how many more people they shove into the ranks of those paid less than some local or national minimum.‖22 The Living Wage Frequently, studies of a minimum wage will coincide with the concept of a living wage. Often times, the terms are used interchangeably. A ―living wage‖ is like a minimum wage, but it is typically an ―ordinance that mandate[s] that businesses under contract with the city, or in some cases receiving assistance from the city, must pay their workers a wage sufficient to support a family financially.‖23 The major difference between a living and a minimum wage is that a living wage is scaled to meet a basic standard of living whereas a minimum wage does not. Inevitably, however, the 20 Don’t Raise the Minimum Wage – The Bar Is Already Too High. National Center for Policy Analysis, Brief Analysis, No. 290 (1998). 21 Donald Deere, Kevin M. Murphy, & Finis Welch, Sense and Nonsense on the Minimum Wage, Regulation: The Cato Review of Business and Government, Volume 18, No. 1. (1995) available at http://www.cato.org/pubs/regulation/reg18n1c.html. 22 Alan Reynolds, Below the Minimum Wage, The Cato Institute, January 19, 2006, available at http://www.cato.org/pub_display.php?pub_id=5409. 23 David Neumark, How Living Wage Laws Affect Low-Wage Workers and Low-Income Families, Public Policy Institute of California (2002). establishment of a living wage will most likely be higher than the minimum wage24, so the economic effects of increasing the lowest earners pay will be similar. Arguments Against Raising the Minimum Wage A Minimum Wage Increase will Reduce Employment On April 1, 1990 the federal minimum wage was increased from $3.35 per hour to $3.80.25 About a year later, it was increased to $4.25. The National Center for Policy Analysis cites the 1990-1991 minimum wage increase (from $3.80 to $4.25) as an example of decreasing employment. During that increase, the Center states that employment reduced by 3 percent during that time.26 In addition, a study on living wage laws show that a 50 percent increase in the living wage ―would reduce the employment rate for workers in the bottom tenth of the skill distribution by 7 percent.‖27 Finally, the Center for Policy Analysis cites that ―the last two minimum wage increases in 1997-98 resulted in the percentage of workers earning less than the minimum rising from 2.9 percent in 1996 to 6.2 percent in 1998 -- even as overall unemployment fell from 5.4 percent to 4.5 percent.‖28 During his testimony in front of the House of Representatives, Small Business Committee; Subcommittee on Workforce, Empowerment, and Government Programs, 24 ―A living wage ordinance requires employers to pay wages that are above federal or state minimum wage levels.‖ Issue Guide on the Living Wage, Economic Policy Institute (2005) available at http://www.epi.org/content.cfm/issueguides_livingwage_livingwagefacts. 25 Supra note 21. 26 Id. 27 Supra note 24 at 1. 28 Minimum Wage Hikes Increased the Number of Below-Minimum-Wage Worker, Daily Policy Digest National Center for Policy Analysis, Nov. 13, 2001 available at http://www.ncpa.org/iss/min/pd111301b.html. Paul Kersey29 stated, ―estimates of this ―elasticity‖ vary, but the average estimate by labor economists is that for a 10 percent increase in the minimum wage, employment among those affected drops by 5 percent.‖30 A Minimum Wage Increase Generally Helps/Hurts Only Teenagers Opponents argue that the popular belief that minimum wage workers are poor adults working full-time and trying to raise a family is largely untrue.31 As the Pennsylvania state director of the National Federation of Independent Businesses, remarks, ―[A minimum wage increase] is just a glorified allowance bump.‖32 Opponents of a minimum wage increase also assert that a minimum wage increase will impact teenagers in other, less noticeable, ways. Citing ―idleness‖33 as a concern, the Heritage Foundation cites that ―less talented‖ or ―unskilled‖ teenagers will be displaced by more talented workers induced by the higher wages. Furthermore, these ―more talented‖ teenagers will be induced to drop out of high school in order to pursue the higher wages that a minimum wage increase brings.34 Reasons Why Minimum Wage Workers Earn a Minimum Wage 29 30 At the time, a visiting fellow to the conservative thinktank Heritage Foundation. The Economic Effects of the Minimum Wage: Hearing before the House of Representatives; Small Business Committee; Subcommittee on Workforce, Empowerment, and Government Programs, , 108th Cong. (2004) (statement of Paul Kersey, Bradley Visiting Fellow, The Heritage Foundation). 