Chairman Middleton, Vice Chairman Astle, members of the committee, thank you for allowing me to speak with you today. My name is David Cooper. I am the senior economic analyst at the Economic Policy Institute (EPI). EPI is a nonpartisan, nonprofit research organization in Washington, D.C. whose mission is to analyze the economy through the lens of the typical U.S. working family. EPI researches, develops, and advocates for public policies that help ensure the economy provides opportunity and fair rewards for all Americans, with a focus on policies to support low- and middle-income households.

I am testifying in support of SB 543, which would raise the Maryland minimum wage to $15 per hour by July 2023 and then index it to inflation thereafter. In my testimony, I will discuss why $15 in 2023 would be an appropriate level for the Maryland minimum wage, and briefly summarize what the economics literature tells us about how an increase to such a level is likely to affect workers, businesses, and the broader Maryland economy. I will discuss why claims that a $15 minimum wage will damage the state’s labor market are unfounded and obscure the more important question of how a $15 minimum wage will affect the welfare of the state’s low-wage workforce. I will discuss why alternative proposals, such as SB 368, would result in much weaker protections for some of Maryland’s most vulnerable workers. Finally, I will discuss why the tipped wage provisions of SB 543 are critical to protecting Maryland workers.

Background and appropriateness of a Maryland minimum wage of $15 in 2023

As shown in Figure A, from the late 1940s until the late 1960s, the federal minimum wage was raised regularly, at a pace that roughly matched growth in average U.S. labor productivity. The federal minimum wage reached an inflation-adjusted peak value in 1968 of $9.90 per hour in 2017 dollars. Since then, increases in the federal minimum wage have been either too infrequent or inadequate to simply keep up with inflation, resulting in a federal minimum wage that is worth 25 percent less today than it was 50 years ago.

This erosion in the minimum wage has caused a host of problems, including, though not limited to:

1. Today’s low-wage workers being paid less per hour than their counterparts a generation ago, despite, on average, being older and possessing more education;
2. More difficulty for low-wage workers and their families to afford their basic needs;
3. Greater reliance on government assistance programs among working families; and
4. Increased inequality—specifically, greater distance between low-wage workers and workers in the middle class.

Figure A also shows that the current value of the federal minimum wage and minimum wages in most states are not the result of economic necessity. If the federal minimum wage had been raised at the same pace as growth in average U.S. production-worker wages, it would be approaching $12 per hour today. If the federal minimum wage had kept pace with U.S. labor productivity, it would be well over $19 per hour today. These statistics indicate that the U.S. economy has the capacity for significantly higher minimum wages than are currently the norm.

Although many states have enacted minimum wages higher than the federal minimum wage, the vast majority are still at levels below the 1968 value and virtually all are still inadequate to ensure that someone working full-time, year-round can afford a decent quality of life. For example, someone working full time, year-round at the Maryland minimum wage of $10.10 per hour that will take effect in July will earn pre-tax income of roughly $21,000. According to the Economic Policy Institute’s Family Budget Calculator—which calculates the income required for a typical family or individual to afford modest yet adequate living standards with no savings left over—it currently would cost a single individual with no children in Somerset County, Maryland (one of the least expensive counties in the state) $32,554 annually.1 This equates to a full-time, year-round wage of $15.65 per hour in 2017. Similarly, a single individual with no children in Garrett County (another relatively low-cost areas of Maryland) would need $33,322 annually—the equivalent of $16.02 per hour full time, year round. Thus, $15 per hour in 2023—6 years from now—is a conservative target for setting a wage floor that affords a decent quality of life, even in the lowest cost areas of Maryland. Of course, many workers and families, especially those in more expensive parts of the state, will inevitably still require additional support through state and federal assistance programs.

