By Waringa Kamau
Debbie Levonick works at Lexington’s Holiday Inn front desk, answering the telephone and checking in guests. She earns a little more than the minimum wage of $7.25 an hour. While this is not her only source of income, she said it does little to make ends meet for her and her family.
This is the situation of many of the country’s low-wage workers, a group that includes housekeepers, waiters and some factory workers.
[pullquote] It’s sad that people have to live on minimum wage. I don’t know how people do it especially when they’re only working one job. — Debbie Levonick [/pullquote]
The current federal minimum wage is $7.25 an hour, but Pres. Obama has started a national debate about whether that rate should be raised for the first time in five years.
During his State of the Union address in January, Obama announced that he would sign an executive order to increase the minimum wage for federal contractors to $10.10 an hour. And he has since been pushing Congress to increase the minimum wage for all workers by 2016.
Levonick describes this possible increase as “long overdue” and believes it could benefit people like her.
But opinions about the merits of a higher minimum wage vary sharply across the country, with economists and policymakers lining up on both sides of the debate. While many agree with Levonick that an increase would help those on the lower rung of the economic ladder, critics believe an increase — especially one as large as the one Obama is proposing – would squelch job creation at a fragile time for the economy.
A higher minimum wage is “a very bad idea, not only for the economy as a whole, but for the low-wage workers it is supposed to help,” according to economists at the Heritage Foundation, a conservative think tank. They believe a higher minimum wage has the potential to eliminate jobs and make it harder for unskilled workers to get jobs in the future.
A ripple effect
The first federal minimum wage, established in 1938, was 25 cents an hour. The rate has been raised 22 times since then, most recently in 2009, when the rate was increased from $6.55 to $7.25 an hour. From 1997 to 2007, however, the minimum wage was stuck at $5.15 per hour.
States may also establish minimum wages; the level in 20 states – including Virginia — is the same as the federal level. Four states have rates that are lower than the federal rate, but in those cases the federal rate prevails. In states where the rate is higher than the federal rate, the state rate takes precedence. Washington state has the highest minimum wage: $9.32.
Virginia’s minimum wage is currently at $7.25.
According to a report by the non-partisan Congressional Budget Office (CBO), 16.5 million workers would receive higher incomes as a result of an increased minimum wage.
Economists at the Brookings Institution report that a higher minimum wage could result in a “ripple effect” that could raise the wages of close to 35 million workers— that’s about 29.4 percent of the workforce. This number includes workers whose wages are at and around the current minimum wage. Brookings Institution is a think-tank based in Washington DC.
Compensation Programs Manager at Washington and Lee University Jodi Williams describes the ripple effect as the systemic increase in other employees’ wages as a result of a higher minimum wage.
“If all of a sudden positions that require less knowledge and a lower level skill-set are paid the same as those that require higher skill-set, then there needs to be a redistribution of pay rates,” she said.
People now making $10 an hour, for example, would need to receive pay increases as well to ensure that they are being treated equitably.
Impact on labor force
Economists on both sides of the issue say that a higher minimum wage is likely to cost the U.S. economy some jobs, but exactly how many is a topic of debate.
According to a report by the Heritage Foundation, the proposed minimum wage would eliminate 300,000 jobs. That translates into fewer opportunities for unskilled workers to get started in the labor market and move their way up.
The CBO estimates that raising the minimum wage would lead to a 0.3% decrease in employment across the country – or 500,000 jobs.
Carl Kaiser, a labor economist at Washington and Lee University, says some industries will be hit harder than others by an increased minimum wage. He said fast food and service industries such as hotels and supermarkets would be most affected.
Tom Oscella, regional operations manager for Dominion Lodging, concurred, saying about 75 percent of the employees at Lexington’s Holiday Inn would be affected by an increased minimum wage. This 75 percent includes employees who are earning the current minimum wage and those whose hourly rate is below the proposed wage of $10.10.
Oscella said he estimates that an increased minimum wage could cost the hotel an additional $60,000 a year, which would cut into the hotel’s bottom line.
Oscella said the hotel would have to make adjustments to cover the increased cost of labor.
