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Improving the Quality of Jobs Through Better Labor Standards

The dynamic of full employment does more than increase the quantity of jobs, it also tends to raise compensation and enhance job security and job quality.  But what happens when labor markets slacken? Without institutionalizing rules that protect workers and mandate basic job quality, firms will be free, as they mostly are now, to cut their costs by lowering wages, denying overtime pay, skirting wage and hour laws, and using undocumented workers, part-timers, unpaid interns, and so-called independent contractors to avoid the regulations designed to protect the labor force.

Working families cannot afford to wait for full employment to begin improving job quality and compensation, and, absent better policy, even full employment has been inadequate in the past to assure strong and broad wage gains.  To that end, this paper proposes a broad set of ideas to raise the quality of jobs and their compensation, especially for low- and middle-wage workers.

The most fundamental labor standard is the provision in the Fair Labor Standards Act (FLSA) for a minimum wage.  The minimum wage, when it rises, is a significant source of upward pressure on income.  When workers on the bottom rung of the wage ladder get an increase, firms have to raise wages for the workers just above them and, to a certain extent, for workers on up the ladder.  If the minimum wage were increased over three years from $7.25 an hour to $10.10, 17 million workers would receive an increase directly, and another 11 million would benefit from the “spillover effect.”  Thus, raising the minimum wage by a little less than $3.00 over three years would improve job quality for 28 million workers.

Minimum wage increases have always been dependent on ad hoc legislation at the federal level.  Twice since 1981, presidential or congressional opposition has delayed increases for more than nine years (from 1981 to 1990, and from 1997 to 2007), and it is now nearly five years since the minimum wage was last increased in July 2009.

Because of inflation, these delays decrease the real value and purchasing power of the minimum wage and undermine wages for workers farther up the scale, since employers can maintain the spread between entry-level or minimum wages and the next rungs on the ladder without raising wages at all.  When the minimum wage is frozen, the wages of better-paid workers also erode.  The solution is to index the minimum wage to the inflation rate or to the national average wage, so that it maintains its purchasing power.
But it does little good to index from a wage so low that no one can live on it.  Even though the nation is richer and minimum wage workers are better educated than in the past, the average value of the minimum wage in the first decade of the 2000s was $1.56 per hour less than in the 1970s:  $6.46 versus $8.02.  Its relation to the average wage has fallen as well, from about 50% to about 37% of the national average wage for production, non-supervisory workers.

It seems fair that the minimum wage should maintain some rough parity with productivity (a measure of how much the average worker produces each hour), because productivity increases determine the nation’s capacity to raise its income.  By that measure, since productivity has increased by 80 percent since 1973, the minimum wage should be about 80 percent higher in real terms than it was in 1973; instead of $7.25, it would be $15.15.  Such an increase is not so far-fetched when one takes into account the increased educational attainment of low-wage workers.  In the 1970s, 75 percent had only a high school education or less, versus 57 percent today.

Another indexing option is to set the minimum wage high enough to keep a full-time worker with a family out of poverty.  In 2013, that would require $11.30 an hour. 

By nearly all of these measures, the level called for in legislation introduced by Rep. George Miller (D-CA) and Sen. Tom Harkin (D-IA) — $10.10 an hour in 2016 — is at the low end of what is appropriate and desirable.

Fears that a higher minimum wage will lead to job losses, especially for teens and minority workers, have not been consistently borne out in the past.  In an exhaustive study of minimum wage differences across county and state borders from 1990 to 2006, Dube, Lester, and Reich found no adverse employment effects.  And analyses by Wolfson and Belman and Doucouliagos and Stanley of research studies on the employment effects of minimum wage increases found that the results cluster around zero, evidence that the increases had no discernable impact on employment.

Conversely, the Congressional Budget Office’s analysis of the Miller/Harkin plan estimated that, while 24 million workers would benefit from the increase, 500,000 jobs would be lost.   Various analysts have criticized that estimate, correctly noting that it down-weighted newer, high-quality work that finds no adverse job effects from moderate increases in the minimum wage.  But even if CBO is correct, its findings show the 98 percent of targeted workers would benefit from the Miller/Harkin increase, at no cost to the federal budget.

Tipped employees also deserve a better deal from the minimum wage.  Approximately 3.3 million workers regularly receive tips as part of their compensation, and the minimum wage they receive has been frozen at $2.13 an hour since 1991.  Part of the price for raising the minimum wage in 1996 was fixing the tip wage at $2.13, instead of at half the minimum wage, where it had been pegged since 1966.  Even at half the current full minimum, the tipped amount would be only $3.63 an hour. 

Six states require employers to directly pay the full minimum wage to tipped employees, without counting tips, and many others require employers to pay more than the federal requirement of $2.13 an hour.  There is no evidence that these policies have done any harm to restaurant employment in those states.  Unsurprisingly, the higher the mandated minimum wage is for tipped employees, the higher their earnings tend to be and the less likely they are to fall into poverty (tipped workers are more than twice as likely, and waiters almost three times as likely, to fall beneath the federal poverty line as the average worker).

The full report is available here in PDF format.