31 D. Mark Wilson, Increasing the Mandated Minimum Wage: Who Pays the Price?, Heritage Public Policy Research and Analysis (1998) available at http://www.heritage.org/Research/Labor/BG1162.cfm. 32 Sarah Larson, Working Wage, The Intelligencer, March 21, 2005, available at http://www.phillyburbs.com/pb-dyn/news/113-03212005-465927.html. 33 Teenagers neither in school nor employed. Supra note 32. 34 ―Lower-skilled teens are displaced from the job market while more highly skilled teens are lured in by higher wages even at the expense of completing their education. After the 1996 increase in the minimum wage, the school enrollment rate declined for every subgroup of teenage youth but black teens.‖ Id. Opponents of a minimum wage increase often cite various reasons for why a minimum wage increase will not help those in poverty permanently stay out of poverty. For example, the National Center for Policy Analysis states that ―the minimum wage does make it more difficult for those who already have a hard time getting a job – the least skilled – to begin or continue a career.‖35 The Center continues to explain that little education and ―lack of skills‖ is what is keeping people from earning more. The Cato Institute also cites that when dividing low-income earners by education, race, and age, the largest percentage of the group earning minimum wage are high-school dropouts.36 Price and Cost Effects of a Minimum Wage Increase The competitive model indicates that an increase in the minimum wage will lead to an increase in product prices. Often times, this increase in price is called ―the ripple effect.‖37 This will occur as these higher costs [the increase in the minimum wage] will be either passed on to consumers through higher prices or profits will be reduced for firms.‖38 In 1998, the Heritage Foundation argued, ―Raising the minimum wage to $6.15 will cost consumers and workers about $2.4 billion in fiscal year 1999 and another $4.1 billion in fiscal year 2000 as the increased cost of entry-level jobs is passed on through higher prices and lower real wages.‖39 They continue by stating, ―Prices would be 0.2 35 36 Supra note 21. Supra note 22. 37 Robert Pollin, Mark Brenner, & Jeannette Wicks-Lim, Economic Analysis of Florida Minimum Wage Proposal , Political Economy Research Institute (2004) available at http://www.americanprogress.org/site/pp.asp?c=biJRJ8OVF&b=191242 38 David A. Macpherson, The Effects of the Proposed Pennsylvania Minimum Wage Increase, Commonwealth Foundation for Public Policy Alternatives and the Employment Policies Institute (2005). 39 Supra note 32. percentage points higher in 1999 and 0.1 percentage points higher in 2000 as employers passed on their increased costs to both poor and non-poor consumers.‖ In totality, the compounded price increases, labor cost increases for employers, and unemployment creates, according to minimum wage opponents, a strong burden on the overall economy. The Employment Policies Institute, citing the ―enormous economic cost of a mandated wage‖ stated that a minimum wage increase in Pennsylvania, ―would result in a loss of just over 10,000 jobs and impose a $350 million hit on the Pennsylvania economy. Most of the economic cost--$262.7 million—stems from increased labor costs for employers. A significant portion, however-$86.7 million—is the result of the lost income for the 10,000 employees who will lose their jobs. That more than half of the job losses fall on those under 25 and almost 30 percent on those earning less than $25,000 adds cruel irony to the consequences.‖40 With this overall increase, the Public Policy Institute of California remarks, ―As the minimum wage drives up prices, low-income families pay proportionately more than high-income families for the goods they buy.‖41 Thus, it would be argued, the increased labor costs, job losses, and price increases would not only hurt the overall economy, but especially the families targeted to benefit from minimum wage increase. Alternatives to Increasing the Minimum Wage Many opponents to the minimum wage increase highlight tax breaks and incentives to increase business as the best option for eliminating poverty. Championed 40 41 Supra note 25. Increasing the Minimum Wage, Research Brief, Public Policy Institute of California (2000) available at www.ppic.org/content/pubs/rb/RB_500MORB.pdf. often by opponents of the minimum wage increase, is the Earned Income Tax Credit (EITC).42 An economist advocating for the EITC, remarks, ―Instead of supporting an ineffective anti-poverty tool, policy makers should support strategies that increase entrylevel opportunities for low-skill Americans. The EITC is the most effective anti-poverty program in existence. This credit provides a tax-free cash supplement to the incomes of working families while simultaneously creating an explicit incentive for increased work effort. Since the EITC is not available to those without a job, it provides an unambiguous incentive to work.