Now Is Still a Good Time to Raise the Minimum Wage

With minimum wages set to rise next week in Nevada, Oregon, Illinois, and the District of Columbia--as well as in Chicago, Minneapolis, Los Angeles, San Francisco, and 12 other smaller cities and counties--it's not surprising that business groups that always oppose higher minimum wages are calling for states and cities to put scheduled increases on hold in light of the coronavirus pandemic. There is no question that the pandemic has created unprecedented challenges for state and local economies, but the case for raising wages for low-wage workers hasn't changed. If anything, current conditions make it even more important for governments to strengthen pay standards, especially those that help low-income households.

The number one problem for businesses right now isn't excessive labor costs, it's a lack of demand. The federal government's failure to quickly implement large-scale testing, contact tracing, and containment programs in the early days of the coronavirus' spread forced most state and local governments to effectively put their economies into hibernation--limiting business activity to slow the spread of the virus. As cities and states reopen their economies, the central challenge for businesses and economic policymakers will be restoring consumer demand and making regular economic activity safe in the face of continued legitimate concern over the virus.

From a general macroeconomic perspective, raising the minimum wage in a period of depressed consumer demand is smart policy. Minimum wage hikes put extra dollars in the pockets of people who are highly likely to spend every additional cent they receive, often just to make ends meet. Workers who benefit from an increased minimum wage disproportionately come from low-income households that spend a larger share of their income than business owners, corporate shareholders, and higher-income households, who are likely to save at least some portion of the dollars that finance a minimum wage hike. As a result, raising the minimum wage boosts overall consumer demand, with research showing that past raises have spurred greater household buying, notably on dining out and automobiles. (Such findings are a good reminder that relatively small increases in a worker's paycheck might be all that is needed for them to qualify for an auto loan or a mortgage.)

Because a higher minimum wage lifts up lower-income households--although some middle-income households benefit too--it is likely to have a stronger effect than many--possibly even most--other recession response measures state and local policymakers might consider. Tax breaks or deferrals, rent subsidies, expanded lending programs, and other business-oriented relief measures all can help firms weather a downturn, but they're not going to drive additional spending in the same way that a minimum wage hike does.

It's understandable why, in a downturn, some policymakers would be concerned about the additional cost to businesses from raising the minimum wage, but expenses from a minimum wage hike are far more easily absorbed than other common business expenses. For example, if a store's rent goes up, they might be able to raise prices to offset the added expense, but there is no reason why a landlord raising the rent would mean that the store's clientele suddenly have more money to spend. However, if a local minimum wage hike drives a business to modestly raise its prices, at least the store owners know that workers throughout the local economy are receiving larger paychecks. This is one reason why decades of research have shown that businesses are generally able to absorb higher minimum wages without any meaningful negative impact on jobs.

If policymakers are genuinely concerned about aiding local small businesses, they should target support to help them adapt to the crisis and lessen non-labor expenses that are typically a larger share of operating costs anyway. For most small businesses, commercial rents are often their largest expense. The optimal policy response then would be to let minimum wage hikes go forward--helping struggling low-income workers and boosting consumer demand--and simultaneously consider some small business subsidies, such as tax deferrals, rent subsidies, special lending programs, or other supports that help these businesses ride out the pandemic. Governments might also help businesses adopt socially-distant operating practices, such as expanding availability of outdoor seating space for restaurants or providing free personal protective equipment (PPE).

Finally, it's worth noting that in current labor market conditions--when unemployment is high and workers don't have many job options available to them--employers' wage-setting power is even more pronounced. In other words, workers have even less bargaining power than usual to try to push for a raise, which is one reason why many workers categorized as "essential" have been required to work without any additional compensation for the added risk they face on the job.

In a state like Virginia, which has already delayed the minimum wage increase originally passed by the legislature, more than one in five "essential" workers have incomes at or near the poverty line. Raising the minimum wage at a time like this can help push wage levels to a more reasonable equilibrium, providing low-wage workers--who are far less likely to be able to telework--with some added compensation at a time when many are being asked to shoulder greater risk on the job. Indeed, higher minimum wages disproportionately benefit women workers and workers of color, both of whom are disproportionately represented in frontline industries and "essential" jobs.