Opinion pieces and speeches by EPI staff and associates.

[ THIS TESTIMONY WAS PRESENTED BEFORE THE FINANCE COMMITTEE OF THE MARYLAND STATE SENATE ON FEBRUARY 10, 2005. ]

Testimony on a proposal to raise the Maryland minimum wage SB 89

By Jeff Chapman

A brand new poll by the nonpartisan Pew Research Center shows that Americans overwhelmingly support an increase in the minimum wage: 82% said it was an important priority and only 6% opposed an increase.1 In 2004, voters in Florida and Nevada (both “red” states) voted for increasing their states’ minimum wages in far greater numbers than they did for President Bush.

The minimum wage has been a key part of our nation’s economy for over six decades. It has been a critical safeguard for America’s low-income workers. It has served as a basic statement of how we value work in this country. Despite its importance and popularity the minimum wage has been allowed to decline recently at the federal level. The federal government has not made raising the minimum wage a priority. It has let the purchasing power of the minimum wage fall every year since 1997. The minimum wage is now worth no more than it was before the last federal increase and worth less than in all but two of the last 48 years. Its value is lower relative to the average wage than it has been since the 1950s.

Fortunately the states are stepping in. Since the last federal increase (in 1997), sixteen states, including the District of Columbia, Delaware, and New York have raised their minimum wages. Other states, including Pennsylvania and New Jersey, are considering taking action this year.

The minimum wage is a popular issue because Americans believe that everyone deserves the opportunity to earn a decent wage. That’s true whether they’re a young worker just starting out and trying to earn money for college or a single mother supporting a family. The minimum wage is about fairness, the value of work, and the opportunities that work provides.

Nor do we believe employers should be allowed to unreasonably profit by exploiting the lack of negotiating power of low-wage workers. The free market fails to set a fair price when one side holds all the bargaining chips. In another context, this is why laws exist against monopolies. If only one supplier supplies a good, it can charge more than the good is worth because the purchaser is powerless to obtain it elsewhere. Low-wage workers are in the opposite position of the monopolist. They lack the skills that command higher wages, but, because they need to work to survive, they cannot withhold their labor from the market. The monopolist can set the price at almost whatever level it wants, while the low-wage worker must take almost whatever is offered for his or her labor. Minimum wages exist for the same reason that laws against monopolies exist—they deal with situations in which the market fails to set fair prices.

You’ll hear that raising the Maryland minimum wage will have unintended consequences—that low wage workers will actually be hurt or that the state’s economy will be critically undermined. There are very good reasons to disregard those predictions:

The proposals being considered are modest. Raising the Maryland minimum wage by $1.00 would only affect less than 3% of the workforce. Raising it by $2.00 would affect 7%. In contrast, the last federal increase affected 9% of the national workforce and was followed by a significant nationwide employment boom. Over 500 economists, including three Nobel Prize winners and four past presidents of the American Economics Association agreed that “increases in state minimum wages in the range of $1.00 to $2.00 can significantly improve the lives of low-income workers and their families, without the adverse effects that critics have claimed.”

Last year, I took a careful look at the labor markets in states that have increased their minimum wage rates recently.2 The last few years have been difficult for labor markets across the country and I wanted to see if state minimum wages had exacerbated the problem in affected states. On the contrary, I found that while some of the states with higher minimum wages experienced worse than average recessions and recoveries, others did better than average. And in the states that did worse, industries (such as restaurants and retail) that are affected by a minimum wage increase did relatively well, while industries relatively unaffected by the minimum wage (such as manufacturing and information) were the primary source of job loss. Clearly, there is no connection between state minimum wages and poor labor market outcomes.

While sometimes painted as elementary economics that higher minimum wages have adverse effects, the positive experiences of states with higher minimum wages is explainable by the following propositions:

• Employers have power to set wages because workers incur substantial personal cost during unemployment.
• Employers exercise that power by paying their employees less than what they would earn in a truly competitive market.
• By paying lower wages, employers may cause higher turnover and incur higher costs to recruit, train, and supervise their workers.

While these observations may seem like common sense to most people, historically economists had failed to incorporate them into analyses of low-wage labor markets. Using these conditions an increase in the minimum wage may not have a substantial impact on employment (and may even increase employment over some ranges) because workers are being paid less than what they are really worth economically to the firm. Rather than cause job loss, minimum wage increases would therefore correct a market imbalance by forcing employers to pay a fair wage. And by decreasing recruitment, training, and supervisions costs, increases to the minimum wage may not have a substantial impact on the cost of doing business for employers.

The proposal before you is as straightforward as legislative issues come. It’s a popular, positive, moderate, and common sense proposal that will improve the living standards of Maryland’s workers.

References
1 More details of the results on this poll are available at http://people-press.org/reports/pdf/235.pdf.
2 This report, as well as fact sheets, frequently asked questions, and other research are available online at http://www.epi.org/content.cfm/issueguides_minwage_minwage

Jeff Chapman is an economist at the Economic Policy Institute in Washington, D.C.

[ POSTED TO VIEWPOINTS ON FEBRUARY 10, 2005. ]