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A pandemic can be a risky time for a higher minimum wage

The US job market has been through more turbulence in recent times than at any time in modern memory. Total employment is down 10 million from February 2020, mostly among low-paid workers. The pandemic classifies employers as winners and losers, boosting some like those in e-commerce to the detriment of traditional small retailers.

Is it time for a major intervention in the labor market? Democrats think so: They push to double the federal minimum wage from $ 7.25 an hour to $ 15 by 2025, then index it to the median wage. While the Senate is unlikely to maintain the higher minimum wage proposed in the current Covid-19 relief legislative package, President Biden will likely continue to look for other ways to act.

For advocates, an increase is more urgent as the coronavirus pandemic has fallen so hard on low-paid workers who cannot work remotely. Jobs in food preparation and service, personal care and service, where the median wage ranges from $ 11 to $ 13 an hour, fell 23% from the year to January, compared to a decrease of 5% for all occupations.

Biden has identified raising the minimum wage as a key goal of his administration, but economists and lawmakers disagree on the potential impact. The WSJ asked two economists and a minimum wage worker what the costs and benefits of a $ 15 minimum wage might be. Photo: Bill Clark / Congressional Quarterly / Zuma Press

Yet this also makes a sharp increase in the now particularly risky minimum wage. Compensation is low in these industries because productivity, measured by income per employee, is also low. The pandemic has further hurt income by devastating demand and adding capacity restrictions, testing and disinfection requirements. A higher minimum will bite these employers much deeper than usual, while largely sparing those where business has boomed, such as big box retailers.

Decades of research indicate that moderate increases in the minimum wage reduce poverty while causing few job losses. These results may be less applicable to the present. The magnitude of the proposed increase and the uncertainty surrounding the economic environment have little precedent.

“It was much easier to be optimistic about the effect of increasing the minimum wage when you were in a tight labor market with rapidly increasing incomes at the bottom of the page,” said David Autor, an economist at the Massachusetts Institute of Technology who studies work and pay disparities. “It’s a lot harder to be optimistic now.”

The latest federal minimum wage increase coincided with the deep recession of 2007-2009. Jeffrey Clemens, an economist at the University of California at San Diego, compared employment performance in states where the policy increased wages with states where it did not because the local minimum wage was already higher . He found that the increase had significantly affected employment among high school dropouts aged 16 to 30.

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Larry Mishel, an economist at the Liberal Institute for Economic Policy, retorts that in its early stages, the current proposal will affect few employers because low-end wages are already higher in most states. By 2023, when the minimum wage is expected to hit $ 12.50, unemployment is expected to be quite low. “By the time that starts to bite, we will no longer be in a recession,” he said.

Yet in the long run, the pandemic will still create what economists call a “reallocation shock,” shifting activity from some regions and sectors to others. For example, Autor says business travel is unlikely to return to its pre-pandemic level, depressing employment in its ecosystem of hotel staff, limousine drivers and dry cleaners in resorts. big cities.

The pandemic has accelerated the shift of activity from physical to digital, from shopping malls to e-commerce, from cinemas to video streaming. Digital businesses are investing heavily in technology to deliver their products with fewer employees. It’s no surprise that Amazon.com Inc.

supports an increase in the federal minimum wage to $ 15: its sales per employee are much higher than those of other retailers, which allows it to pay more.

Research has found that employers respond to a higher minimum wage in several ways. Some had sufficient control over local labor markets before the increase in underpaid workers; these will absorb the highest salary into their profit margins. Some will pass it on to prices. A recent study by Orley Ashenfelter and Štěpán Jurajda found that McDonald’s restaurants that raised wages because of the local minimum wage between 2016 and 2020 did not tend to close stores or invest more in saving technology. such as touch screen control terminals. On the contrary, they have increased the prices.

But Mr Clemens said companies avoid revising their business models when times are right; that changes in recessions when survival is at stake. “The fact that the restaurant industry is rebuilding itself from the ashes of the pandemic means that many of these choices will be made again. I would expect a larger increase in the minimum wage to translate into a more substantial shift to online retailing, or… relying less on low-paying jobs. “

Indeed, a 2012 study found that 88% of the loss of routine, mid-skill jobs since the 1980s occurred during and around recessions. Separately, the McKinsey Global Institute noted that robot installations have exploded after the 2007-09 recession and expects a similar rush in workforce replacement technology now. The company conducted a survey which found that 68% of executives around the world had stepped up investments in automation and artificial intelligence since the start of the Covid-19 epidemic.

This does not kill the cause of a higher minimum wage; much of that investment will happen anyway, and a higher minimum wage could allow workers to share some of the benefits. He argues for consideration of whether alternatives, such as a phased introduction later or increased aid to the working poor, could reduce poverty so much with fewer unintended consequences.

Write to Greg Ip at greg.ip@wsj.com

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