Written by Brandon Croarkin, GEI Associate
Seattle is the largest city in the Pacific Northwest, a bustling emerging economy on the cutting-edge. Known for the Space Needle, the Super Bowl XLVIII Champions Seattle Seahawks, and soon a $15 minimum wage.
The minimum wage in America currently stands at $7.25, a number that is all too familiar to me and the countless others that have worked small retail jobs. While this may have been acceptable for me, at the time a high school student looking for some disposable income, it is not enough to support the millions who use this money to support themselves and sometimes a family. It is not a living wage.
Throughout the country, people have been protesting for this higher “living” wage. Simply put, a living wage is a wage where if you put in the time (40 hour work week), you will be able to support yourself. This seems like a fair proposition. Yet as stands, no single county in the United States can support a person working 40 hours a week at the minimum wage in an average one-bedroom apartment, according to a federal survey used to figure housing vouchers. Even in the poorest, most-broken rural areas, it takes more than the current minimum to make rent on that one-bedroom home. In Seattle, it currently takes an estimated $17.56 an hour to afford that small apartment. However, this number can reach as high as $29.83 an hour in San Mateo County, California, the most costly housing geography in America.
Seattle has been on the forefront of this movement for a living wage, and finally, after a year of activism, they have received what they have been seeking: the elusive $15 minimum wage.
Plan to Implement
However, this will not be an immediate change. It has been deemed a necessary precaution to slowly implement this change. On June 3, 2014, Seattle Mayor Ed Murray signed a billed that will gradually raise Seattle’s minimum wage up to $15 an hour. The gradual move towards $15 will start with a hike to $10 next April for small businesses (<500 employees) and $11 for larger ones. It will take seven years for the small business minimum wage to reach $15, while larger businesses must reach that rate in three years. While some have argued that this is too slow, it is definitely progress.
However, how can I as an Economics major possibly support this? One of the first things learned in Microeconomics is that if wages go up, employment must go down. However, while I support much of the principles of Economics, I am also a big supporter in empirical evidence, and the evidence seems to be in favor of a higher minimum wage. The two cities in the nation with the highest rate of job growth (San Francisco and Seattle) are also the two cities with the highest minimum wage. Furthermore, new data released by the Department of Labor shows that the 13 states that raised their minimum wage on Jan. 1 have added jobs at a faster pace than those that did not. This was in direct contrast to the report done by the Congressional Budget Office in February that said raising the minimum wage to $10.10 an hours could cost as many as 500,000 jobs.
So why is this happening? While there are still competing schools of thought among economists, the general reasoning behind the phenomenon is that if consumers have more money, they will spend more, further increasing demand. An increase in the minimum wage gives consumers who were previously only able to cover rent, food, and other necessities the ability to purchase other goods.
This is an idea referred to as “middle-out economics” and it represents an alternative to the failed dogma of supply-side, or “trickle-down,” economics. Supply side economics has claimed that economic growth is started by the investment of the wealthy, called “job creators,” and therefore they should be incentivized by lower taxes and minimal regulation. Beginning in the late 1970s, supply side economics had led to rising inequality, slower growth, and a weakened middle class.
The “middle-out economics” approach switches the focus of the economy away from the wealthy and towards the middle class. They view the middle class not as the benefactors of the wealthy but as the core of the economy through which all activity flows.
As stands, wages have dropped below levels that can be justified. By keeping our wages stagnant, we are unable to adjust to our shifting economy. Consequently, wages have not kept pace with inflation or productivity. Since the minimum wage was last raised to $7.25 per hour back in 2009, its real value has slipped back to where it was in 1998.
Further, if the minimum wage had simply tracked U.S. productivity gains since 1968, it would currently be $21.72 an hour, three times what it is now.
So where have these productivity gains gone? To CEO’s. During the past three decades, compensation for CEO’s has grown 127 times faster than it did for workers. Since 1950, the CEO-to-worker pay ratio has increased 1,000 percent. CEOs used to earn 30 times the median wage; now they rake in 500 times. The result, vastly increased income inequality in our country.
People argue that inequality is intrinsic to a capitalist society, which is true, but not in the levels we have found in our society. In 1980, the top 1 percent controlled about 8 percent on the national income. The bottom 50 percent shared about 18 percent. Today the top 1 percent share about 20 percent; the bottom 50 percent, just 12 percent. This increase in income inequality is pertinent to our economy because it is hurting our middle class and it is a consequence of our policies that have focused on the rich. But a weakened middle class is a problem for everyone:
- A stronger middle class consumes more of its income than the rich do, which increases business certainty about demand. This makes investment more attractive as it boosts entrepreneur confidence
- A stronger middle class increases social mobility, which is part of the American dream
- A weakened middle class has to borrow more during times of need, meaning a more volatile economy
A shift away from trickle-down economics and towards “middle-out” economics are needed in our country. Actions like this minimum wage increase in Seattle are a crucial first step along the road to a better, more productive, society.