In this episode of Who Belongs? we look at the impacts of minimum wage increases with Michael Reich, a Professor of Economics and Chair of the Center on Wage and Employment Dynamics at UC Berkeley. Michael Reich is a leading expert on minimum wage research and has published extensively on the topic, including a recent study on how minimum wage hikes reduce racial wage gaps between black and white workers.
- New Study: Minimum Wage Increases Reduce Racial Wage Gaps (2021 Study by Michael Reich)
- $15 Minimum Wage Could Save Federal Budget At Least $65 Billion (2021 Analysis by Michael Reich)
- Raising the federal minimum wage to $15 by 2024 would lift pay for nearly 40 million workers (2019 study from the Economic Policy Institute)
Michael Reich: Public support for the minimum wage, in general, it runs about 70 to 80%. And then all of the state referenda, there've been about 28 or 29 of them, almost every one has passed. So Florida, while it was voting for Trump, it was passing a $15 minimum wage.
Marc Abizeid: Hello and welcome to this episode of Who Belongs?, a podcast from the O&B Institute. In this episode, we're going to take a look at the minimum wage with Michael Reich, a Professor of Economics and Chair of the Center on Wage and Employment Dynamics at UC Berkeley. The federal minimum wage has been frozen at $7.25 an hour since 2009. That's an annual income for a full-time worker of just $15,000.
Marc Abizeid: A few weeks ago, Senator Bernie Sanders and other progressive legislators introduced the 2021 Raise the Wage Act, which would gradually increase the federal minimum wage to $15 an hour by 2025. After 2025, the minimum wage would continue to increase to keep up with inflation without having introduced new legislation every few years. The lawmakers had been trying to get this act included in the coronavirus relief package so it could be passed with a simple majority, but on Thursday we learned that's probably not going to happen because of an archaic Senate rule, meaning it would need to be introduced as a standalone bill and requires 60 votes to pass.
Marc Abizeid: Our guest Michael Reich is a leading expert on minimum wage research and has published extensively on the topic, including a recent study on how minimum wage hikes reduce racial wage gaps between black and white workers. So we'll discuss that as well as address some of the common critiques of minimum wage increases. Here was our conversation:
Marc Abizeid: I mean, I guess the first thing really is just to address the most recent news about the minimum wage act, not being, or very unlikely going to be included in the coronavirus relief package, which a lot of us expected would happen. So what did you think when you heard that news?
Michael Reich: I was very disappointed to learn the Parliamentarian had ruled it out of order. I'm glad the house is still keeping it in their bill and I hope the Senate has a full vote on the bill so we could find out who was on record for and against a $15 minimum wage. And I know there've been other attempts that have been talked about such as putting the bill into another budget reconciliation measure down the road, or Bernie Sanders is talking about using tax credits as a means to get firms to raise your minimum wages to $15. But it's going to be very difficult to get 60 votes in the Senate for any minimum wage go up, $10 is still like a poverty wage. And I doubt that would get 60 votes at this point, but I'm not a political scientist. I'm here to talk about the economics of the minimum wage.
Marc Abizeid: Let's talk about the economics of the minimum wage then. Tell us, I mean, you've been studying the minimum wage for a really long time. Let's say the minimum, let's say it did pass, let's say it was included in the bill. It did pass. We would get $15 by 2025. What do you expect the impact of that would be on working people?
Michael Reich: Well, best estimates are there're about 32 million people would get raises of averaging about $3,300 a year. And of course that will be higher among the people who were lower paid to begin with. So that's already a really large number and it would help the households of those workers quite a bit.
Michael Reich: We know from past research that minimum wages are used to... \higher minimum wages are used, for example, to buy cars require a car, 25% of black low wage workers don't have a car in their household, and if you can get a car and then which also helps them credit, so you can pay for it more easily because credit ratings go up a lot. And you can do something very concrete, not just have more food on the table, but also be able to look for it and get jobs or because you can search for those jobs in a broader radius and you have a car.
Marc Abizeid: So can you tell us a little bit more about that racial equity component of raising the minimum wage, which you outlined in that new paper that you put out a few weeks ago? And we're going to link to that on our website, belonging.berkeley.edu/whobelongs.