‖43 Relying on the business and free market advantages of the EITC would keep businesses successful and flourishing, according to proponents. The Economic Policies Institute furthers the argument, As an anti-poverty device, the EITC has many undisputed advantages. For example, unlike cash wages, the refundable EITC is not subject to payroll taxes and does not reduce income based-eligibility for other needed government benefits such as food stamps, Medicaid and Supplemental Security Income. It thus does more to increase family disposable income than the minimum wage.44 With these tax credits for business, the argument is furthered that pro-business climates from regulators will ultimately improve working families more so than a ―blunt‖ regulatory measure such as the increase in the minimum wage. 42 ―The Earned Income Tax Credit (EITC) sometimes called the Earned Income Credit (EIC), is a refundable federal income tax credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.‖ Internal Revenue Service Website, http://www.irs.gov/individuals/article/0,,id=96406,00.html 43 Minimum Wage and Its Effects of Small Business: Hearing Before the Subcommittee of Workforce, Empowerment, and Government Programs, 108th Cong. (2004) (statement of Craig Garthwaite, Director of Research, Employment Policies Institute). 44 Richard S. Toikka, The Minimum Wage and the Earned Income Tax Credit: A Decade of Progress, Policy Brief, Employment Policies Institute (2001) available at www.epionline.org/studies/epi_policybrief_07-2001.pdf. Opponents of the EITC state that it suffers from the complexity of its rules and regulations. In 1999, errors in tax filing created a $6 billion loss for filers.45 In addition, ―about 70 percent of filers claiming the EITC resort to paying commercial tax preparers to file their return, a larger percentage than for tax filers generally.‖46 Thus, despite its overall goal, it appears that the benefits of the EITC are not fully realized by many intended recipients. Arguments to Increase the Minimum Wage In general, arguments for a minimum wage increase tend to minimize the traditional economic view of a minimum wage increase through statistics and contradictory studies. Moreover, arguments for a minimum wage increase include ―softer‖ reasons, such as the moral aspect of increases the wages of those at the ―bottom‖ of the economy as well as having companies compete on ―ingenuity and effective management.‖47 Moral Argument The moral argument surrounding a minimum wage increase stakes the position that a minimum wage increase is a question of maintaining communal welfare according to the shared values of the community.‖48 Numerous advocacy groups for a minimum wage increase deem the increase ―a hand up, not a hand out.‖49 Advocates to raising the minimum wage in Pennsylvania include numerous editorial boards and advocacy groups. 45 $2.4 billion in direct math errors and $3.6 billion in indirect math errors. Earned Income Tax Credit (EITC) Program Effectiveness and Program Management FY 2002 – FY 2003, IRS, www.irs.gov/pub/irsutl/eitc_effectiveness.pdf. 46 Robert Greenstein, The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor, Center on Budget and Policy Priorities (2005) available at http://www.cbpp.org/7-19-05eic.htm. 47 State Minimum Wages and Employment in Small Businesses, Fiscal Policy Institute (2004) available at http://www.fiscalpolicy.org/minimumwageandsmallbusiness.pdf. 48 Oren M. Levin-Waldman, The Case of the Minimum Wage, Competing Policy Models 22 (2001). 49 Supra note 21. The Pocono Record Editorial Board states, ―But states owe it to their lowest-paid workers to act when an irresponsible Congress has failed to raise the minimum wage since 1997.‖50 In general, the moral argument is couched in terms such as ―fairness‖. The Keystone Research Center argues that an increase in the minimum wage would push Pennsylvania ―towards a moral economy‖ and ―uphold Pennsylvania‘s values.‖51 Such arguments cite the higher wages in different states, the widening gap between the wealthy and middle class52, and the lower value of today‘s minimum wage adjusted for inflation. Another argument in the moral realm of advocacy is the incremental subsistence purchasing power a raise in the minimum wage can provide. As Robert Reich pointed out, President Clinton‘s proposal to increase the minimum wage would provide $1800 in potential income for minimum wage workers, which could provide families the opportunity to buy ―seven months of groceries‖, ―nine months worth of utility bills‖, and ―basic housing costs for almost 4 months.