Raising the minimum wage to $15 by 2023 would raise the purchasing power of the minimum wage to a new high point for workers in Maryland. Using the Congressional Budget Office’s projections for inflation, $15 in 2023 is the equivalent of $13.03 in 2017 dollars—an increase of 31.6 percent over the 1968 purchasing power of the federal minimum wage.2

However, $15 in 2023 would still be lower than the 1968 federal minimum wage, when considered relative to the overall distribution of wages in Maryland. Economists often assess the strength of a minimum wage by calculating the ratio of the minimum wage to the median wage of a full-time worker (i.e., someone in the exact middle of the wage distribution.) As shown in Table 1, at its historical high point in 1968, the federal minimum wage was equal to 52 percent of the national median wage. In Maryland, the state minimum wage of $10.10 set to take effect in July will be equal to roughly 37 percent of the state median wage. Under conservative assumptions for median wage growth over the next 6 years, a $15 minimum wage in 2023 would equal between 47.6 and 49.3 percent of the state median wage—slightly lower than the national ratio in 1968.

Table 1 also shows that raising the Maryland minimum wage to $15 by 2023 would raise the state wage floor at a slower pace than past increases in both the federal minimum wage and the most recent increases in the Maryland minimum wage. When the federal minimum wage was raised to its peak in 1968, it increased at a pace of 13.1 percent annually for two years. The most recent federal increase, occurring from 2007 to 2009, raised the federal minimum wage 12.1 percent each year for three years. The Maryland minimum wage increase still underway, which has raised the state minimum wage from $7.25 in December 2014 to $10.10 this coming July, will be an increase of 9.9 percent per year over 3.5 years. The proposed increase to $15 by 2023 would represent an increase 8.2 percent per year for 5 years.

All of these statistics lead to several important conclusions:

1. A $15 minimum wage in 2023 would provide the lowest paid workers in Maryland a higher wage than they have ever had before.
2. Raising the minimum wage to $15 by 2023 would largely—although not entirely—undo the growth in wage inequality between low- and middle-wage workers in Maryland that has occurred over the past 50 years. A full-time worker at the minimum wage in Maryland would be effectively as close to the middle class as their counterparts in the late 1960s.
3. The United States has had minimum wages at this same relative level before, with no obvious damage to the health of the labor market. Unemployment in 1968 was below 4 percent, and modestly declined over the two years following the increase to the minimum wage’s highest point ever. Given that productivity has increased significantly since then, it should be an even easier lift for the economy today to accommodate a minimum wage at this level.
4. Various states and counties have had minimum wages of at these same relative levels at times over the past several decades. Similarly, both the United States and Maryland have raised the minimum wage at faster rates than what is being proposed. Over the past 30 years, there has been extensive research on the effects of higher minimum wages on employment, the bulk of which has concluded that higher minimum wages have had negligible effects on job growth.3 A Maryland minimum wage of $15 in 2023 would fall within the bounds of this research literature, suggesting that a minimum wage of this level would not produce effects different from what has been observed in the past.

The minimum wage’s effect on jobs

Over the past three decades, there has been a dramatic shift in economists’ understanding of the effects of higher minimum wages as each new wave of research on the topic has employed better, more sophisticated methods. Early studies of the federal minimum wage in the 1960s and 70s seemed to confirm the rudimentary supply-and-demand model of competitive 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, the consensus in the economics profession was that increases in the minimum wage caused job losses.

But that consensus began to crack with a new round of research in the mid-1990s when—after a decade of no change in the federal minimum wage—states began raising their minimum wages, creating an opportunity for researchers to more precisely study the effects of higher minimum wages. Many rigorous studies in the 1990s showed no employment losses and in some cases employment gains due to increases in the minimum wage.4 At the same time, other studies that still found negative employment effects were finding them to be much smaller than was previously thought.5 By the mid-2000s, the profession was at a place of 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.

Over the last 10 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.

Figure B shows the results of Doucouliagos and Stanley (2009), a “meta-study”—or study of studies—of 64 published papers on the minimum wage between 1972 and 2007. The X-axis shows the effect on employment resulting from a minimum wage increase; the Y-axis shows the statistical rigor of the study. As you can see, the results of the vast majority of studies cluster around zero, and those studies with the highest statistical power—i.e., the most rigorous studies—all fall on the zero line.

