Testimony | Wages, Incomes, and Wealth

Testimony for Montgomery County Council: Bill 28-17, Human Rights and Civil Liberties–County Minimum Wage

EPI’s Marni von Wilpert delivered the following testimony before the Montgomery County Council regarding Bill 28-17, Human Rights and Civil Liberties–County Minimum Wage on September 26, 2017.

Good afternoon Council President Berliner and members of the Committee.

My name is Marni von Wilpert. I serve as an Associate Labor Counsel at the Economic Policy Institute, a non-profit, non-partisan research organization in Washington, D.C., that focuses on improving the economic conditions of low- and moderate-income Americans.

I am here today to speak in support of Bill 28-17 and its establishment of a $15 per hour minimum wage for certain employers in Montgomery County by 2020.

Establishing a county minimum wage of $12.50 by July 2018 and then gradually raising it to $15 by 2020, would raise the wages of those workers who earn the least in Montgomery County. Although EPI has not conducted a specific analysis for Montgomery County, there is a large body of evidence showing that previous minimum wage increases both nationally and at the local level tend to work exactly as intended, raising wages for low-wage workers with few adverse consequences in terms of reduced employment.1Minimum wage increases in general largely benefit adults working full-time, many of whom are supporting families and raising children. Many people in Montgomery County who would benefit from raising the minimum wage work in the industries that are the foundation of thriving communities, such as accommodation and food service, retail, office support, residential care and child care, hospitals, and other services such as janitorial and personal care services. 2

Is a $15 minimum wage appropriate for Montgomery County?

Two of the most important considerations for an appropriate minimum wage level are, first, what workers actually need to maintain an adequate standard of living and, second, what level of a minimum wage will the labor market be able to bear while still providing adequate income earning opportunities for lower wage workers.

The first measure by which economists typically judge the appropriateness of a wage floor is by evaluating what workers actually need to maintain an adequate standard of living. For years, EPI has published and regularly updated a feature on our website called the Family Budget Calculator. This tool measures the income a family needs in order to have a modest yet adequate living standard in 618 different geographic areas in the United States. It accounts for differences in costs of housing, food, child care, transportation, health care, taxes, and other necessities.

Compared with the federal poverty line, EPI’s family budgets provide a more accurate and complete measure of economic security in America. In particular, for a two-parent, two-child family in the Maryland suburbs of Washington, DC, it costs $82,129 per year to secure a decent yet modest standard of living.3

Based on the Congressional Budget Office’s forecast for inflation, a $15 minimum wage in 2020 is the equivalent of about $14.01 in today’s dollars.4 That means that a two-parent, two-child family, with both parents working full-time all year at the proposed $15 minimum wage, will earn roughly $56,040 per year. The $15 minimum wage proposal will therefore be an important increase for low-wage workers, but it is far from an excessive increase—as it will not even meet the needs of a two-parent, two-child family to secure a decent yet modest standard of living in Montgomery County.

The second key measure by which economists typically judge the appropriateness of a wage floor is to compare the value of the minimum wage to the wage of the median full-time worker. The ratio of the minimum to median wage allows us to compare the current proposal to other minimum wage increases we have seen historically and in different regions of the country. The full-time median wage for workers in the Silver Spring-Frederick-Rockville metropolitan area was about $26.02 in 2016.5

Assuming modest real wage growth of about 0.5 percent annually, the ratio of the $15 minimum wage to the full-time median wage in this metro area in 2020 would therefore be about 51.6 percent. To put this in comparison, this value is slightly lower than the high point of the national minimum wage in 1968 of 52.1 percent. Therefore, the Montgomery County minimum wage proposal, while a bold and meaningful wage increase, is not more aggressive than what the US has already experienced.6

How would this increase affect employment in the local economy?

The effect of increasing the minimum wage on employment is likely the most studied topic in labor economics and the consensus of the profession has shifted dramatically over the past several decades. Early studies of the federal minimum wage in the 1960s and 70s seemed to confirm the rudimentary supply-and-demand model of labor markets, which predicts that an increase in the minimum wage above a “market-clearing rate” will lead to a loss of employment. Up until the early 1990s, there was a consensus in the economics profession that increases in the minimum wage caused job loss.

But that consensus began to crack with a new round of research in the 1990s, with many new rigorous studies showing no employment losses and in some cases employment gains due to increases in the minimum wage.7 At the same time, other studies that still found negative employment effects were finding them to be much smaller than was previously thought. By the mid-2000s, the profession had no consensus on whether the effect of increases in the minimum wage on employment was positive or negative. However, there was a growing consensus that the effect, whether positive or negative, was small.