‖53 54 The Minimum Wage is Worth “Less” Today Robert Reich, while the Secretary of Labor under President Clinton, during arguments for a minimum wage increase, argued that the minimum wage is worth less 50 Editorial Board, Raise PA's minimum wage, Pocono Record, Feb. 1, 2006 available at http://www.poconorecord.com/apps/pbcs.dll/article?AID=/20060201/NEWS04/602010301 51 Stephen Herzenberg, Mark Price, & Peter Wiley, The State of Working Pennsylvania 2005, Keystone Research Center, Keystone Research Center (2005) available at http://www.stateofworkingpa.com/pdf/SWP2005.pdf 52 Income Gap Of Poor, Rich, Widens, Associated Press, Aug. 16, 2004, available at http://www.cbsnews.com/stories/2004/08/13/national/main635936.shtml. 53 Robert Reich, Making Work Pay: The Case for Raising the Minimum Wage, Office of the Chief Economist, U.S. Department of Labor (1996). 54 An interesting counter example to Reich‘s examples of purchasing power comes from the conservative Paul Kersey, who states, ―While it is natural to have sympathy for our fellow citizens who work at lowwage jobs and still live in poverty, we should remember that our notion of poverty is relative. Using U.S. Census data, Heritage Foundation scholars examined the living standards of poor Americans and found that the average poor American has a car, air conditioning, at least one color television along with cable or satellite TV, a home that is in decent condition and enough food in the refrigerator.‖ Supra note 31. than it used to be.55 He went on to argue that ―the value of the minimum wage has fallen by nearly 50 cents since it was last increased in 1991, and is now 29% lower than it was in 1979. If left unchanged, its real value will be at a forty-year low by January 1997.‖56 The Keystone Research Center furthers this inflation-based argument for Pennsylvania. In their study, ―The State of Working Pennsylvania 2005‖, the Center argues that the ―erosion‖ of the minimum wage by inflation has left ―low-wage earners in Pennsylvania mak[ing] slightly less than they did in 1979‖ and the ―inflation-adjusted minimum wage has lost 41 percent of its value since 1968.‖57 Employment Changes and Price Increases are Minimal In a study by David Card and Alan Krueger of Princeton University, the researchers analyzed 410 fast-food restaurants in New Jersey and eastern Pennsylvania following the increase in New Jersey‘s minimum wage from $4.25 to $5.05 per hour in 1992 (Pennsylvania‘s minimum wage did not change).58 After their study, Card and Krueger concluded that ―Contrary to the central prediction of the textbook model of the minimum wage…we find no evidence that the rise in New Jersey‘s minimum wage reduced employment at fast-food restaurants in the state.‖ The Fiscal Policy Institute performed a study that used several comparisons between states with a higher minimum wage than the federal $5.15 minimum and all other states who abided by the federal minimum. Their overall conclusion found that 55 ―If the minimum wage in 1979 had been indexed for inflation, it would be $6.92 today (2004 dollars). In other words, the inflation-adjusted minimum wage is 26% lower today than in 1979.‖ Issue Guide on the Minimum Wage, Economic Policy Institute (2005) available at http://www.epinet.org/issueguides/minwage/epi_minimum_wage_issue_guide.pdf. 56 Supra note 54. 57 Supra note 52. 58 David Card and Alan B. Krueger, Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania, Industrial Relations Section, Princeton University, Vol. 84, No. 4 (1993). ―employment growth (all nonfarm employment and retail employment) in states with a higher minimum wage than the federal minimum has performed at least as favorably as in states where the $5.15 federal minimum prevails.‖59 The study went on to highlight that the higher minimum wage states‘ employment increased by 6.2 percent from January 1998 to January 2004, while the combined job growth rate of the other states was 4.1 percent.60 Perhaps most surprising in the study is that retail employment in the higher minimum wage states increased by 6.1 percent while regular minimum wage states grew by only 1.9 percent. Proponents of the minimum wage argue against the impact of the ―conventional‖ economic conclusion that a minimum wage increase will increase prices. In a study conducted by the Federal Reserve Bank of Chicago on the impact of minimum wage hikes in Canada and the U.S. on restaurant prices, the study showed that there is no price response leading up to an increase in the minimum wage and in the months subsequent to the increase.61 The study did note that ―excepting the few months around the enactment date‖62, but, ―if anything, there is some evidence that minimum wage price effects dissipate over time.