There have been many other rigorous studies published since 2007 confirming this finding. A few notable examples:

• Dube, Lester, and Reich (2014) examined what happened at the county level after every single minimum wage increase in the United States from 1990 to 2006 concluding that there were “strong earnings effects and no employment effects from a minimum wage increase.”
• Belman and Wolfson (2016) aggregated the results of 15 years of published research on the minimum wage from 2000-2015, concluding, “We find…no support for the proposition that the minimum wage has had an important effect on U.S. employment.”
• Most recently, Cengiz et al. (2017) analyzed 137 minimum wage increases that have occurred in the United States since 1979, looking at how change in the number of jobs below the new minimum wage compared to the number of jobs above the minimum wage five years later. They concluded, “on average, the number of missing jobs paying below the new minimum during the five years following implementation closely matches the excess number of jobs paying just above the new minimum. This leaves the overall number of low-wage jobs essentially unchanged, while raising average earnings of workers below those thresholds.”

Effects on businesses and the broader economy

There are several reasons why higher minimum wages have never manifest the negative job impacts predicted by textbook models. Research has shown that when minimum wages are raised, businesses are typically able to adjust through variety of channels.6 These include:

1. Reductions in turnover and increased job tenure, which can reduce business costs of recruitment, hiring, and training;
2. Increases in productivity, as a result of increased work effort by employees, raised expectations by managers, or new efficiencies identified by businesses;
3. Wage compression—i.e., raises for higher paid workers may be delayed or reduced;
4. Increased consumer demand, generated by the increased spending power by low-wage workers across the affected region; and
5. Modest price increases, on the scale of 0.3–1.5 percent per 10 percent increase in the minimum wage.7 These increases can be more easily absorbed as result of concurrent boost in pay to a large portion of the region’s workforce, combined with the fact that all area businesses will be facing similar increases in labor costs—i.e., no single business will be at a competitive disadvantage if they all must raise prices.

Indeed, recent job growth in Maryland has shown little to suggest that recent minimum wage hikes have been overly burdensome. Over the three-plus years since the state began raising its minimum wage from $7.25 per hour to the current $9.25 per hour, job growth in Maryland has outpaced that of all the state’s neighbors, save for the District of Columbia (which enacted even more substantial minimum wage increases than Maryland). Total nonfarm employment in Maryland has grown 4.2 percent since January 2015. Over the same period, job growth has been slower in Delaware (2.2 percent), Pennsylvania (2.9 percent), Virginia (4.0 percent), and West Virginia (-1.9 percent).8 Although such trends should not be interpreted as conclusive evidence that raising the minimum wage had a demonstrable positive impact on the state’s labor market, they do dispel claims that minimum wage increases will substantially damage the state’s job growth, or put Maryland at a disadvantage to its neighbors.

Why past research should encourage lawmakers to be pursue bolder minimum wages

As previously noted, a Maryland minimum wage of $15 in 2023 would be higher than the 1968 high point of the minimum wage in terms of purchasing power, yet within the bounds of past experience when comparing the position of the minimum wage to the wages of a typical worker. Similarly, the pace of the proposed change—increases of less than 9 percent per year—is consistent with, if not slower than, the increases that have been studied. For this reason, an increase to $15 by 2023 is unlikely to produce effects different from what has been observed by existing research.

Even so, the bounds of past research should not be the limits of policymaking. The fact that past research on raising the minimum wage has not shown significant negative effects on employment should encourage policymakers to target bolder minimum wages than what has been typical in recent decades. If the modest increases of the 1990s and 2000s had little to no cost in terms of negative impacts on employment, then lawmakers could have enacted larger increases. By not doing so, they essentially left money on the table for low-wage workers.

The vast majority of research on the minimum wage has found that higher minimum wages have expanded the total wages paid to low-wage workers. In other words, regardless of how job levels or employment dynamics may have changed, the population of workers affected by raising the minimum wage received more money, as a group, than they would have in the absence of the policy change.

