Business

01.02.14

After Years of Waiting, Millions of Workers Are About to Get a Raise

No thanks to Congress, the minimum wage in several states and cities will rise in 2014. That will help the working poor and lift wages for even more Americans.

Here’s my bold prediction for 2014: lots of Americans will finally get wage increases.

The obsession of large companies with low wages—even amid a record stock market, record profits, an record amounts of cash on their balance sheets—has been one of the more unsavory and frustrating aspects of the current economic expansion. Lots of businesses can easily afford to pay more. But they don’t—because they don’t have to, because the labor market is weak, because they’re obsessed with boosting profits, because labor unions are almost non-existent, and because societal and cultural norms have changed significantly. For many companies, including our biggest employers (Walmart, McDonald’s), paying decent wages simply isn’t part of their mission, or goal, or self-image.

Ultimately, as I’ve argued, the refusal of profitable companies to pay higher wages—and to refuse to even aspire to do so, or to argue that crappy wages are in fact a positive good—is self-defeating. In the U.S., consumers account for about 70 percent of economic activity. For the overwhelming majority of Americans, wages are the fuel for consumption. So if employers insist on keeping a lid on pay, they’ll find that demand for their products and services is likely to be stagnant. And, indeed, this is what Walmart, McDonald’s and plenty of other firms have discovered in 2013.

The obsession with low wages is also self-defeating, because it exposes companies to the prospect of higher regulation and scrutiny. If companies won’t raise wages, and then build a business model that presumes employees will get food stamps and Medicaid to get by, they’re essentially asking for the government to act. While President Obama has been pushing for a higher minimum wage, the Republican majority in the House has essentially ensured that there will be no action on a higher national minimum wage.

But across the country, states, cities, and towns have been acting. And starting in 2014, the minimum wage will rise in a big chunk of America—in 13 states and four cities, to be exact. Let’s review. In New Jersey (population 8.9 million), a constitutional amendment approved in November bumps the stage minimum wage up to $8.25 an hour and stipulates that it should rise every wear with inflation. In New York State (population 19.95 million), the minimum wage is rising to $8.00. In Connecticut (population 3.6 million), the minimum wage is set to rise from $8.25 to $8.70 per hour. In Rhode Island (population 1 million), the minimum wage is going up to $8.00. In July, California (population 38 million) will increase the minimum wage to $9.00

If employers insist on keeping a lid on pay, they’ll find that demand for their products and services is likely to be stagnant.

In nine other states, where the minimum wage is indexed to inflation or the cost of living, the floor under salaries will also be rising by small amounts. These include places where lots of Americans live, like Florida, Ohio, Colorado, Washington, and Arizona.

Now, only a small minority of the American workforce works for the minimum wage. But these legislative acts are nonetheless important. They will force companies to pay some existing employees more—often significantly more. They’ll push companies to raise the wages of those earning just above the current minimum wage. Most importantly, they set a higher standard for businesses. In effect, these states are telling companies, large and small, that if they want to operate in certain very large jurisdictions, they will have to design their operations in such a way that allows for slightly more decent compensation.

Yes, some companies that can only exist by paying $7.25 an hour might close or reduce employment. But the overwhelming majority of firms will adapt. And many will benefit, because the higher wages are very likely to be spent immediately on local goods and services. What’s more, economists will soon have several interesting experiments to conduct, which should shed further light on the impact of higher mandated wages. Several already-wealthy neighboring states (Rhode Island, Connecticut, New York, and New Jersey) are raising their minimum wages at essentially the same time, which creates an interesting new regional cluster. Washington, D.C., and two neighboring counties in Maryland are also contemplating a joint move to boost wages, which will set up an interesting comparison with Virginia. Economists will be able to compare employment growth in states that are raising minimum wages (like New Jersey), with bordering states that aren’t, like Pennsylvania. They’ll be able to look at how employment markets fare in states that raise the minimum wage as a matter of course (Florida, Ohio) to neighboring states that don’t (Georgia, Kentucky.) And they’ll be able to see whether low-wage employers like McDonald’s and Walmart decide to close stores and slash employment in response to the higher wages, or whether they maintain employment and expand in areas where higher wages might lead to higher consumer spending. (I’m guessing the latter will be the case. In fact, Walmart just opened two stores in Washington, D.C., where the minimum wage is already $8.25. and the city council just voted to boost it to $11.50 by 2016.)

Let’s be clear. These increases are not single-handedly going to lift the working poor out of poverty, but they’re a start. And despite the arguments of large business groups and their political allies, these minimum wage increases aren’t likely to lead to a drop in employment, a significant decline in profits, or a decline in start-ups. In the past few years, the economy has weathered shocks far more significant than a modest increase for several million low-wage employees.