The “donor class” and the minimum wage

When the Congressional Budget Office (CBO) recently released a new report estimating the effects of a higher minimum wage, conservatives pounced on the possibility that a minimum wage hike to $10.10 would cost about 500,000 jobs. But much like their reaction to the recent report about the Affordable Care Act, they are jumping to conclusions far too quickly.

First, there are reasons to be skeptical about the negative employment effect. Many studies find no negative employment effects. A recent report by Demos finds that by stimulating economic growth, a minimum wage could in fact create jobs. After all, a worker for one company is a customer for another. Minimum wage workers struggling to make ends meet are more likely to spend, reviving local economies. This is the argument forwarded by billionaire investment banker Nick Hanauer and economists like Joseph Stiglitz. It has strong theoretical support, as well as empirical support; studies show that poor workers are more likely to spend marginal income than wealthy workers.

Part of the problem is that the CBO relies heavily on simulations, rather than the empirical (observed) effects of the minimum wage. Textbook economics would predict job losses; if you make a good (labor) more costly, you reduce demand for it. But the world doesn’t work like a textbook. Workers being paid more may work harder (economists call this an “efficiency wage”). Workers struggling to make ends meet may not be paid in accordance with their ability, because they can’t credibly threaten to leave their job or unionize (they will simply be fired and replaced). The most famous study on the issue, by David Card and Alan Krueger finds 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.” More recently, these findings were replicated empirically by Arindrajit Dube, T. William Lester and Michael Reich.

Looking internationally will not help Republicans. Even the right-leaning Economist magazine has argued that a minimum wage hike in Britain, “has done little or no harm” and instead, “Not only has it pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale—and thus reduced wage inequality.” The U.S. minimum wage pales in comparison to other developed countries; Australia’s is more than double our own. Historically, too, the current minimum wage is anomalous. Adjusted for inflation, it is far lower than the $10.77 a worker would be making in 1968.

But even if some minor job losses materialize, raising the minimum wage is still good policy. The data show that 55% of the people making a minimum wage work full-time and their the average age is 35. Many of these workers are struggling under student debt, or the costs of raising children. These are not simply college students working on the side; for many people these jobs are the only source of vital income. For these poor workers, a $3 raise may be the difference between a Thanksgiving Turkey and empty stomachs.

The minimum wage has potent implications for our national discussion of inequality and upward mobility. Republicans have been paying lip service to the idea of reducing inequality and increasing upward mobility, but so far policy proposals have been sparse. The minimum wage is a perfect solution. It requires little government spending and is unlikely to have any significant effect on the deficit. It certainly doesn’t violate the “no new taxes” pledge. So a minimum wage hike would be the perfect conservative solution to inequality: targeted at working people (rather than the unemployed), minimal bureaucracy and no new revenue for the government. And studies show it would work. Larry Mishel of the Economic Policy Institute finds that the declining value of the minimum wage has been a major driver of increased inequality. Citing the work of David Autor, he finds that more than half of the growing divide between workers at the median and workers at the lowest 10% of the income distribution can be explained by a declining minimum wage.

The CBO isn’t interested in adjudicating studies, but rather creating a consensus, and it generally errs on the side of conservatism. While the effects of the minimum wage on the job market is mixed and uncertain, the effect on upward mobility is not. The CBO estimates that in total, “overall real income would rise by $1 billion” and that a $10.10 minimum wage could lift 900,000 people out of poverty. The report estimates that those making less than $26,300 a year will their real family income increase by $300 dollars, and those making less than $51,400 would see it rise by $200. All told, more than 16 million workers will be positively affected. For many, that might enough to fix a broken dishwasher or afford Christmas presents. However, one group would be negatively affected: those earning more than $182,200, who would see their real family income drop by $700. Given that this classis the most likely to vote and donate money to Republicans, it’s unsurprising that the part will be slow to embrace raising the minimum wage. Business groups like the Chamber of Commerce have spent millions aiming to keep the minimum wage low.

Republican opposition indicates just how much the party has been co-opted by the interests of the donor class. While a large plurality of economists and more than 73% of citizens support raising the minimum wage, research by Larry Bartels finds that only 40% of the wealthiest Americans do. When combined with research by Martin Gilens and Kay Lehman Schlozman showing how the wealthiest Americans have a disparate voice in public policy affairs we begin to see why the minimum wage has yet to gain traction: class interests, not economics are driving the debate.

If Republicans are serious about reducing inequality and increasing upward mobility without increasing deficits and killing jobs, the minimum wage is the way to go. Sadly, they have been co-opted by a donor class less interested in good policy than their own economic interests.

Originally published on Salon.

Leave a Reply

Your email address will not be published. Required fields are marked *