Whereas the benefits of higher minimum wages in terms of increased earnings for low-wage workers and their families have always been relatively clear, assessments of potential costs are more uncertain, particularly given the nature of the low-wage labor market. A distinguishing feature of the low-wage labor market is a high degree of churn—i.e., workers moving into and out of employment. Low-wage workers’ labor market experience is typically characterized by spells of employment and non-employment throughout the year. (Non-employment spells may be the result of a variety of factors, not limited to the availability of jobs. For example, caring for children and family members, or attending school can also limit availability for work.) For many low-wage workers the number of hours they work each week can also vary, sometimes at one job and sometimes across multiple jobs.

In this type of environment, analyzing the minimum wage’s impact on the level of jobs masks the true effect that any significant change would have on workers’ actual labor market experience. If a substantially higher minimum wage led to a slowdown in low-wage job growth, what that really means is a reduction in the total hours worked by low-wage workers throughout the year. Such a reduction could manifest in a variety of ways: some workers might work fewer hours per week, some may work fewer weeks per year, and some multiple job holders may reduce their total number of jobs. In of all these cases, if affected workers are earning significantly higher hourly wages, they may very well be better off—or at least no worse off—in terms of annual income than they would have been otherwise. Thus, even if research were to show that a substantially higher minimum wage had a negative impact on jobs, it would likely overstate the actual harm to low-wage workers. And lawmakers would still have other policy tools at their disposal—such as targeted jobs programs, skills training programs, and wage subsidies—to mitigate instances where the policy change genuinely harmed some workers’ access to adequate employment.

Establishing different increase schedules by business size, as SB 368 would do, needlessly creates space for abuse

Labor standards work best when they are universal. Any time that standards can be applied differently to different classes of workers or different classes of firms, it creates opportunity—and in some cases, incentive—for behavior that subverts or evades the intent of the law. For example, youth exemptions that allow for lower wages to be paid to workers below a certain age create incentive for businesses to replace young workers when they reach the age threshold, for the simple reason that doing so allows them to save on labor costs.

Similarly, establishing different wage standards for businesses of different sizes—whether classified by revenue or the number of employees at a firm—creates incentive for businesses near the threshold to look for ways to remain classified under the weaker standard. For example, if businesses with fewer than 50 employees were granted a lower minimum wage, or a slower schedule to get to $15—as is proposed in SB 368—there would be incentive for firms with close to 50 employees to either limit their employment growth or reclassify workers in a way that evades the law. Some employers might begin classifying some employees as independent contractors in order to remain below the threshold—which is illegal, but difficult to police. Alternatively, they could legally contract out certain tasks within their business to smaller contractors—such as a janitorial firm—that may also fall below the employment threshold. (Such “fissuring” of workplaces has contributed to the long-term stagnation in wages for most U.S. workers.9) As of 2016, roughly 30 percent of all employment in Maryland is in firms with fewer than 50 people.10

Some firms may also seek ways to obfuscate their actual revenue amount, in order to remain below the revenue threshold. Such behavior would not only mean slower wage growth for workers in those firms, it would also have tax implications for the state.

SB 368 would also significantly weaken the value of the resulting Maryland minimum wage. Figure C shows what the inflation-adjusted value of the Maryland minimum wage would be under SB 543 and SB 368. SB 543 would raise the minimum wage for all businesses to $15 in 2023 and then index it to inflation thereafter. As previously noted, based on the CBO’s projections for inflation, this would result in a minimum wage of $13.03 in today’s (2017) dollars. Under SB 368, the minimum wage for large businesses would rise to $15 in 2022, reaching an inflation-adjusted value of $13.34 in 2017 dollars, and the minimum wage for small businesses would be raised more gradually to $15 by 2026, the equivalent of $12.14 in 2017 dollars. However, because the minimum wage for large businesses would not be adjusted for inflation until 2026, when the small business minimum wage also reaches $15, the value of the large business minimum wage would be allowed to erode for four years, effectively undoing all the raises that occurred after 2020. By 2026, both large and small businesses would be subject to the same minimum wage, $12.14 in today’s dollars—a 7 percent loss in value from the minimum wage proposed in SB 543, or the equivalent of $1,850 in annual earnings for a full-time minimum wage worker.

