Florida’s New Minimum Wage: for Better or for Worse?
Demonstrators gathered in front of a McDonald’s in Fort Lauderdale, Florida demanding a $15 minimum wage (In These Times).
By Mitchell Simoes
The 2020 General Election was a historic one with record-breaking voter turnout, polarizing issues in question, and results that are sure to be impactful for years to come. But for Floridians, the presidential race wasn’t the only thing at stake. On the Florida ballot this past election was the $15 Minimum Wage Initiative, a proposed constitutional amendment which was approved with a 60% supermajority vote. This amendment is set to raise the state’s minimum wage to $10/hour on September 30th, 2021 and then by another $1/hour each subsequent year until it reaches $15/hour in 2026. Minimum wage laws have been a point of contention among policymakers and citizens for a long time, but new research shows how people may be overlooking some key considerations and even misinterpreting data.
Currently, the minimum wage in Florida is $8.56/hour and in recent years many residents have been advocating that this is not a sufficient living wage. So much so that the petition to place this amendment on the ballot, backed by Orlando trial attorney John Morgan, received over 766,000 signatures. MIT’s Living Wage Calculator estimates that the hourly living wage for a single adult with no children in Florida is $12.39/hour while the poverty wage for the same adult is a mere $6/hour. This means that the current minimum wage in Florida is actually closer to the poverty wage than to the reasonable living wage. In fact, about 6.6% of Floridians have an income that is at or below the federal minimum wage of $7.25/hour, which is even lower than Florida’s minimum wage – making up a very large population that is living near poverty levels. It is important to note that workers earning below minimum wage may be as a result of them not being covered by federal minimum wage laws due to exemptions and exclusions.
The main detractors of an increased minimum wage point to some admittedly alarming possibilities. Their argument follows that while an increased minimum wage would be beneficial to the employees earning said wage, the negative effects on other employees and consumers would largely outweigh the good. But many of these assumptions have glaring oversights or are propelled by misleading data.
In a study researching the possible effects of a heightened minimum wage, the Congressional Budget Office (CBO) speculated that an increase of the federal minimum wage to $15 could lead to the unemployment of an estimated 1.3 million workers. That is equal to a 0.8% reduction in the number of employed workers nationwide. This widespread job loss is one of the biggest fears when it comes to asserting a minimum wage, because the prospect of raising the living standard of millions seems a whole lot less attractive when an equal number of people are left without work.
Along with a potential spike in unemployment, some reason that the small business owners will be faced with increased operational costs. These business owners won’t be able to afford the same employment and will be forced to either cut hours, fire workers, or raise prices in order to account for the reduced profit. In a review of 30 academic studies on the price effects of minimum wage, Sara Lemos concluded that a 10% US minimum wage boost would raise overall prices by about 0.4%, pointing to the real impact such a policy could have. By raising prices, consumers will be forced to bear the costs of the increased wage, leading to lower demand from inflated prices and again affecting the small business owner’s bottom line. Following this thinking, it’s not too far off to predict that at least a portion of these small businesses could go under as a result.
Thinking again of the consumers in a minimum wage increase scenario, we can look at which consumers specifically will be affected. While all consumers will pay higher prices, it is those who spend more that would pay more of the cost. This means that the costs of raised wages will be spread out in proportion to a consumer’s level of income, with higher-income consumers absorbing more of the cost. What minimum wage detractors also point to in this case is how, though low-wage earners will receive a greater income, they will be faced with a higher cost of living as a result, therefore at least partially undoing the effect of the rise in wages.
But, while these arguments are all sound in theory and even have some data to back them up, they fail to account for a few things.
When a business is faced with higher costs there are various adjustment channels through which this new cost is spread out, not just with the cutting of hours and firing of employees. Higher wages can work as an economic stimulus, in which the millions of employees who benefit from it will be more inclined to spend their money in the market. Higher demand would, at least to some capacity, offset the increased employer costs with more revenue. This is even thought to possibly raise GDP and employment levels to some degree.
Another adjustment channel is the effect on employee turnover, the number of employees who leave a business, and the costs that it brings. High-wage workers are more likely to remain at their jobs because the cost of leaving, their elevated wages, would be too great. Comparatively, low-wage workers have little incentive to remain at their jobs and so are much more likely to quit when friction arises at work. A study by Dube, Lester, and Reich found that a national 10% increase in the minimum wage results in about a 2% lower turnover rate for teens and about the same decline for restaurant workers. Turnover rates are an important metric because of how expensive it is for an employer to recruit and train new workers – costing an estimated 16% of the low-wage employee’s annual salary. Because of the reduced turnover rate, the cost of an increased minimum wage is again partially offset.
Higher wages have also been found to be correlated with increased morale, productivity, and effort by workers. The higher pay is a motivating factor to employees, as they face a higher cost to losing their job and also wish to maintain a level of work that merits such pay. The resulting higher productivity is another plus for the employers. In tandem with this, employers have been seen to increase performance standards and work effort, further inspiring employees to earn their higher pay.
Two separate meta-studies, reviewing a total of 90 individual studies, found no statistically significant negative employment effects of minimum wage. These meta-studies, because they cover a breadth of individual research studies, provide useful insight into overarching trends throughout the literature. These findings seem contradictory to the evidence for negative employment effects that critics of minimum wage often point to. But this disparity was explained in a study by Dube, Lester, and Reich in which they accurately simulated past research and findings of negative employment effects. Once they controlled for the region of the country, they concluded that the effects “are generated primarily by regional and local differences in employment trends that are unrelated to minimum wage policies.” The reason that the region of the country introduced bias into the prior statistics is because overall employment trends vary greatly across regions as a result of other factors (a phenomenon called spatial heterogeneity), with employment levels typically growing more rapidly in regions where the minimum wage is low (e.g. in the South) and more slowly where it is high (e.g. in the Northeast). By controlling for this variable, they made the model more accurate. In doing so, working with the same data that previously resulted in negative correlations, they were able to show that the effects of increased minimum wage policies are negligible.
Recent research has proven that the negative employment effects of minimum wage are greatly exaggerated and that the evidence for such is shaky at best. What Florida stands to gain from the new policy far outweighs any losses it may suffer, if any. By passing this new minimum wage, Florida will have millions of people rising out of poverty and likely even see accelerated economic activity, improving the lives of nearly everyone in the state. What possible negative effects this may have is bound to be overshadowed by all the good it will do. Only time will tell what the real effects of the $15 Minimum Wage Initiative will be, but right now things look very promising.