In the last few years, another round of research on the minimum wage—representing the best methodological practices we have—has been peer reviewed and published in top academic journals. These studies find that there has been essentially no effect of increases in the minimum wage on employment, neither positive nor negative.

This consensus among economists has become so strong that in 2014, 600 Ph.D. economists, including eight Nobel Prize winners, sent a letter to Congress encouraging them to raise the federal minimum wage.8 The letter stated, “In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market.”

There is a more limited number of studies examining effects of city-level minimum wages, but those that do exist have also found little to no impact on employment. In 2004, the city of Santa Fe, New Mexico, enacted a city minimum wage that was 65 percent higher than the state minimum wage and implemented that increase all in one step. Researchers at the Bureau of Business and Economic Research at the University of New Mexico published an analysis of the effects of the minimum wage hike in 2006. They concluded that “the ordinance had no discernible impact on employment per firm and Santa Fe actually did better than Albuquerque [the closest neighboring city that did not raise its minimum wage] in terms of employment changes. Overall employment levels have been unaffected by the ordinance. In contrast to prevailing economic theory, the accommodations and food services sector did comparatively better [after the minimum wage increase].”9

A 2011 study by researchers at the Center for Economic and Policy Research found that the Santa Fe minimum wage—as well as a similar minimum wage ordinance enacted in San Francisco at the same time— “raised the earnings of low-wage workers without a discernible impact on their employment. Moreover, the lack of an employment response held for three full years after the implementation of the measure.”10

Even though the best evidence suggests little adverse consequences of minimum wage increases in terms of employment losses, it is important to remember that even if there are some employment reductions due to the minimum wage, low-wage workers can still have higher annual incomes. The low-wage labor market is characterized by high rates of churn and turnover, with workers constantly moving in and out of employment. As a result, any employment losses for low-wage workers are better thought of as reductions in hours worked over the year, with some individuals working one job after the wage increase instead of two or three. In either case, if these affected workers are earning significantly higher hourly wages due to the minimum wage increase, they may very well be better off in terms of annual income.

Furthermore, in January 2017, County Executive Isiah Leggett vetoed an ordinance passed by the county council that would have matched the minimum wage in the District of Columbia, raising the county minimum to $15 by 2020. Leggett then commissioned the consulting firm PFM to analyze the potential economic effects of raising the minimum wage in Montgomery County.11 As EPI discussed in a previous report on the PFM study, the study had significant flaws in its methodology that rendered its results completely unreliable.12 The study essentially concludes that raising the minimum wage in Montgomery County—even a small amount—would be the most devastating economic shock the county has experienced in a generation, more damaging than the Great Recession. Even the County Executive himself has raised concerns about PFM’s results, and has encouraged the County Council to move forward with Bill 28-17 without regard to the PFM study.13

Concerns about proposed changes to the bill

EPI has concerns about the County Executive’s proposed changes to the minimum wage bill. First, establishing a 90-day initial period when an employer may pay a new employee 85% of the minimum wage will negate the positive effects of raising the minimum wage for a significant number of Montgomery County workers. Lower wages based on tenure of employment is bad for low-wage workers, because these are generally high-turnover jobs—which could cause workers to consistently be caught in the lower training wage bracket, and could incentivize employers to push workers out after a few months.

Second, EPI does not support the County Executive’s proposed longer timelines to reach $15 per hour. As discussed above, data from EPI’s family budget calculator shows even a $15 minimum wage in 2020 would not fully secure a decent yet modest standard of living for a two-parent, two-child family in the Maryland suburbs of Washington, DC, even if both parents work all year, full-time at the minimum wage. Extending the timeline to reach $15 would further disadvantage these workers and their families.

Third, while the language in the County Executive’s proposal is ambiguous, EPI would not support the proposal for creating an opportunity wage in Montgomery County that would carve young workers out of the minimum wage. EPI also has concerns about the exemption in the current bill for workers under age 19. Creating a blanket exemption to the minimum wage for workers under the age of 19 who work no more than 20 hours per week—as is currently written in the bill—would undermine key functions of the law and should be strongly reconsidered. There are 29 states, 31 cities, and 9 counties across the country that have established their own prevailing minimum wage and not one of them has a similar exemption—and for good reason. When the wage floor is universally applicable, it ensures that all workers are treated equally and that the law is not advantaging certain businesses over others. Any exemption is an opportunity for potential abuse. In this case, drawing a line at age 19 creates an incentive for employers to replace any worker who reaches their 19th birthday with someone younger.