I understand that some policymakers may feel compelled to offer a slower increase schedule for smaller businesses under the premise that adjusting to higher wage floors may be more difficult for them than it is for large firms; however, there is little evidence that such fears are justified. I do not know of a single piece of published research that indicates disparate impacts of higher minimum wages on firms of different sizes. This may be due to the fact that market forces may render such separate increase schedules largely irrelevant. Because small firms have to compete with large firms for staff, economic theory suggests that many will have to abide by the large-firm wage standard anyway in order to attract and retain workers. Why, then, does it matter if they are granted a lower wage floor? Because if there are instances where businesses are able to pay below-market wages, it indicates that other circumstances are reducing those workers’ bargaining power or their ability to seek a better job. These are precisely the workers that labor standards like the minimum wage are meant to protect—those in vulnerable groups with the least bargaining power.

The importance of raising the minimum wage for tipped workers

Finally, I’d like to discuss the importance of raising the state’s tipped minimum wage and eliminating the differential treatment of the tipped workforce—a step that nine states 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.11

The clearest indicator of the damage caused by this separate wage floor for tipped workers is the differences in poverty rates for tipped workers depending on their state’s tipped minimum-wage policy. As shown in Figure D, in the states where tipped workers are paid the federal tipped minimum wage of $2.13 per hour, 18.5 percent of waiters, waitresses, and bartenders are in poverty. Yet in the states where they are paid the regular minimum wage before tips (equal treatment states), the poverty rate for waitstaff and bartenders is only 11.1 percent.12 Contrary to claims made by the restaurant industry, full service restaurants in states that have eliminated the lower tipped minimum wage have experienced stronger growth both in terms of the number of establishments and the number jobs compared to states with a separate, lower minimum wage for tipped workers.13 Research that has analyzed the specific impact of raising the tipped minimum wage has also found no significant effect on employment.14

Conclusion

Given improvements in productivity, low-wage workers in Maryland and throughout the United States could be earning significantly higher wages today had lawmakers made different choices over the past 50 years. As such, the question for policymakers today should not be whether we can have significantly higher minimum wages, but rather, on what timeframe can we achieve such levels.

Raising the Maryland minimum wage to $15 an hour by 2023 would finally raise the state’s wage floor to a purchasing power above the previous high point set in the late 1960s. It would simultaneously return the wage floor to nearly the same position it had at that time relative to the wage distribution in Maryland, undoing much of the growth in wage inequality that has occurred between wage-earners at the bottom and those in the middle class.

The bulk of the research on the effects of higher minimum wages has found that past increases have achieved their intended effects, raising pay for low-wage workers with little to no negative impact on employment. Moreover, even if there were some negative impact on jobs, the benefits in terms of larger total pay for low-wage workers are likely to vastly exceed any potential costs in terms of reduced job growth. In the high-churn low-wage labor market, even if a wage hike did reduce growth in low-wage jobs, it still may not adversely affect the welfare of most low-wage workers. What matters is the resulting effect on workers’ total annual work hours and net earnings.

Labor standards work best when they are universal, without exemptions or different treatment for different classes of businesses or workers. Some alternatives to SB 543, such as SB 268, lack this universality and would create greater space for the most vulnerable workers to be exploited – the very group of workers that labor standards like the minimum wage are intended to protect.

Gradually raising and eliminating the separate, lower minimum wage for tipped workers should also be a priority for lawmakers. In states where all workers are protected by one minimum wage, wages are higher and poverty rates are lower for workers who receive tips—with no evidence whatsoever that restaurant industry growth has suffered as a result.

I strongly encourage the committee to pass SB 543 and guarantee all Maryland workers a wage that gives them a shot at a decent life.

