Inside the benefits, costs of minimum wage hike

Last night, the Massachusetts House and Senate reached an agreement to raise the state’s minimum wage from $8 per hour to $11 per hour. That amounts to an increase of nearly 40 percent, and it reflects a growing consensus among state policymakers that the likely benefit to workers outweighs the cost to businesses.

What are the benefits of raising the minimum wage?

Raising the wage to $11, as the legislature has proposed, would help nearly 600,000 low-wage workers, or about 1 of every 6 workers across the state, according to an analysis by the Economic Policy Institute. These low-wage workers have experienced almost no bounce back in wages since the worst days of the recession. And if you look back to the late 1970s, you’ll find that while higher-wage workers have seen their real earnings grow by 46 percent, low-wage workers have barely kept up with the rising cost of goods. Raising the minimum wage is a way to push back against these kinds of trends and to support workers and families.

What about the costs?

Imagine you own a business and you pay your workers the minimum wage. If the minimum wage goes up, you’ll have to pay your workers more. Some groups argue that this is not only bad for business, but it’s also bad for workers. After all, it may happen that businesses can’t afford to pay their employees the higher minimum wage, in which case they’d have no choice but to lay off workers.

The question of whether raising the minimum wage leads to job losses is among the most well-studied in economics, and the findings are pretty consistent. Raising the minimum wage can cause some job loss but not much, especially compared to the increased wages. When researchers at the Congressional Budget Office looked at the plan to raise the US minimum wage to $10.10, they estimated that 24 million workers would get higher wages while about 500,000 jobs would be lost.

Now, this isn’t always the case. If the minimum wage were increased to $100 an hour, that probably would lead to large-scale layoffs, because businesses just can’t afford to pay that much. But an $11 minimum wage is hardly unprecedented. When you adjust for inflation, you find that in 1968, the minimum wage in Massachusetts was $10.72. Just last week, the city of Seattle raised its minimum wage to $15, and elsewhere in the world the minimum wage is even higher.

What else is included in this bill?

Apart from increasing the minimum wage to $11 by 2017, the bill would set a new minimum wage for tipped workers. If you work in a restaurant, your boss doesn’t have to pay you the minimum wage. He can pay you less and let your tips make up the difference. How much must he pay? Currently, it’s $2.63. This proposal would increase it to $3.75. That’s roughly in line with what the House had proposed earlier, but lower than the Senate wanted.

Were any major proposals left out of the bill?

If you set the minimum wage to $11 and then forget about it, its value actually goes down. That’s what inflation is all about. Drop a dollar behind your bed and fish it out 10 years later, and you’ll find that dollar is worth less. To keep the minimum wage from losing its value year after year, the Senate had proposed indexing it, basically increasing it little by little over time to offset the effects of inflation. The House didn’t support this provision, and the indexing didn’t make it into this bill.

Is this a done deal?

Yes and no. With the House and Senate having come to agreement, and with the Governor having signaled his general support for a minimum wage increase, there don’t seem to be any major legislative hurdles.

But there is one potential snag. Advocacy groups have been collecting the necessary signatures for a ballot initiative with slightly different provisions. The ballot question calls for a lower minimum wage, $10.50, but it includes a mechanism to automatically adjust for inflation. By July 2, the groups behind the initiative will need to decide whether to go ahead and take the issue directly to voters. If they do, and if voters support it, we could have two, competing minimum wage laws in the state, which would likely mean a new set of negotiations.