‖ The Card and Krueger study of New Jersey and eastern Pennsylvania also analyzed the price effects of the New Jersey minimum-wage increase. Card and Krueger followed the prices of various menu items on the fast-food menus for related chains.63 59 60 Supra note 48. Id. 61 Daniel Aaronson, Price Pass-Through and Minimum Wages, Review of Economics and Statistics, Vol. 83 (2001). 62 During the ―few months‖ around the enactment date, restaurant prices ―rise approximately one-for-one with changes in the wage bill‖. Id. 63 Card and Krueger were successful in tracking prices of three standard items: a medium soda, a small order of french fries, and a main course. ―The main course was a basic hamburger at Burger King, Roy Rogers, and Wendy‘s restaurants, and two pieces of chicken at KFC stores.‖ Supra note 59. During the time of the study, after-tax meal prices rose 3.2-percent faster in New Jersey than in Pennsylvania.64 Within New Jersey, however, the outcome is ―less consistent with a simple ‗pass-through‘ view of minimum-wage cost increases.‖65 What the study found was that the meal prices rose at the same rate at stores in New Jersey with differing levels of initial wages. The researchers go on to speculate that the reason for the difference between price pass-through for Pennsylvania and New Jersey is that ―stores in New Jersey compete in the same product market‖ and ―as a result, restaurants that are most affected by the minimum wage are unable to increase their product prices faster than their competitors.‖66 The authors continue to state that ―In contrast, stores in New Jersey and Pennsylvania are in separate product markets, enabling prices to rise in New Jersey relative to Pennsylvania when overall costs rise in New Jersey.‖67 Thus, it would seem that proponents of the minimum wage increase in Pennsylvania would argue that the closest markets, such as Delaware, New York, and New Jersey, already have higher prices so Pennsylvania would not be adversely affected by exceeding their already established pass-through prices. Finally, the Economic Research Service of the Department of Agriculture undertook a study to determine the effect of a minimum wage increase on food prices. The study concluded that a simulated minimum wage increase of $0.50 that would be completely passed on to consumers would ―increase food prices by 1 percent for most of the foods at a foodstore and by 1 percent at eating and drinking places.‖68 64 65 Id. Id. 66 Id. 67 Id. 68 Chinook Lee, Gerald Schluter, & Brian O‘Roark, How Much Would Increasing the Minimum Wage Affect Food Prices?, Current Issues in Economics of Food Markets, U.S. Department of Agriculture (2000) available at www.ers.usda.gov/publications/aib747/aib74703.pdf. An Minimum Wage Increase Helps More Adults than Teenagers Many proponents of the minimum wage have a difficult time overcoming the perception that a minimum wage increase only affects teenagers working part-time jobs. Just over 2 million people in this country work for minimum wage or less, according to the Bureau of Labor and Statistics. Of those 2 million, ―About half are age 16 to 24. But the other half are 25 and older.‖69 During the 1997 minimum wage increase, the Secretary of Labor, Robert Reich, argued that ―about two-thirds of minimum wage workers are adults, and four in ten are the sole bread winner of their family.‖70 In Pennsylvania, of those affected by a minimum wage increase (workers earning between $5.15 an hour to $7.14 an hour), 71% of them are aged 20 and older.71 With such a large portion of the population coming from adults, it is important for proponents of an increase to highlight these percentages. In a separate paper, the Keystone Research Center shows a decidedly different side to the argument, however, when discussing a smaller minimum wage increase of only $6.25 per hour. In the paper, they argue that ―only‖ 109,000 adults would benefit from a raise to $6.25 compared to the 303,000 adults who would benefit with a $7.15 an hour increase.72 They conclude that if the Pennsylvania Legislature truly wanted to help working adults then they would not work towards a smaller minimum wage increase. Small Business is Improved with a Minimum Wage 69 70 Supra note 33. Supra note 54. 71 Supra note 52. 