 

Endnotes

1. Data from Economic Policy Institute (2018).

2. See CBO (2017).

3. For a review of this literature, see Belman and Wolfson (2014) or Kuehn (2014).

4. The most famous of these studies was Card and Krueger (1994).

5. For an example, see Neumark and Wascher (2008).

6. For greater detail, see Schmitt (2013).

7. See Allegretto and Reich (2018).

8. Author’s calculations from BLS Current Establishment Survey data, January 2015 to December 2017.

9. See Weil (2017) for greater detail.

10. Author’s calculations from the Quarterly Workforce Indicators data, published by the Bureau of Labor Statistics, 2016Q4.

11. See Lynn et al (2008).

12. Cooper (2017).

13. Calculations using the Quarterly Census of Employment and Wages. See Gould (2016).

14. See Allegretto and Nadler (2015).

References

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Allegretto, Sylvia and Michael Reich. 2018. “Are Local Minimum Wages Absorbed by Price Increases? Estimates from Internet-based Restaurant Menus.” ILR Review, 71(1):35-63. January. http://irle.berkeley.edu/are-local-minimum-wages-absorbed-by-price-increases/

Belman, Dale and Paul Wolfson. 2016. “15 Years of Research on U.S Employment and the Minimum Wage” Tuck School of Business Working Paper, December. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705499

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 Review. http://davidcard.berkeley.edu/papers/njmin-aer.pdf

Cengiz, Doruk, Arindrajit Dube, Attila Lindner, and Ben Zipperer. 2017. “The effect of minimum wages on the total number of jobs; Evidence from the United States using a bunching estimator.” AEA Working Paper. http://www.sole-jole.org/17722.pdf

Congressional Budget Office. 2017. An update to the Budget and Economic Outlook: 2017 to 2027. https://www.cbo.gov/publication/52801

Cooper, David. 2017. “Valentine’s Day is better on the West Coast (at least for restaurant servers)”. Working Economics Blog. Economic Policy Institute. February 9. http://www.epi.org/blog/valentines-day-is-better-on-the-west-coast-at-least-for-restaurant-servers/

Doucouliagos, Hristos and T. D. Stanley. 2009. “Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis.” British Journal of Industrial Relations, vol. 47, no. 2, pp. 406-428.

Dube, Arindrajit. 2017. “Minimum Wage and Job Loss: One Alarming Seattle Study Is Not The Last Word.” The New York Times. Upshot [Blog] July 20. https://www.nytimes.com/2017/07/20/upshot/minimum-wage-and-job-loss-one-alarming-seattle-study-is-not-the-last-word.html

Economic Policy Institute (EPI). 2018 (forthcoming). “Family Budget Calculator” (update).

Gould, Elise. 2016. “D.C.’s Fair Shot Minimum Wage Amendment Act of 2016.” Testimony Before the Council of the District of Columbia Committee on Business, Consumer, and Regulatory Affairs. May 26. http://www.epi.org/publication/d-c-s-fair-shot-minimum-wage-amendment-act-of-2016-testimony-before-the-council-of-the-district-of-columbia-committee-on-business-consumer-and-regulatory-affairs/

Kuehn, Daniel. 2014. The Importance of Study Design in the Minimum-Wage Debate. Economic Policy Institute Issue Brief #384. http://www.epi.org/publication/importance-study-design-minimum-wage-debate/

Lynn, M., Sturman, M., Ganley, C., Adams, E., Douglas, M. and McNeil, J. 2008. Consumer Racial Discrimination in Tipping: A Replication and Extension. Journal of Applied Social Psychology, 38: 1045–1060. http://onlinelibrary.wiley.com/doi/10.1111/j.1559-1816.2008.00338.x/full

Neumark, David and William Wascher. 2008. Minimum Wages. Cambridge, MA: The MIT Press.

Schmitt, John. 2013. Why Does the Minimum Wage Have No Discernible Effect on Employment? Center for Economic and Policy Research Briefing Paper. http://www.cepr.net/documents/publications/min-wage-2013-02.pdf

Weil, David. 2017. The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It. Harvard University Press.