“I see us trying to streamline our labor, which might slightly negatively impact the service we offer,” he said. “I could also see them [the hotel owners] wanting us to get higher prices [to pay for] higher labor.”
The hotel would remain profitable if it didn’t raise its prices. But if the owners wanted to maintain their current profit margins, they would have to hike prices to cover the higher cost of labor.
Levonick fears that another way the hotel could adjust is by having employees work fewer hours. This, she said, would end up hurting employees more than helping them.
“Those of us working 32 hours may be cut back to 24 hours,” she said. “So what are you gaining really?”
Williams said she doesn’t foresee W&L cutting back on jobs if the minimum wage is increased.
“We haven’t thought as far as eliminating positions because we certainly need the workforce,” she said.
At the university, the people who would be most affected by an increased minimum wage would be students and some casual workers.
Williams said dining services and the university’s operations department would be the most affected because these two areas rely most on casual workers, that is, people who do not work enough hours to be eligible for benefits.
And Samuel Allen, a labor economist at Virginia Military Institute, said paying workers more can benefit the employer – by reducing turnover.
“Firms really want to invest in workers to keep them from quitting or resigning,” he said. “They want to reduce turnover because it’s costly to have turnover.”
The poverty line
Various studies state that an increased minimum wage would help reduce poverty.
But how true is this? Let’s do the math.
Take for example the Jetsons, a hypothetical family of four with one working parent earning the proposed minimum wage of $10.10 an hour. If the parent works 40 hours a week, 52 weeks a year – and this is the family’s only source of income — this family would have an annual income of about $21,000.
According to the 2014 Federal Poverty Guidelines, a family of four qualifies as living under the poverty line if it has an annual income of less than $23,850.
Therefore, the Jetsons would still be living below the poverty line even with the proposed minimum wage.
Kaiser said a higher minimum wage would still have value because it would increase the income of low-income families.
“A lot of people will have extra money to support themselves and they’ll be better off whether or not they are raised above the official poverty line,” he said.
Unintended consequences
Some economists maintain that employers might respond to an increased minimum wage by upgrading the level of their workforce rather than cutting back. This means that employers will want to hire more skilled and qualified workers because they would be paying more for their labor.
That could put less-educated and less-experienced workers out of jobs.
“The greatest downside [of an increased minimum wage] would be a limit to workplace exposure for people earlier in their working careers,” Allen said.
Some worry that this would particularly hurt black and Latino teens.
Walter E. Williams, an economist and professor at George Mason University, argues that when faced with legislated wages that exceed the productivity of some workers, firms will make adjustments in their use of labor. One adjustment is to hire fewer youths and also to seek among them the more highly qualified candidates.
“It turns out for a number of socioeconomic reasons that white youths, more often than their black counterparts, have higher levels of educational attainment and training,” he writes in a research paper for the Center for Economic and Policy Research, a liberal Washington, D.C. think tank. “Therefore, a law that discriminates against low-skilled workers can be expected to place a heavier burden on black youths than on white ones.”
Other economists suggest that an increased minimum wage is ultimately good for the national economy because it gives people more purchasing power.
Kaiser said it is especially important for low-income people to have higher purchasing power because they tend to live paycheck to paycheck.
“If they have more money in their hands they’ll probably spend that money so that money goes back into the economy and — all other things being equal — that makes the economy a little bit stronger by increasing our GDP by a little bit.” Kaiser said.
Allen said a higher wage could also change society’s perception of blue-collar jobs.
[pullquote] There’s a disconnect between low paying jobs and the value that society sees for those jobs, so in a sense this could add value to those lower paying careers. — Samuel Allen[/pullquote]
A higher minimum wage should also be viewed as an economic and social justice, he said.
“Everyone who’s working hard at their job, regardless of what job it is should have enough money to have the basic necessities,” he said.
But away from the politics and economics, those who will be truly affected by an increased minimum wage say timing makes all the difference.
“By the time they get this passed, the cost of living will have increased,” Levonick said. “Today this new wage would make a difference, but not a few years from now.”