72 Few Working Adults Would Benefit from a State Hourly Minimum Wage Increase to Only $6.25, Policy Watch, Keystone Research Center, available at http://www.keystoneresearch.org/presspdf/PW_Few_Adults.pdf. The Fiscal Policy Institute compared states with higher minimum wages with other states and found that the number of small business establishments grew twice as quickly in states with a higher minimum wage.73 The Fiscal Policy Institute study is quick to point out, however, that ―We do not know enough from this analysis to conclude that increasing the minimum wage will boost employment growth over what it otherwise would have been. What does seem to be clear, however, is that it is hard to sustain the argument made by some observers that an increase in the minimum wage will result in adverse aggregate employment outcomes.‖74 A Final Counterpoint to the Card and Krueger Study The Cato Institute, a libertarian/conservative think-tank, is one of the few notable critics to the Card and Krueger study. Cato takes on the data pool, analysis, and validity of the Card and Krueger study. With respect to the Card and Krueger determination that employment actually rose in New Jersey after the minimum wage increase, Cato states: The baseline used to infer that employment rose after the minimum went up is calculated just before the higher minimum takes effect, and long after employers knew of the legislated increase. To conclude that the change in employment over this time frame gives a complete view of the minimum wage effect is like comparing the number of teenagers on the street at 11:59 P.M. and 12:30 A.M. to measure the effect of a midnight curfew. Finding no difference does not mean that the curfew has no effect. Cato concludes that the minimum wage increase will ultimately follow classical economic models, 73 74 Supra note 60. Id. From these isolated findings Card and Krueger paint a big picture wherein increased minimum wages do not decrease, and may increase, employment. Our view is that there is something wrong with this picture. Artificial increases in the price of unskilled laborers inevitably lead to their reduced employment; the conventional wisdom remains intact. In the end, Cato believes that, despite the favorable findings in the Card and Krueger study, the findings are short-sighted and short term. Winners, Losers, and Unanswered Questions from Card and Krueger The Card and Krueger study provides a unique case study for Pennsylvania. As Card and Krueger noted, ―New Jersey…is an economy closely linked to nearby states.‖75 Card and Krueger‘s comparison of Pennsylvania and New Jersey involved the similarity in economies in the southeastern portion of Pennsylvania and southern New Jersey. Throughout the state, the geographical similarities of the states are interesting. Different ends of each state are capped with an urban, metropolitan area. In New Jersey, the state is affected in the north by New York and in the south by Philadelphia. In Pennsylvania, the state is affected in the west by Pittsburgh and in the east by Philadelphia. With Pennsylvania‘s history of steel and manufacturing, it is no surprise that one of the main differences between the state of New Jersey and Pennsylvania include New Jersey‘s strong edge in ―aggregated innovation capacity‖ and ―aggregated digital economy‖.76 75 76 Supra note 59 at 23. New Jersey ranks 4th in the country in ―Aggregated Innovation Capacity‖ compared to Pennsylvania ranking 20th overall. The components of the ―Aggregated Innovation Capacity‖ include number of hightech jobs, scientists and engineers, patents, venture capital, and industry investment in R&D. For the ―Digital Economy Score‖, New Jersey is 5th in the nation while Pennsylvania lags at 28th. The factors in the ―Digital Economy Score‖ include the percent of the population online, the number of commercial internet domain names, technology in schools, electronic government, the percentage of farmers with Internet access and who use computers for business, The percentage of manufacturing establishments with Internet access, and the use and deployment of broadband telecommunications infrastructure over telephone lines. The 2002 State New Economy Index, Progressive Policy Institute, available at The Card and Krueger study does not portray a picture of complete success for a minimum wage increase. A minimum wage increase is a complicated situation with many uncertainties and many unknown costs. The Card and Krueger study portends a similar outcome for Pennsylvania where there will be ―winners‖ and ―losers‖ with a minimum wage increase. The losers include companies and workers ―at the margins‖, where a minimum wage increase will create a loss in job opportunities at companies who are operating at thin profit margins. In addition, the shareholders of these companies will lose with the failure of the business. The winners include companies who can retain their employees at