Testimony | Jobs and Unemployment

Testimony in support of HB 1204: “Labor and Employment – Maryland Wage and Hour Law – Payment of Wages”

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Committee: House Economic Matters Committee
The Honorable Dereck E. Davis, Chair

Thank you for allowing me to speak with the committee today. I am going to briefly describe the effects of raising the Maryland state minimum wage to $10 per hour by 2015. I will also very briefly discuss what the economics literature tells us about increasing the minimum wage and how this particular increase would affect the Maryland economy.

Who would be affected by raising the minimum wage to $10 per hour?

Raising the Maryland minimum wage to 10 per hour in three steps by July 2015 would give a raise to 536,000 workers in Maryland, or about one fifth of all workers in the state.

Of those workers, 55 percent are women. That is roughly 300,000 Maryland women who will see their annual income from wages go up by an average of nearly $2,000 over the course of the three increases.

Contrary to common perceptions of minimum wage workers, the vast majority of affected workers are not teenagers. Fully 87 percent of the workers who would be affected are at least 20 years old.

Most of these workers also work longer hours than many people think. 56 percent are full-time workers, working at least 35 hours per week. Another 27 percent work between 20 and 34 hours per week.

They are also better educated than commonly believed. Of the affected workers, 46 percent have at least some college education, an associate’s degree or a bachelor’s degree.

These are workers of all races. Of those that would be affected 44.7 percent are white, non-Hispanic workers, 31 percent are African American or black, 16.5 percent are Hispanic and 7.8 percent are Asian or of another race or ethnicity.

Those affected by the increase are concentrated in lower-income families. 54 percent come from families will total family incomes of less than $60,000 a year. By comparison, the median family income in Maryland in 2011 was more than $83,000.

Finally, many of these workers have families of their own. About a third of the affected workers are married. A quarter of the affected workers have children. In fact, roughly 350,000 children in Maryland have at least one parent who would be affected by this increase to the minimum wage.

What does the economics literature say about increasing the minimum wage? Does increasing the minimum wage lead to job losses?

The earliest research in the 1960 and 70s found results consistent with the basic supply-and-demand understanding of competitive labor markets, which holds that an increase in the minimum wage above a market-determined wage rate, the “market-clearing rate”, will lead to a loss of jobs. Some studies also suggested that increases in the minimum wage led to offsetting reductions in hours, so that minimum wage workers did not actually see their incomes improve. Thus, at that time, there was a general consensus among economists that increases in the minimum wage would cause job loss and may be bad for its intended beneficiaries.

In the 1990s, this consensus began to unravel. A new round of research showed that increases in the minimum wage caused no employment losses and some studies actually showed employment gains. The most famous of these studies, by David Card and Alan Kreuger, examined fast food employment in border counties between New Jersey and Pennsylvania when New Jersey raised their minimum wage but Pennsylvania did not.1 Card and Kreuger’s results showed that employment rose in New Jersey, where the minimum wage had gone up, while employment in Pennsylvania declined.

There were other studies that still showed employment declines, most notably by David Neumark and William Wascher.2 Neumark and Wascher utilized national-level data, and the fact that different states have increased their state-level minimum wages at different times, to isolate the independent effect of increasing the minimum wage. They found statistically significant negative employment effects from increases in the minimum wage, although the effects they found were considerably smaller than those found in earlier research.

By the mid-2000s, this is where the literature stood, with national-level approaches finding small negative effects on employment from increasing the minimum wage, and case study approaches like Card and Kreuger’s paper, finding no such disemployment effects, and sometimes small, positive employment effects.

In the last few years, the missing link between these two different methodologies was bridged. A new round of research, utilizing both national-level and case-study approaches, showed that increases in the minimum wage had no negative effect on employment. One of these studies, by Arin Dube, William Lester, and Michael Reich utilized the case study method of looking at border regions between states with differing minimum wages, but applied it at the national level.3 They compared employment in every single pair of neighboring U.S. counties that straddle a state border and had differing minimum wage levels at any time between 1990 and 2006. This allowed them to analyze employment and earnings data for over 500 counties. They found that minimum wage increases did not cause job losses. At the same time, their research showed that minimum wage increases did clearly lead to increased earnings for low-wage workers.