If the goal of this exemption is to encourage employers to consider hiring young workers, there are far less problematic alternatives. For example, the federal minimum wage allows for employers to pay training wages (typically some percentage of the regular minimum wage) to young workers during their initial period of employment. Under federal and Maryland state law, employers may pay workers under the age of 18 a training wage of 85 percent of the regular minimum wage during their first 180 days of employment. This temporary reduction in the wage requirement allows businesses to hire a young worker and either train them or verify that they have the requisite skills for the job before being held to the full minimum wage requirements.

A training wage of this structure – some fixed percentage of the regular minimum wage for a limited duration – would be far optimal to establishing a complete exemption to the law based on arbitrary choice of age. There are undoubtedly workers in Montgomery County ages 18 and 19 who have siblings, children, or parents whom they support. If the goal of this law is to improve the welfare of Montgomery County’s workforce, it would be counterproductive to exempt younger workers, who are often the most vulnerable and face the greatest need.

Finally, EPI urges the County to end its tipped minimum wage and eliminate the differential treatment of the tipped workforce—a step that nine states and one city have already taken. Research indicates that having a separate, lower minimum wage for tipped workers perpetuates racial and gender inequities, and results in worse economic outcomes for tipped workers. Forcing service workers to rely on tips for their wages creates tremendous instability in income flows, making it more difficult to budget or absorb financial shocks. Furthermore, research has also shown that the practice of tipping is often discriminatory, with white service workers receiving larger tips than black service workers for the same quality of service.14

Conclusion

Workers in Montgomery County, like those in many cities and counties across the country, are in desperate need of higher wages to meet rising costs of living. Raising the city’s minimum wage to $15 by 2020 is a reasonable means and appropriate target for achieving that goal.

Endnotes

1. See Wolfson, Paul J. and Belman, Dale (December 10, 2016). 15 Years of Research on U.S. Employment and the Minimum Wage. Tuck School of Business Working Paper No. 2705499.

2. Cooper, David. 2017, Raising the minimum wage to $15 by 2024 would lift wages for 41 million American workers.

3. Gould, Elise, Tanyell Cooke, and Will Kimball. 2015. “Family Budget Calculator.” Economic Policy Institute. Figure in the text adjusted to today’s dollars using CPI-U-RS.

4. Based on the Congressional Budget Office’s forecast for the CPI-U. Congressional Budget Office. 2017. The Budget and Economic Outlook: 2017 to 2027.

5. Bureau of Labor Statistics Occupational Employment and Wage Estimates for May 2016, adjusted upward by 10 percent to account for a 10 percent wage premium for full-time workers.

6. Inflation assumptions from CBO June 2017 economic projections. 1968 minimum-to-median wage ratio from Cooper, David. 2017, Raising the minimum wage to $15 by 2024 would lift wages for 41 million American workers.

7. See Card, David and Alan Krueger. 1994. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” The American Economic Reviewhttp://davidcard.berkeley.edu/papers/njmin-aer.pdf

8. Letter to President Obama, Speaker Boehner, Majority Leader Reid, Congressman Cantor, Senator McConnell, and Congresswoman Pelosi. January 14, 2014. http://www.epi.org/minimum-wage-statement/

9. Potter, Nicholas. 2006. Measuring the Employment Impacts of the Living Wage Ordinance in Santa Fe, New Mexico. University of New Mexico Bureau of Business and Economic Research.

10. Schmitt, John, and David Rosnick. 2011. The Wage and Employment Impact of Minimum-Wage Laws in Three Cities. Center for Economic and Policy Research.

11. See Rachel Chason, Washington Post, Study: Montgomery would lose 47,000 jobs by 2022 if minimum wage went to $15 (August 1, 2017).

12. Cooper, David. 2017. “The Montgomery County minimum wage impact study is absurd junk scienceWorking Economics Blog. Economic Policy Institute.

13. See Memorandum from County Executive Isiah Leggett to Roger Berliner, President Montgomery County City Council (September 13, 2017).

14. See Lynn, M., M. Sturman, C. Ganley, E. Adams, M. Douglas, and J. McNeil. 2008. “Consumer Racial Discrimination in Tipping: A Replication and Extension.” Journal of Applied Social Psychology, 38: 1045–1060.


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