Past minimum wage gains make LA’s $6 hike appear rather puny

Hotel workers cheered after LA approved a measure to lift the minimum wage. Reuters

The Los Angeles City Council recently passed a law increasing the minimum wage to US$15 per hour by 2020. The city joins the ranks of San Francisco and Seattle in boosting the wage to this level.

Currently, Los Angeles’ (LA) minimum wage is $9 per hour, which means at least a few low-wage workers in this city are going to receive a $6 (66%) increase over the next five years.

Is there any precedent for a minimum wage jump this large?

The answer might surprise many people, because even larger increases than this have occurred before, both in California and at the federal level.

At a minimum, this suggests the economy has absorbed similarly sized and much larger pay hikes in the past. Given how few people will likely be affected by LA’s wage increase, the city probably won’t have any problem absorbing this one either.

Cheered and derided

LA’s new law, which passed by a 14-to-1 vote, will raise the current $9 minimum in five steps. First, the wage will be increased to $10.50 per hour in July 2016, then to $12 in 2017, followed by $13.25 in 2018, $14.25 in 2019 and $15 in 2020. The annual gains range from 5% in the final year to as high as 17% in the first.

LA’s decision to boost the pay of low-wage workers has been both derided by numerous writers and cheered. The reaction isn’t surprising, since minimum wage laws and changes to them are very contentious.

Economists have engaged in acrimonious debates about this topic for years, starting with an influential 1913 book by the English economist AC Pigou. His theory suggested minimum wage laws caused unemployment because they raised pay to levels that led more people to want these higher-paying jobs at the same time that businesses were cutting back on hiring people for jobs that were now more expensive to staff. Later research suggested that minimum wage increases did not affect unemployment, but their impact remains in dispute. Minimum wage opponents claim that it hurts small businesses and even the very people it is supposed to help, while proponents argue it takes “aim at the inherent imbalance in power between employers and low-wage workers.”

Even though many people have strong opinions on the subject, relatively few people in the US actually work at a minimum wage job. In 2014, just three million workers out of the 146 million people employed in the entire US were paid at or below the minimum wage. This means only 2% of all workers were covered last year by the Fair Labor Standard Act, or FLSA, the formal name for the minimum wage law.

The entire state of California had only 108,000 people working in minimum wage jobs (see table 3 here), out of 17.7 million total workers – little more than half a percent. Moreover, one-fifth of minimum wage workers across the US were teenagers 16 to 19 years old (table 7) who are often still living at home, learning the basic skills needed to participate in the labor market and are not considered part of the adult working poor that minimum wage legislation is designed to protect.

Of course, many Los Angeles workers who aren’t making the bare minimum will see their wages lifted as well, but relatively few will get the full 66% increase, limiting its overall impact.

Why is LA raising its minimum?

So why are many major cities such as LA enacting their own increases in the minimum wage?

The graph below shows the history of the federal minimum wage since it was introduced in 1938 at 25 cents per hour. Since then, the minimum has been increased 22 times, or about once every 3.5 years.

The federal minimum wage has historically been lifted in regular increments. Department of Labor

Given that the minimum has been set at $7.25 per hour since 2009, it is not surprising that cities are setting their own increases. Congressional inaction has delayed a federal wage hike that, based on the pace of past revisions, is now overdue, forcing cities to take local action.

Precedent for big wage hikes

It is interesting to argue whether boosting the minimum wage is fair or not fair to low-wage workers and whether it helps or hurts the working poor and the economy as a whole. However, it is more enlightening to understand if such a large boost in the minimum wage has occurred before.

If it has, then looking at what happened afterward could provide a rough guess of what will transpire when LA and other cities boost low-level wages. While it is difficult to see in the above chart, there have been a number of very large increases in the minimum wage.

In 1949, the federal minimum wage was 40 cents per hour. It was increased to 75 cents in 1950, an 88% jump that was intended to account for the inflation that built up during and after World War II. This hefty pay hike – the biggest in a single year – did not appear to crush economic activity. On the contrary, the national unemployment rate fell in subsequent years, to 2.9% in 1953 from 5.9% in 1949.

An 88% increase in LA’s current $9 per hour minimum wage would boost the minimum in one shot to $16.92, well above the $15 being legislated for 2020.

LA’s increase, however, is not a one-year boost but instead will occur over five years. Historical data show a number of times when an increase in the minimum over such a period was quite high.

California’s own experience

California has had its own minimum wage law even longer than the federal government, first enacting one in 1916, three decades before a national law took effect. California initially set its minimum wage at 16 cents per hour. By 1920, the state raised it to 33 cents, more than doubling the minimum in a four-year time frame. If LA boosted its $9 minimum by the same scale, it would have set a rate of more than $18 per hour by 2019, $3 more per hour than what is currently planned and one year faster.

Both the US and California minimum wages have seen other large multi-year increases. For example, from 1973 to 1978, both minimums went up by roughly what LA has recently enacted. The US federal minimum jumped from $1.60 in 1973 to $2.65, a 66% increase, while California’s minimum jumped from $1.65 to $2.65, a 61% gain.

Comparing LA’s incremental increases

LA’s first increase from $9 to $10.50 per hour in July 2016 will be a 17% increase in one year. Both the federal and California minimums have experienced many jumps much larger than this in years not already identified above.

For example, the federal minimum wage in 1955 rose from $0.75 per hour to $1 in 1956, while in 1943-44 the minimum was raised from $0.30 to $0.40 per hour, both 33% increases. An increase of this size would raise LA’s current rate to $12 in one year, equivalent to the total increase LA has proposed for both 2016 and 2017.

So is there a precedent for LA’s wage hike plan? The data provide a clear answer: numerous times in the past, the US and California have experienced even larger increases.

Still unanswered, however, is an important question: will boosting the minimum help or hurt California’s economy?

In my opinion, because the entire state only employs about 100,000 minimum wage workers (see table 3 here), raising the rate in just LA and San Francisco will affect so few people that this 66% boost is primarily symbolic.

The pro-minimum wage side has clearly won the most recent battles in LA, San Francisco and Seattle. Time will tell which side will win the war that has been raging for more than a century.

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