Full COVID recovery requires raising the minimum wage

The coronavirus crisis recovery has been labeled “k-shaped” because of the way it has magnified existing inequalities.

For most highly paid workers, the last year has brought challenges like working from home and lost childcare, but little job loss. But the labor market for lower-wage workers has been devastated, with massive job loss and unemployment. Those essential and front-line workers who still have jobs have had to risk their health and the health of their families for little pay. 

Without aggressive action to counter the blow, the coronavirus recession will further increase inequality — a problem that had reached crisis levels before the pandemic even began. Economic impact payments — checks — will help, but they are not enough to truly set us on a path to an equitable recovery. For that, we need more targeted measures.  

One key action is long overdue — raising the federal minimum wage. 

The labor market is far different and more unequal than it was a generation ago. The share of national income going to the bottom half of the wage distribution has fallen by more than one-third since 1970, while the share going to the top one percent has nearly doubled – average income in the top one percent is now over 80 times that in the bottom half. But other dynamics have been stubbornly persistent. Due to occupational segregation, discrimination and other factors related to structural racism and sexism, Black and Hispanic workers and women remain concentrated in low-wage jobs.

The rise in inequality over the last decades has been a choice. A range of institutions, from the income tax system to labor law to antitrust policy, which once worked to counter inequality, have been weakened or attenuated and have helped the one percent absorb ever increasing shares of national income.

One of the most glaring examples of this has been the minimum wage. From a high of $10.46 in today’s dollars, in 1968, more than a quarter of the real value of the federal minimum wage has been eroded by inflation, over a period when national income per capita has nearly tripled, and productivity has more than doubled. A wage floor that had kept up with productivity growth since the late 1960s would be over $21 per hour today.

The Raise the Wage Act, recently introduced by Representative Bobby Scott (D-Va.) and Senator Bernie Sanders (I-Vt.), would gradually increase the minimum wage in five steps to $15 per hour in 2025. This would generate $107 billion in higher wages for working people, benefiting 32 million workers, their families and their communities. Nearly one-third (31 percent) of Black workers, more than one-quarter (26 percent) of Hispanic workers and 26 percent of women would get a raise. Further, essential and front-line workers make up a majority of those who would benefit. 

Opponents of the increase have raised three main objections. None hold up.

First, they argue that the minimum wage increase would lead to massive job loss among low-wage workers. This reflects an understanding of labor markets that is decades out of date and is inconsistent with modern scientific evidence. Hundreds of rigorous empirical studies of the effects of minimum wages indicate somewhere between zero and very small disemployment effects, much smaller than the earnings increases accruing to minimum wage workers.  

This is something that the Congressional Budget Office got wrong in its analysis of the Raise the Wage Act this week. CBO assumed employment effects that were three times as large as what they would have found had they simply used the methodology that they themselves used in an earlier report on the minimum wage — despite new, high quality research in the intervening years that the employment effects of the minimum wage are smaller than previously assumed.

Moreover, even insofar as minimum wages lead to small reductions in labor demand, this may manifest as small declines in annual hours for minimum wage workers, leaving them with higher earnings (and less need to rely on public support) nevertheless. In a 2015 poll of leading economists conducted by the University of Chicago, only about a quarter believed that a $15 minimum wage would lead to substantial job loss — and that share is likely lower now, as further accumulation of compelling evidence has shown that minimum wage increases cause no or minimal job losses.

Second, opponents argue that $15 is too high. Here, it is important to keep in mind that inflation gradually erodes any nominal wage floor and the floor would not reach $15 until 2025 — when, due to inflation between now and then, it will be worth roughly $13.70 in today’s dollars. This represents only a 25 percent increase in the real value of the minimum wage from 1968, far short of productivity growth. Our economy can more than afford a $15 minimum wage. 

Last, some may argue that while a higher wage floor is appropriate in the rich coastal states, we should set a lower floor in states where wages are currently lower. There are three responses here. First, persistently lower wages in many states are, in part, a result of a history of weak labor standards, including inadequate minimum wages. Setting a lower minimum wage for these states would simply lock in these disparities. Second, no one is proposing to raise the minimum wage in these states all the way to where it is in the wealthiest states. Several of the richer states have already implemented their own state-level wage floors that will remain above the federal level even after the Raise the Wage Act is fully phased in. Finally, the proposed $15 minimum wage in 2025 — which, recall, is lower in real terms than it seems — is affordable, even in lower-wage states. Even in Mississippi, by far the lowest wage state, it will represent a share of income per capita around half of what it was in 1968.

We cannot continue to let inequality grow unchecked in our labor market. It is toxic to our people, to our society, and to our democracy. A higher minimum wage is an important first step to reversing it.

Rothstein is professor of Public Policy and Economics at the University of California, Berkeley. Shierholz is senior economist and director of policy at the Economic Policy Institute. Each served as chief economist at the U.S. Department of Labor in the Obama Administration.