Minimum Wage Hikes: A Solution to Income Inequality?

minimum wage

Initiated by fast-food workers in New York City, the Fight for $15 is a nationwide movement advocating a higher minimum wage. This push for wage hikes has steadily gained prominence; As of 2017, 30 states have raised their minimum wages to amounts higher than the federal minimum of $7.25/hour. The disparity in minimum wage rates across the federal, state, and city levels is stark. With national movements like the Fight for $15, with increasing income inequality among the bottom 50% of Americans, and with so many state-led policies raising the minimum wage, why is the federal minimum wage so low, and why has it been stagnant since 2009?

Conventional supply-and-demand analysis, and popular opinion, suggests that the minimum wage has a negative effect on employment. However, real world results prove otherwise.

The fast-food giant, McDonalds, claims that its recent wage hikes have resulted in improved customer service, and thus, increased sales. The company’s CEO, Steve Easterbrook, started implementing changes in 2015 to try to improve McDonald’s profit margins and customer traffic. In addition to closing weak stores and simplifying the menu, Easterbrook raised the wage offered to his workers to about $10/hour. He did so in the hopes of incentivizing better customer service and streamlining company changes. It seems to have done just that. McDonald’s US president, Mike Andres, remarked that the wage hike, “has done what we expected it to—90 day turnover rates are down, our survey scores are up—we have more staff in restaurants. So far we’re pleased with it—it was a significant investment obviously but it’s working well.”

A similar wage hike by Walmart further reveals the advantages of increasing the minimum wage. From 2015 to 2016, the retail company spent about $2.7 billion on higher wages for hundreds of thousands of its store workers. Its new part-time wage is $10.58/hour, while full-time workers earn $13.38/hour. Like McDonald’s, Walmart decided to increase wages in the hopes of improving customer service and retaining workers. It seemed a necessary step, to incentivize workers who have increasing responsibility, “in a tightening job market, at a time when working in stores is getting more involved.”

Since its wage hikes, Walmart has reported six straight quarters of sales growth, an increased number of shoppers, and improved customer service scores. Not only do the higher wages increase company profits, but they also make workers better off, and thus stimulate the greater economy: The more you make, the more you spend, the faster the economy grows.

What the cases of McDonalds and Walmart prove, is that an increased minimum wage should be considered more seriously, both economically and politically. In their groundbreaking paper, Distributional National Accounts: Methods and Estimates for the United States, economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman found that the US is deeply unequal; The top 10% alone, own almost 50% of all pre-tax national income. What they report, however, is that raising the minimum wage can help reduce income inequality.

They found that, if the minimum wage is low, like in the US today, then raising it can actually raise employment by raising labor supply. A higher minimum wage makes it more attractive for low wage workers to start work, which increases their productivity, and stimulates growth.

Thus, with technological progress, globalization, and tightening job markets, minimum wage is an important factor of equality in the wage distribution. For the US to combat further economic inequality, policy changes must be made – starting with the federal minimum wage. As Walmart CFO Brett Biggs stated, a higher minimum wage has a domino effect, in that, “associates feel better about what they are doing. They feel obligated to the company to return that investment.” Thus, politicians and business executives weary of paying workers a higher wage need only think of it as a “business investment” for the country – as a necessary step on our way to economic growth and equality.

Sources:

http://fortune.com/2016/03/09/mcdonalds-wages/

http://fortune.com/2016/03/16/walmart-wages/

Distributional National Accounts

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