Rising Wage, Less Assistance

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Govs. Jerry Brown and Andrew Cuomo are in a heated race to the bottom – of the economic ladder.

Both have thrown their weight behind measures to boost the minimum wage in their respective states to $15 an hour. The quest is to see which will get there first – California’s legislature last week gave its OK to a measure that would hit the mark by 2022 for most businesses. In New York, Cuomo has included a provision in his next budget that would increase base pay there to $15 an hour by 2021, but late last week was still trying to sway some resistant Republicans to join the effort.

The arguments for and against increasing the wage are familiar: proponents point to the increase as one tool in an effort to reduce income inequality and lift people out of poverty; opponents cite the economic pressure, particularly on owners of small businesses, the increase would cause and warn of lost jobs as a result.

Both sides have trotted out reams of academic studies that support their view, though an informal survey suggests there may be more data supporting the benefits of an appropriate increase.

In the narrow view, where we look only at the impacts on a minimum wage increase on businesses and their employees, there is no doubt that some negative effects will be felt. Invariably, those businesses operating on narrow margins (restaurants come most immediately to mind) will be forced to choose between an even narrower margin or one less employee. Odds are that the employee loses that one.

But it is likewise true that for many, an increase in the minimum wage will have a real – though perhaps not profound – effect on their lives. A person earning California’s minimum wage of $10 an hour earns about $20,000 a year. If that person is a single parent raising two children, they barely eclipse the federal poverty threshold.

The poor are by necessity spenders, not savers.

What that means is that someone earning a $15 hourly wage – roughly $30,000 a year – would have 30 percent more spending power than they do now. And spend they will, with each transaction generating sales taxes for their localities.

But sales taxes are just one modest benefit of an increased wage.

What ought to be especially cheering to those for whom bigger government is anathema is the significant body of literature showing that a minimum wage increase may reduce reliance on several forms of government assistance, from food stamps to Section 8 housing.

A 2014 report from the Economic Policy Institute found that “workers in the bottom 20 percent of wage earners receive over $45 billion in government assistance each year from the six primary means-tested income-support programs.” What’s more, those earning less than $10.10 an hour – then under discussion as a target federal minimum wage – were the beneficiaries of “half of all public assistance dollars from means-tested income-support programs.”

Among its conclusions, the EPI found that “raising the (federal) minimum wage to $10.10 would reduce government expenditures on current income-support programs by $7.6 billion per year – and possibly more, given the conservative nature of this estimate.” What’s more, it found, “Safety net programs would save 24 cents for every additional dollar in wages paid to workers affected by a minimum-wage increase to $10.10.”

To be sure, not all are convinced that public assistance rolls will go down as the minimum wage increases. In an essay on the Federal Reserve Bank of San Francisco’s website, David Neumark, a professor of economics at UC Irvine, wrote that there was not conclusive research showing that a higher minimum wage would reduce government spending on welfare – “with the possible exception of food stamps.”

That seems like a good enough place to start, even if the other impacts are muted.

California has led the nation on most issues aimed at protecting its residents. There will no doubt be some pain – some people will lose jobs and some businesses may be forced to close. It has always been the case.

And yet the state remains the largest economy in the country – and one of the largest in the world – drawing entrepreneurs and other talented people from around the globe. We won’t fall into the sea, we’ll just pay the folks at the bottom a little better.

Jonathan Diamond is editor of the Business Journal. He can be reached at [email protected].

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