The Minimum Wage: Assessing Its Impact on Workers and the Economy
One such policy is the minimum wage. While a country like France has had a policy of a relatively generous national minimum wage for over 40 years, other countries had no such policies before the crisis.
Germany, for example, broke with its tradition of relying solely on collective bargaining between trade unions and employers’ associations to set pay levels by instituting an hourly minimum wage of €8.5 on January 1, 2015.
The UK also decided to provide workers at the bottom of the economic ladder with a pay hike by implementing its National Living Wage in April of this year, set at £7.2, or about €8.6 per hour.
But it is the US’ recent experience and in particular the “Fight for $15” movement, which started in the fast food sector and spread throughout the country’s services industry, that has sparked the most debate around the issue of whether or not a high minimum wage is good for the economy overall.
For though it provides workers at the bottom of the pay scale with a decent standard of living and reduces inequality to an extent, it raises the following questions:
- Does it make good macroeconomic sense, boosting flagging consumer demand by providing workers with more take-home pay?
- Or does it hurt the economy by leading to job cuts and higher prices?
- And what about its effects on productivity? Finally, what are the consequences for the industrial structure of the economy?
To explore these issues, France Stratégie recently held a talk with Michael Reich, professor of economics and co-chair of the Center on Wage and Employment Dynamics at the Institute for Research on Labor and Employment (IRLE) at the University of California at Berkeley, and OECD economist Andrea Garnero. It also organized a seminar on the minimum wage, bringing together academics and representatives from government and governmental organizations, with France, Germany, the UK, Portugal, Sweden and the US represented.
An old policy tool
New Zealand was the first country in the world to introduce a minimum wage in 1894, followed by the state of Victoria in Australia in 1896 and the US state of Massachusets in 1912. France, for its part, introduced its minimum wage substantially later in 1950.
The US has had a federal minimum wage since 1938 when the Fair Labor Standards Act was passed under FDR, legislating working hours and setting a national floor for wages. However, congressional action is required to increase the minimum wage, meaning it doesn’t necessarily rise along with inflation and the cost of living. Today, it hasn’t been raised in over seven years. In fact, in terms of real US dollars, the minimum wage has declined substantially from its high point reached in 1968.
A renewed push stateside
Inaction at the federal level has pushed several US states and also cities to the lead the way in raising the minimum wage towards the $15 goal. In 2014, San Francisco, Los Angeles and Seattle were among the first cities to sign into law a gradual increase in their minimum wages to $15. Earlier this year both California and New York followed suit, signing landmark laws that would raise the minimum wage in the former to $15 by 2022 and gradually increase it in New York City over three years before extending it across the entire state by 2021.
Reich stressed that a hike in the minimum wage would have big effects on the wage structure but little overall effect on the economy. According to a recent study he co-authored on the effects of the raise in New York State, while it would increase worker productivity and lead to higher prices and some automation – and thus cause some job loss – the measure’s costs would be made up for by a reduction in turnover, improved living standards and higher worker purchasing power.
He went on to say that in the US the bottom 20% of workers have seen their pay stagnate over the past 40 years. Moreover, low-wage work concerns a much larger portion of US workers today than it did fifty years ago, affecting some 35-40% of the private workforce. What’s more, the profile of such workers has changed. Whereas it used to be largely teenage workers, today it is typically women in their 30s, often with one or two children to provide for. In short, the stakes have gone up.
Increasing pressure on companies
This coupled with the pressure coming from a period of economic recovery and increased public awareness about top corporate executives getting substantial pay raises has created a tipping point, he emphasized. On top of this, it has come to light that many low-wage workers are receiving public assistance in the form of things such as food stamps and the healthcare programme Medicaid. Companies that rely on low-wage labour, such as Walmart and McDonald’s, are in effect externalizing the costs of labour.
Garnero added that US senator Bernie Sanders made this point in his presidential bid, stating that nobody working 40 hours a week should be poor and that part of the cost of welfare should be taken on by companies in the form of pay hikes for low-wage workers.
Drawing a contrast between France and the US, he also underlined the stark difference in the way minimum wages are set in the US compared to France. In the latter, the question was almost one of arithmetic, with the SMIC (Salaire minimum interprofessionnel de croissance), the country’s minimum wage, being indexed on inflation. The government can increase it further based on the advice of an expert commission (this happened in the months following François Hollande’s election – the only time in the past decade).
In the US, on the other hand, the issue is entirely political: Congress makes a decision based on political arguments, and more often than not Democrats support an increase and Republicans are opposed regardless of the health of the economy. As mentioned above, it hasn’t been updated since 2009.
The French and German experiences
In recent years the debate in France has centred on the contributions employers pay into social benefits for low-wage workers and what those workers’ actual take-home pay is. This is because as the principle of a minimum wage is broadly accepted in the country, rather than undermine it successive governments have made it a policy to encourage companies to hire low-wage workers by exempting them from certain contributions.
As to Germany’s experience, Professor Joachim Möller of the country’s Institute for Employment Research, stressed the loss of some 1.2 million jobs that opponents of the minimum wage in Germany foretold has failed to materialize. So-called minijobs are down, but regular jobs have increased by almost 700,000. Only in eastern Germany have jobs been lost, numbering 60,000. The measure has, however, decreased turnover, and, he added, probably been a plus for productivity.
Gilbert Cette, an economist at the Banque de France, pointed out the problem for low-wage employees is less the level of the minimum wage per se than the probability of experiencing upward mobility. He referred to France’s work bonus (prime d’activité), which low-wage workers can qualify for, as a tool more effective for fighting poverty than the minimum wage.
Stefano Scarpetta, director, employment, labour and social affairs at the OECD, stressed the importance of the interaction of the minimum wage with taxes and benefits. He pointed to the case of France in which the gross minimum wage relative to median wage is among the highest in the OECD, while the cost of labour at the minimum wage is about average among the organization’s 35 countries. Finally, the renewed interest in the minimum wage and its impact on workers and the economy has created the need for further benchmarks to be established.
 Reich, M. et al. (2016) “The Effects of a $15 Minimum Wage in New York State”, Center on Wage and Employment Dynamics, University of California, Berkeley, http://www.irle.berkeley.edu/cwed/briefs/2016-01.pdf.