A number of other studies have replicated these results, including one by Sylvia Allegretto, Arin Dube, and Michael Reich that examined what happened to employment when the minimum wage was raised in a period of high unemployment.4 Specifically, the researchers looked at what happened when the federal minimum wage was raised in 2008 and 2009 during the Great Recession. Again, the research found that there is no difference in the effect of minimum wage increases when the unemployment rate is high versus low: raising the minimum wage did not cause job loss.

How will raising the minimum wage affect the Maryland economy?

As I mentioned before, increases in the minimum wage have been shown to result in significant increases in earnings for households with low-wage workers. This finding was confirmed by another recent study by economists at the Federal Reserve Bank of Chicago.5 They analyzed 23 years of household spending data and found that an increase in the minimum wage causes households with a minimum wage worker to significantly increase their spending over the next year.

This is a critical point because it describes how raising the minimum wage in Maryland can actually create jobs. As we know, the minimum wage goes primarily to workers in low and moderate-income families who depend on their earnings to get by. These are the families with little other choice than to spend every additional dollar that they earn. As economists would say, they have a high “propensity to consume out of income”. Thus when you raise the minimum wage, you put more money in the hands of those that are most likely to spend it right away. Low-wage workers are far more likely to spend additional income than corporations, business owners, or shareholders.

At the same time, it is not entirely clear that businesses would lose all that income. For example, we know that businesses see some offsetting gains when the minimum wage is raised, particularly from reductions in turnover costs, improvements in organizational efficiency, and small price increases.

Raising the minimum wage can therefore benefit the larger economy because it shifts income from an entity less likely to spend it—the employer—to one that is very likely to spend it—the low-wage worker. In a period of high unemployment, this can lead to job gains as employers add jobs in response to increased consumer demand.

We calculated that increasing the state minimum wage to $10 by 2015 would result in $778 million in additional wages for Maryland workers. After accounting for some reduction in corporate profits, this translates into a net increase of $492 million in new economic activity. This would, in turn, generate about 4,300 jobs.

Finally, I want to note that wages in Maryland, particularly for low-wage workers have fallen considerably over the last few years. The 20th percentile wage in Maryland has fallen by 10 percent since 2009. As long as Maryland and the country are faced with elevated levels of unemployment, there will continue to be strong downward pressure on wages. When employers see scores of workers lined up for every new job opening, they have no incentive to offer higher pay packages to attract new workers or give raises to retain their current employees. This means more and more workers in lower and lower-paying jobs.

Raising the minimum wage would combat this downward pressure and put more money in pockets of workers who will spend it right away. This will help many families struggling to make ends meet and provide a modest boost to the Maryland economy. From an economic perspective, this is a very compelling case for raising Maryland’s minimum wage.

For these reasons we ask the Committee give a FAVORABLE report to House Bill 1204.

Endnotes

1.  Card, David, and Alan B. Krueger. Minimum wages and employment: A case study of the fast food industry in New Jersey and Pennsylvania. No. w4509. National Bureau of Economic Research, 1993.

2.  Neumark, David, and William L. Wascher. Minimum wages. MIT Press, 2008.

3.  Dube, Arindrajit, T. William Lester, and Michael Reich. “Minimum wage effects across state borders: Estimates using contiguous counties.” The review of economics and statistics 92.4 (2010): 945-964.

4.  Allegretto, Sylvia, Arindrajit Dube, and Michael Reich. “Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data.” INDUSTRIAL RELATIONS50.2 (2011).

5.  Aaronson, Daniel, Sumit Agarwal, and Eric French. “The Spending and Debt Response to Minimum Wage Hikes.” (2008).

See more work by David Cooper