January 28, 2019
Antony Davies and James R. Harrigan
Governor Tom Wolf has pushed to increase Pennsylvania’s minimum wage every year since he took office in 2015. Wolf’s claim is that the minimum wage is not a “living wage.” But it isn’t supposed to be. A minimum wage is supposed to be an entry-level wage that applies to people who have little to no skills or experience. The lower that wage is, the more likely employers will be to risk hiring these workers, and the more quickly the workers will be able to accumulate skills and experience.
How do we know workers will quickly earn more? Because very few are earning the minimum wage now. Only 1 percent of Pennsylvania’s workers earn the minimum wage. Out of 6 million workers, 40,000 earn the minimum. Another 60,000 tipped workers receive less than the minimum from their employers, but often earn much more than the minimum from their customers. Around 70 percent of minimum wage workers live in households that are already earning more than the “living wage” of $15 an hour. Fewer than 7 percent of minimum wage workers have dependents.
Regardless, if the minimum is supposed to be an entry-level wage, $15 an hour isn’t that. Fifteen dollars an hour is, functionally, a middle-class wage. It is just pennies below the median wage in the nonmetropolitan areas of the Commonwealth, and 15 percent less than the median wage in Pittsburgh. Only in Philadelphia, where the median wage is over $20 an hour, is a $15 wage more than 25 percent below what most people are already earning. Of course, the cost of living in Philadelphia is higher, but the governor is not advocating different minimums tailored to different areas — he’s pushing a one-size-fits-all minimum.
Excluding tipped workers, the average Pennsylvanian earning under $15 an hour earns around $12, meaning a $15 minimum would increase the cost of such a worker by a whopping 25 percent. When more experienced workers who already earn $15 see less experienced workers getting 25 percent pay raises, the more experienced workers are going to demand increases as well. Employers will have to accede or suffer significant morale problems. And there are only three ways for employers to pay for a wage hike: by cutting into profits, by charging customers more, or by laying off less productive workers.
Most people believe that the average company has more than a 35 percent profit margin, and so can afford to pay for a massive wage hike out of its profits. This is so far from correct as to be laughable, or at least it would be if the ramifications weren’t so severe. The average U.S. company’s profit margin is less than 8 percent. And businesses that employ large numbers of low-skilled workers, like retailers and restaurants, have profit margins closer to 2 percent. It is unlikely that such businesses are making anywhere near enough to afford to pay for a hefty wage hike out of their profits.
That leaves price increases and layoffs. When businesses raise their prices to pay for a minimum wage hike, minimum-wage workers give back some of their gains. A wage boost looks much less attractive when accompanied by increases in the prices of things workers need to buy. And then there are the layoffs. Making low-skilled workers more expensive encourages businesses to replace them with machines. So, when you go into a McDonald’s, you’ll see more kiosks and fewer cashiers. When you go into a movie theater, you’ll see an automated drink dispenser and fewer concession workers. When you hire a lawn mowing service, you’ll get one expensive riding mower that requires one operator instead of several cheaper push mowers that require several operators.
In the end, the minimum wage is not $15, $7.25, or any other number politicians might throw around. The minimum wage is, and will always be, zero. That’s the wage workers earn when their jobs disappear because some politician decided that employers must pay workers more than their labor is worth. Tom Wolf and his friends in the tinkering class would do well to remember this, because the jobs they will destroy are the ones held by the very workers they claim to be helping.
Antony Davies is associate professor of economics at Duquesne University. James R. Harrigan teaches in the department of Political Economy and Moral Science at the University of Arizona. They host the weekly podcast, Words & Numbers.