Michael Reich: Yeah. I don't have the numbers in front of me from that paper and I've been doing a lot of work more recently on the $15 bill itself. But the issue is, it's something I've worked on for a long time, as you mentioned, not just minimum wages, but also racial inequality. And what you find if you look at say workers who have a high school or less degree who are paid less than 1.5 times the current or the revenue minimum wage that you would that are disproportionately female, disproportionately black and not lesser extent. And most of these workers are 25 and over, a lot of them support kids or the sole support of their household. And so it does seem that a minimum wage would not only increase earnings would benefit all low wage workers specifically, or especially benefit black workers and female workers.
Michael Reich: And then when we ran the numbers, we found that it did in fact the minimum wage increases over the last 20 years. Would they reduce racial inequality is not obvious because about I think half of black people still live in the South, which is mainly a $7.25. And the States that have been increasing their minimum wages like California or State of Washington are already higher wage States. And so potentially it could be that raising the minimum wage in the past as we have been at the state level, but actually widen black-white differences in the country as a whole. And in those individual States and comparing what's happening in the State of Washington to what's happening in Mississippi. And so it was interesting to see whether in fact the fact that the minimum wage did reduce racial inequality, racial wage gaps.
Michael Reich: And we looked at all the wage increases at the state level and the local level too over the last 20 years. And then it's just been the federal level, there's only been increases in 2007 to 2009, at least in the last 20 years. So what we find and controlling for a lot of other things that are going on, so we think we have actual causal analysis rather than correlations, is we find that in fact those that the record minimum wage increases at the state federal local level.
Michael Reich: Those include reducing racial wage gaps and especially among women, but then when we try to figure out why it did that, it wasn't so much that black workers started a lower wage, we thought that would be the explanation. It was much more that these other benefits kicked in such as being able to acquire a car. And then that led indirectly, in other words, to even more benefits for black workers, for white workers and in all these cases we did not find any evidence of job loss.
Marc Abizeid: One of the things I think that hasn't really gotten a whole lot of attention with this push to raise the minimum wage. And this act, specifically, which home was almost included in the coronavirus relief package, was that it's going to phase out these so-called tipped wages. And a lot of people have never heard of this before, but a tipped wage it's separate from a minimum wage. It's only $2.13 an hour. So can you tell us a little bit of what is this tipped wage and how could it possibly be so low?
Michael Reich: Right. So the tipped wage was set at $2.13 in 1996 under Clinton and it was a compromise and it hasn't been increased the federal level since. However, States can increase the so-called sub minimum wage to minimum wage. And there are seven States who which there's no tip credit. That is where the minimum wage is the same for servers as for anybody else. And those States include California as well as Oregon, Washington, Nevada, Alaska, well, I'd hope Pacific rim in other words. And so, especially in California, people haven't heard about it, but even people on East Coast don't know about it.
Michael Reich: The basic idea is that since these workers, the servers in restaurants particularly are getting tips that some of the minimum wage could be covered by tips rather than by the employer. The employer has to, say, provide at least $2.13 per hour.
Michael Reich: And if the rest of it is made up by tips to get to $7.25, then the employer doesn't have to pay more. If the rest of the tips don't fill out that amount to $7.25, then the employer is liable to pay more. So server still has to get to $7.25. Basically, the mechanism is that consumers, people who dawn in these restaurants think they're giving a bonus to the servers for good service.
Michael Reich: In fact, what they're doing is subsidizing employer, because their tips are replacing the wages that the employer would otherwise have to pay to that $7.25 an hour. Tips are really good deal for bartenders on a Saturday night, they can make a lot of money per hour and tips, but for servers, especially when you get outside the big name restaurants, you're talking about a very small, much smaller amount, and of course is contingent on how many people come in on a particular night, when it's raining that night and so on. So it's not a very reliable way to earn a living.
Marc Abizeid: I know that the current minimum wage is only $7.25 cents. If you work that out annually, that's only about $15,000 a year, so that's just unlivable. But a $15 wage is still only about $31,000 a year before taxes. And that's still is only $31,000 for a lot of regions. That's also pretty unlivable. Do you even think that it is sufficient for a federal minimum wage? Or can we think about going even higher than that?
Michael Reich: That's the $15 would get you to the poverty level for a single individual with a couple of kids, even in Alabama, Mississippi where housing costs aren't as high as they are in California, or New York. And that I think that's the lowest floor I would want to see, at least get you out of what's in the poverty level, but there's still poverty wages. I mean, it's true. You're not going to be doing very well. You're not going to have many opportunities to go to vacation or go to the movies or save for later on in your life. So, I can see arguments for going higher, but so far we do have higher minimum wages in Seattle and San Francisco and the state go above. If you're down $16.39 in Seattle, the concern becomes... Well, when you get to really high minimum wages, will you have negative employment effects?