the higher wages without losing jobs or significantly increasing prices. Presumably, if the market recoils after its initial surge from a higher minimum wage, these companies will be stronger with their human resources intact. Inevitably, there is a short-term wealth transfer that will occur as the market reacts to the increase in the minimum wage. The duration and impact of such a transfer is difficult to measure, but in the case of New Jersey, it is a few months. Despite their support of the minimum wage increase, unions may not receive an overall benefit from a minimum wage increase in the short term. Primarily, for unions with members in the margins of businesses, their members may lose their jobs. On the other hand, their overall membership will likely receive higher wages to reflect the increase in the minimum wage. Thus, depending on the size of the minimum wage increase and the duration of the market changes, unions may be better off. Regional and national markets may also be affected by a raise in the minimum wage in Pennsylvania. Given its shrinking manufacturing markets, a raise in the minimum wage may ultimately end many manufacturing opportunities in Pennsylvania. http://www.neweconomyindex.org/states/2002/pennsylvania.html. With competitive wage rates in other states or countries that are lower than Pennsylvania‘s, some outsourcing is most likely to occur. However, in general retail and services (especially in the fast food market) where outsourcing is not possible, the regional versus national change in markets may be minimal. Another unknown outcome in raising Pennsylvania‘s minimum wage will be ―offthe-book‖ workers who comprise the ―underground economy‖ where the minimum wage does not apply. In many respects, the raise in a minimum wage may induce workers not paying taxes to work legally to attain the higher minimum wage. At the same time, however, there may be a substitution effect, where undocumented workers may increase because employers would be more willing to save labor costs by paying workers off-thebooks. Again, at the margins, there seems to be some benefits and some losses, but more studies need to be undertaken to solve this problem. Western and central Pennsylvania may have the most unknown outcomes under an increase in the minimum wage. Since western and central Pennsylvania was not studied in the Card and Krueger study, no metrics are included to determine the residual outcome in the western and central portion of Pennsylvania. Western and central Pennsylvania is also much different in geographic and economic terms than the eastern portion of the state. Western Pennsylvania is known for its coal mines, steel mills, and industrial sections surrounding the urban area of Pittsburgh. Central Pennsylvania is known for its agricultural economy. Eastern Pennsylvania is known for Philadelphia and its metropolitan areas and the northeastern portion is concentrated around the Poconos which is known for its agriculture and tourism. Western Pennsylvania has an average median income of $23,400 central Pennsylvania‘s is $24,600, and eastern Pennsylvania is $28,800.77 This type of geographic and economic disparity might change the outcome of a minimum wage increase in different portions of the state. Thus, it would be beneficial for Card and Krueger to study the affects of Maryland‘s minimum wage increase with the south-central portion of Pennsylvania. In addition, since both West Virginia and Ohio have not raised their minimum wage beyond the federal minimum, the forecasting for Pennsylvania‘s western portion is much more unknown and variable and does not lend itself directly to a Card and Krueger-type study.78 Despite ―mixed results‖ from the Card and Krueger study regarding the increase in price after the minimum wage increase, there appears to be sound, conventional support that a minimum wage increase will (in some ways) increase prices. It should be noted, however, that the potential price increases are offset by increased economic opportunity for wage earners. With the immediate impact an appropriate minimum wage increase will have on working adults, it is a compelling policy to implement. In the end, a minimum wage increase has worked in New Jersey by raising the wages of employees while not adversely affecting the economy as a whole. It should be given an opportunity in Pennsylvania since the economies are similar, the negatives are not catastrophic, and the benefits affect over 300,000 adults. 77 Median Household Income, Pennsylvania State Data Center (2000), http://pasdc.hbg.psu.edu/pasdc/Data_&_Information/Data/207a.html. 78 Supra note 6.
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