When the lowest pay rises, what happens?
A minimum-wage hike last week in Massachusetts will help workers to stay afloat.
Massachusetts raised its minimum wage last week and for Felicita Rivera that inspires a simple hope: that she'll be able to keep her head above water financially.Skip to next paragraph
Subscribe Today to the Monitor
For the past seven years, her pay at the small manufacturing plant where she works was stuck at the state minimum of $6.75 an hour, she says. The new state floor of $7.50 an hour means an extra $100 or so each month. But for Mrs. Rivera it's more about trying to stay even than trying to get ahead. The rent on her apartment is set to rise in February, also by $100 a month.
The experience of this worker, and this state, hints at the kinds of results that America can expect from a hike in the federal minimum wage. In Congress, Democratic leaders have planned a House vote Wednesday for the first such raise in a decade.
Debates over raising the minimum wage usually go something like this: Supporters say it will improve the standard of living for low-wage workers. Foes warn that it will force businesses to raise prices for their goods and services and employ fewer people. While there's some truth in both arguments, the larger reality is that most changes in the minimum wage are relatively modest, and so are the results.
For example: After 19 years working at the minimum hourly rate in the same factory, Rivera hasn't lost her job, even though the wage floor has risen several times. But she also doesn't feel her standard of living has improved.
Similarly, for the state of Massachusetts, the economy hasn't imploded, despite seven years with a minimum wage 31 percent above the federal floor of $5.15. But poverty hasn't disappeared, either.
"Both critics and advocates of the minimum wage have exaggerated its effects," says Isabel Sawhill, an economist at the Brookings Institution in Washington. "It doesn't do a great deal of harm. At the same time, it's no panacea for the low earnings of less-skilled workers."
This view, shared by many economists, doesn't mean that setting the wage floor is merely symbolic.
When the wage floor is raised, workers at the bottom of the pay ladder, like Rivera, see a direct and immediate rise in purchasing power.
And employers like Mark Waxler face new costs, which can push up consumer prices and curb the creation of new jobs.
Mr. Waxler runs the 73-room Beechwood Hotel in Worcester, a couple of miles from where Rivera works.
"Everything does affect prices," he says, whether it's a jump in energy costs or higher labor costs.
He says the 20 housekeepers and dishwashers on his staff are paid at least $8 an hour currently, so his payroll costs didn't jump last week as the state law kicked in.
But as workers at the bottom of the state's income ladder get a raise, dishwashers and housekeepers at the Beechwood could be expecting higher pay, too. Moreover, by next year, the Massachusetts minimum wage is set to rise again, to $8 an hour. At that point, if all low-wage workers are earning close to what Waxler pays, his salaries may need to rise to retain the quality of staff he wants. The result: Guests would face higher room rates.
And if wages rise too much, the impact on businesses could widen.
"You can only increase pricing so much" before it affects hotel occupancy and dining-room sales, Waxler says. "You end up having to cut people or cut services just to survive."
He's not opposed to a wage floor. "You don't want anybody to have to worry about poverty," he says. Waxler is simply pointing out that there's no free lunch for the economy.
A central tenet of economics holds that markets find an equilibrium of supply and demand. When the price of something goes up, demand goes down and a new equilibrium is reached.
This rule isn't repealed when politicians pass a minimum-wage hike, labor-market experts say. Higher costs for low-wage workers mean that employers hire fewer of them.
This happens gradually, not so much due to layoffs as to slower job creation.
"It's hard to find workers who lost their jobs" because of a boost in minimum pay, says David Neumark, an economist at the University of California at Irvine.
When the minimum wage rises, "it's not just free manna from heaven," says Tom MaCurdy, a Stanford University economist affiliated with the conservative Hoover Institution. Prices of goods must rise as a result, he says, and often those are the very goods that low-wage workers buy. Some other costs may also fall on low-wage workers themselves, if employers respond by eliminating jobs or cutting spending on benefits and training.