Michael Reich: And we haven't seen that yet. And I'm all for more policy experiments. And particularly for the reasons you're saying that we have so much more wage inequality and economic inequality than we used to have. It should be possible to get to a higher minimum wage level, which would make people have a better lives, and their kids have better lives. But even if it does have some costs in another areas, that there's no other policy here, we look at whether the policy is good or not just by looking at the employment effect, you should also be looking at the benefits, which include not just getting people out of poverty, but their health, that people are healthier, they're better parents to their children and many other kinds of downstream benefits.
Marc Abizeid: So what do you tell people when they invoke that argument? That age old argument that we hear all the time that I was told in high school as you raise the minimum wage, it's going to destroy small businesses, it's going to lead to unemployment. And the congressional budget office just a couple of weeks ago said that if we did pass a $15 minimum wage, it would pull some people out of poverty, I think like 900,000 around a million, but it would also lead to 1.4 million job losses. So what's your response to that?
Michael Reich: Okay. That's a big question. So we've done in all the years I've worked on the minimum wage, there's been a huge number of minimum wage studies, more than any other area of economics and the bulk of the research or the good research, ones that really carefully teasing out causal effects rather than justcorrelations. We're finding more and more that the effects are much smaller than what the congressional budget office was assuming. And congressional budget office is supposed to be just a neutral umpire here, but it really puts your thumb on the scale and trying to come up with much larger employment effects which scares people. Now why as a small business say, or not go out of business because of these minimum wages, the answer I think is fundamentally that they can raise their prices, an individual small business can't raise its price and its competitors down.
Michael Reich: It'll lose a lot of sales. There's a fast food restaurant across the street and you increase your... You're a fast food restaurant and you increase your prices. It will go across the street. But if the costs increase for all fast food restaurants and about the same amount at the same time, which is what happens when you have a minimum wage in Greece. And from the point of view of the industry as a whole, they can raise their prices some without becoming less competitive because the costs shocks are felt by everybody, but all the businesses and... It's turns out not to be such a big shock to prices because not all the workers were earning at the lowest minimum wage before the earning somewhere between the new and old, some of them are earning somewhere halfway in between and also prices don't really... a price increases that reflect total costs, not just labor costs.
Michael Reich: So labor costs are only 1/3 of the operating costs. So if you raise your labor costs go up by 10%, then your prices would only have to go up by 3%. And if some of the workers aren't actually could make as big an increase as the nominal increase in the minimum wage, and maybe that goes down to one and a half percent. And so the price increases could be pretty small for restaurants, even small ones.
Michael Reich: And there are other studies from the department of agriculture, economic research service that shows it that consumers don't go out to eat less. When prices go up just by a little bit, they go out. I mean that there was their response is very small. I did a study. What happened in San Jose men a few years ago when it raises minimum wage overnight through a public ballot process from $8 to $10 as a 25% increase.
Michael Reich: And that's just within the city of San Jose. And I looked at the price effects for restaurants in side the city and those just outside, across the street, in some cases. And I found prices went up by the amount that implied the costs had been fully passed on to the customers within San Jose, but a mile away, prices didn't go up where the costs hadn't gone up. And so customers were not running from inside San Jose restaurants to restaurants elsewhere. They were staying with the places that had raised their prices. If they're buying a car, it might've gone farther to get a lower price, but to get a burrito, say, you're not going to travel a couple of miles. It's more trouble than it's worth. So that's what I kind of say is, it's kind of a different economic frame.
Michael Reich: Even the flavor costs go up, it doesn't mean that prices can't go up and they don't have to go up very much in the case of restaurants, which are the biggest consumers of low wage labor. They can go up a little bit without effecting their sales very much. And so basically what minimum wage increases are doing is they're helping the people who work in restaurants and the people who were paying for the minimum wage of mainly the people who eat in the restaurants were more affluent and it'd become even more affluent over the last 20 years with the growth in inequality.
Marc Abizeid: What do you think? I mean, let's put restaurants aside for now and just think of small retailers or something, or just small, whatever your mom and pop shop that is going to be disproportionately burdened by a wage hike, an increase in the minimum wage. What do you think about that idea of giving tax breaks to smaller businesses and then imposing those taxes or shifting some of that burden onto the larger, more profitable corporations, the Amazons and these types?
