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Latest News - August 2015

August 4, 2015
The Great Unknown: The $15 Minimum Wage
By: Sean Higgins

The push to raise the national minimum wage to $15 an hour has caught fire among Democrats. Once considered politically unrealistic even by many on the Left, it has since been approved in cities such as Los Angeles and San Francisco.

Democratic president candidate Bernie Sanders has introduced Senate legislation to make $15 the federal rate in four stages by 2019, up from the current level of $7.25. A House version has 37 co-sponsors. Even Democratic presidential frontrunner Hillary Clinton has endorsed the idea, albeit not as broadly, arguing that cities like L.A. were right to adopt it.

But nobody really knows what a $15 minimum would do to the economy. Past increases in the federal minimum wage were incremental. There is no precedent for raising it to the level being discussed, more than double its current rate, economists note.

"We are certainly moving into unknown territory with an increase of this size," said Douglas Holtz-Eakin, former director of the Congressional Budget Office under President George W. Bush and now president of the American Action Forum, a conservative leaning think tank.

That is one of the few things David Cooper, analyst at the liberal Economic Policy Institute, would agree with Holtz-Eakin on. The only things he could think of to compare the proposed increase to were past hikes by the cities of Santa Fe, N.M., and San Francisco — and neither case tells much, he said.

"I don't think we can look at those [case] studies and say that would tell us clearly what would happen under a national minimum wage of $15," Cooper said. "It would be hard for any economist to say definitively what would happen."

The federal minimum wage has existed since the 1930s but wasn't made truly comprehensive until 1966, when the rate was set at $1.40 an hour for most occupations, about $9.60 in 2015 dollars.

It has been raised 15 times since then, all incrementally. Prior to 2007, the largest year-to-year increase was a 50-cent hike in 1996.

Trying to figure out what would happen with an increase of the size currently being suggested involves speculating based on economic models, not real-world data because there is none available.

"There is no way of ever coming up with a study that is 100 percent convincing because there are too many variables involved," said Dan Mitchell, senior fellow at the Cato Institute. "You ask five economists and you'll get nine answers — and they will all be estimates."

The variables include questions like at what point would the rising economic cost of labor spur employers into even greater automation? How much inflation would the rising wages create, eliminating the gains from the increases?

Holtz-Eakin co-authored a paper in June with the conservative Manhattan Institute using three economic models to estimate the impact of a $15 minimum. He found that the hike likely would eliminate between 3.3 million to 16.8 million jobs and would increase low-incomes workers' wages by $49.6 billion or possibly cost them as much as $93 billion due to job losses. The wide range of results indicates the difficulty in making a forecast.

Liberals argue that such job loss predictions are much too pessimistic. When Sen. Bernie Sanders, I-Vt., introduced Senate legislation to make the federal minimum wage $15 an hour, he directed naysayers to the example of Seattle-Tacoma, also known simply as "Sea-Tac".

"In January of 2014, SeaTac immediately raised its minimum wage to $15 an hour. Did the unemployment rate in that community go up? No, it went down from 6.3 percent to 4.6 percent," Sanders said in a July 22 speech.

That is not quite right, according to the Bureau of Labor Statistics. Sanders is close on the current unemployment rate, 4.5 percent as of June, but Sea-Tac's rate in January 2014 was 5.6 percent. Also notable was that June 2015 was the third straight month the city's unemployment rate had increased. Still, unemployment in the city is about a full point lower now than it was when the new minimum level was adopted.

Sanders also points to a January study by the University of Massachusetts at Amherst titled, "A $15 U.S. minimum wage: How the fast-food industry could adjust without shedding jobs." The study argued the restaurants would benefit from increased sales and less turnover but also that the labor costs likely would require price increases and lower profit margins — a difficult scenario for fast-food joints, many of which operate at the margins.

"They weren't saying this is what would happen. They were trying to present a plausible case for one way the industry could adjust to $15," Cooper said.

Neil Sroka, spokesman for the Howard Dean-founded group Democracy for America, pointed to a 2014 article by former Clinton administration official Robert Reich.

"When I was labor secretary in 1996 and we raised the minimum wage, business predicted millions of job losses; in fact, we had more job gains over the next four years than in any comparable period in American history," Reich wrote.

That increase took the rate from $4.25 an hour to $5.15 by 1997, a far cry from an increase to $15 from $7.25. Still, that is the logic undergirding the movement: Past predictions of doom were overstated, so why not go big this time?

Mitchell points to the example of Puerto Rico, which in 1977 was required to match the mainland U.S. minimum wage despite the small island having a much different and weaker economy. By 1983, the island's unemployment rate had risen from 19 percent to 24 percent, prompting mass emigration to Miami and New York.

The Puerto Rican unemployment rate has since fallen to 12.6 percent, still more than double the U.S. rate of 5.3 percent.

"We can learn a lesson from this. It doesn't tell us exactly what would happen in the U.S. by any stretch of the imagination, but it at least suggests the direction in which things will trend," Mitchell said.



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