C Gopinath

Biden’s dilemma with the minimum wage

C Gopinath | Updated on February 24, 2021

Raising the minimum wage rate has come with its set of knotty issues

The US has had a federally mandated minimum wage since 1933, when it was introduced as part of the National Recovery Act. The objective was to combat the practice of sweatshops paying below what was considered a living wage.

The federal minimum wage now is $7.25 an hour and was set in July 2009. States and some city administrations have set higher rates and employers are required to pay the highest applicable rate in their area. For some time now, there has been a realisation that the federal minimum needs to be raised as it does not set a realistic floor any more. US President Joe Biden made the rate of $15 an hour as part of his campaign saying that it will lift low-wage workers out of poverty and now the time has come to deliver.

Currently, 29 states have rates higher than the federal minimum. Some like California, Florida and Massachusetts are on track to reach the $15 level. Yet, some metros with high costs like Atlanta, Houston and Philadelphia are staying at the current federal minimum lending support to the argument for the need to raise the level. Biden’s plan is to raise the rate over a four-year period.

Covid queers the pitch

The pandemic has added a twist to the debate. On the one hand, raising the rate would reward workers in industries such as warehouses and grocery stores who have stayed on the job under very difficult conditions. On the other hand, low-wage industries such as the hospitality and leisure sectors lost about 3.8 million jobs in 2020 and raising the rates would hit them financially and also curb their incentive to hire people back while in recovery. Minimum wage earners in the retail, education and health sectors account for about 37 per cent of the work force.

Although the historical intent was to provide a living wage, economists point out the broader macro implications that make it a difficult decision.

The Congressional Budget Office has estimated that raising the minimum to $15 would boost the pay of about 27 million workers and raise 900,000 out of poverty. But at the same time it could cost 1.4 million jobs over the next four years as some businesses would cut back employing higher wage workers. The budget deficit would also increase marginally.

Other research agencies estimate that costs of public assistance programs would fall, costs could raise. Businesses are also divided. The current rate adjusted for inflation would be about $9. Some large employers like Amazon have already raised their minimum to $15, but Walmart has kept it at $11. Businesses that can pass the wage-hike cost on to the consumer will do so, others will rely more on machines, or reduce the number of hours.

Labour markets are regional and states with lower costs of living are understandably against raising the federal minimum as it would make them less attractive for jobs growth.

A sample of what could happen is revealed in California where the city of Long Beach required its grocery chains to pay its employees $4 more to reward them for coming to work during Covid lockdowns. One grocery chain promptly announced that it would close two of its stores because it can’t afford to keep it open at the higher cost. Legislators are hoping to include the wage raise as part of a Covid relief bill being discussed in Congress. Biden has a tough call to make.

Should he reward those who have a job and at the same time hurt those who are young, unskilled and at the lowest rung of the employment ladder? He could raise it part of the way to $11 and signal his intent and encourage states to raise their rates to keep up with the cost of living.

The writer is a US-based academic

Published on February 24, 2021

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