Michael Reich: Well, I picked on restaurants because they're the biggest users of minimum wage labor. Retail, actually, wages are a bit higher even in small shops, like your hardware, your corner hardware store. So they're effected less, but nonetheless, you're raising a very good point, which is a big box store.
Michael Reich: Say... Corporate stores has a lot more resources than your local hardware store. And so there might... it might be a good reason to give some tax credits to small businesses. Small businesses do deserve some support, but it's really important to separate out what the problems are of small business versus big business in them, because they're real problems like retail is disappearing, physical retail compared to giant online retail.
Michael Reich: That's not because of the minimum wage, that's because of other things that are going on. Rise of the internet or now in effect of the pandemic, but yeah, I'm for... I think tax credits are fine. Another thing that we do in California, both at the state level and the city level is we give... First of all, we phased in these minimum wage increases over five years and not overnight. And then we face for even for a longer period for small businesses. So you got less than 25 employees. You have an extra year of adjustment in any of the city and state city minimum wages in California and also state level. So that's also a way to recognize their issues.
Marc Abizeid: Could you give us your prediction of what you expect to see as far as the minimum wage?
Michael Reich: Predictions, you know who Yogi Berra is or was rather?
Marc Abizeid: No.
Michael Reich: All-star catcher for the New York Yankees when I grew up. He was famous for all kinds of aphorisms and one of them was "Forecasting is very hard, especially when it's about the future." I don't know that economists are any better than anyone else or casting, particularly when what's going on now is very much involved in partisan politics. I have seen that many States have raised their minimum wages above the federal level in the last 25 years. And that includes now something like 60% of the workforce and seven States plus now Florida have elected to go to $15 and district of Columbia is another one and there could be a couple more States that will join that list.
Michael Reich: And in Georgia, for example, the minimum wage was very popular. A $15 minimum wage is very popular. And I think the advocacy of $15 minimum wage did help. The two democratic candidates in the runoffs went over the Republicans. And now those are the two of the senators, the most insistent that we keep raising, we do graze the federal minimum wage to $15 or else maybe there will be some change in Georgia politics that has happened previously and say like in Florida or in Virginia, which used to be red States where the minimum wage is one of the issues, not the only issue that has turned those States into purple or blue States. So I expect to see more action continuing at the state and local level, whatever the feds do, and also expect that this will be a... this is such a defining issue now for the Democrats.
Michael Reich: That they're not going to give up on it. They're going to try to keep pushing on it. It may take reform of the Senate rules and getting rid of the filibusters, majority rule, or it may take Democrats picking up a couple more seats, like 22, which is quite likely, we're admitting some more States to the union, like, DC and Puerto Rico States had more Democrats.
Michael Reich: So I'm hopeful that the tide is kind of changing the direction of changes in favor of federal $15 minimum wage, but it's obviously still take a while. And I think the other thing that's really important is that the social movements that have been like Fight for $15, and if they keep the pressure on, and especially at the state level and legislative elections, so on, that's why this has become such a popular issue more than what economists like myself have done. It's the power of those movements.
Marc Abizeid: Right. And it's really Senator Manchin, I think from West Virginia who was blocking all of this, because he's the one dissenter among the Democrats saying that $15-
Michael Reich: It's crazy because the minimum wage is already $8.75 in West Virginia. And there's very few people working there for less than $9 or $10. So when you says $11 can be about right over five years, that's like nothing. And he's denying increases to hundreds of thousands of West Virginia workers or not the lowest wage States in the US. So it's not a very democratic kind of system. The public support for the minimum wage. In general, it runs around 70 to 80% and $15 minimum wage has been running 60 to 70% in all the state referenda. There've been about 28 or 29 of them, almost every one has passed. What about one that one passed later in the same state and all of them have passed by margins like 60, 65%. So Florida while it was voting for Trump was passing a $15 minimum wage.
Marc Abizeid: And that wraps up this episode of Who Belongs?. I'd like to thank our guests, Michael Reich, Professor of Economics and Chair of the Center on Wage and Employment Dynamics at UC Berkeley for sharing his expertise on the impacts of minimum wage increases. We'll put some links to some of Prof. Reich's work, as well as a transcript of this episode and other relevant resources on our website at belonging.berkeley.edu/whobelongs. Thank you for listening.