The Minimum Wage Must Have Minimum Hours

It seems you can’t read headlines today without hearing about a city or state proposal somewhere for a $15/hour minimum wage. We need that conversation, because a federal minimum wage of $7.25/hour is below the single-person poverty threshold in a large part of the country, and so our minimum wage is really a “poverty wage.”

Historically the minimum wage existed specifically to keep people out of poverty and regulate working conditions. The first minimum wage rules were first established during the Great Depression in the National Industrial Recovery Act of 1933, and then confirmed with the first nation-wide minimum of $0.25/hour in the Fair Labor Standards Act of 1938. FDR intended the minimum wage, like most of the new deal, to bring some economic and social equality to the poor.

Those who believe in social and economic justice, as I do, regularly point out that a minimum wage equal to being in poverty goes against the principles of equality upon which our great country was founded. “Our” Representatives and Senators in Washington have raising the minimum wage nowhere on their current politically cluttered agenda. That’s why state and local officials, some of whom believe in economic justice, are pushing it forward and enacting it within their jurisdictions. I applaud them.

But why have we all coalesced around $15/hour — and where did it come from? Economic conditions are varied around the country — at $15/hour you’re below the single-person poverty line in San Francisco, but in Philadelphia, at that rate you can almost touch the middle class.

Not only should we not be focusing on a specific number nationally, but we should also be just as concerned with the number of hours worked at the minimum wage, as well as the minimum wage rate itself.

The $15/hour minimum wage is a shiny object.

Ultimately, $15/hour is a number of the moment — it’s caught our attention because of where we are as a country economically, and where are the wages of the majority of the population. Let’s look at some basic income numbers for all individuals in the US (source):

• 9.15% of the US population makes more than $100k/year
• 6.56% makes between $75k & $100k
• 84.29% of the population makes less than $75k, BUT
• 49.56% of the population makes less than $30k/year.

BINGO! $15/hour is $30k/year! Politicians are not stupid. Fight for a $15/hour minimum wage, and you’re helping 50% of your electorate.

Now, if you’re a politician, or an activist, and you want to get people’s attention, you have to use the biggest tools in your arsenal. Tool #1 is that 50%. Tool #2 is innate human psychology — specifically, how we all have a round-number bias wired into our brains. We see this all over our world, from the gas pump to the stock market to the SATs. (Economist Tim Taylor did a great summary of round-number bias a few years ago here).

So even though $15 doesn’t end in a zero, it’s close enough. It’s also a multiple of 5 (3 times the number of fingers on our hands), and it’s relatable, because by definition, one out of two of us makes $15/hour or less, and if we don’t, we probably know someone who does.

$15/hour certainly makes sense when you consider its roundness and its relevance to 50% of the population, but it doesn’t make it right. In fact, it’s really a shiny object. We did our own ad-hoc compilation of the minimum wage, poverty line (single person and 4-person), as well as the middle class, and the percentage of people in poverty for the 20 largest cities in America. All you have to do is review the regional data and the results are quite clear.

$15/hour is still below the single-person poverty line in San Francisco and San Jose, but is 2.4x more than the federal threshold for single person poverty ($12,490/year). In my home town of Philadelphia, $15/hour gets you close to the middle-class, and is 1.23x more than the 4-person poverty line. In San Francisco, if you’re trying to feed a family of 4 on just one income, you’ll actually need $22/hour ($44k/year, based on a 2,000-hour work year).

Policy makers couldn’t say $20/hour because businesses would have gone nuts with 61.35% of the population making below $40k/year. I mean, this is America not Europe. Especially since the median income in the US is now $59,035/year. Note that again, in my hometown of Philly, the city with the largest percentage of its population in poverty in this list, the Median income is $39,759/year — only $9,759 more a year than you would earn at $15/hour.

In Philly, we don’t need $15/hour, we need the locally calculated living wage of $12.20. But $12.20 is hard in a campaign slogan: “No, really — that twenty cents an hour is the difference between going hungry and not!” It just doesn’t ring. That’s why $15/hour has been so successful — it’s such a shiny object. But it’s not right, and it’s certainly not the whole story.

We must leverage the economic power of the firm — where it makes sense.

The flip side of $15/hour is when businesses say “how can I afford that” and “that will force me to lay people off.” Some businesses will be right — they can’t afford it. It’s always the large food-service firms, or retail firms, that line up against a change in the minimum wage. That makes sense — labor is their second largest input and they’ve budgeted and modeled their entire business based off of the minimum wage, or a wage floor that helps them attract the labor they need.

But I can tell you as a business owner myself (specifically as a business owner that sets compensation policy for hundreds of low-skill, low-income workers in 2 countries) businesses have enormous control in their budgets that they should use to help their low-income workers.

Retail and food-service are scared about the multiplier effect the minimum wage changes can have to their businesses — changing a large part of their budgeting with just one policy. But it is this once policy that should change, and as economist Alan Kruger proved with his landmark 1993 study, the retail/food service lobby claim that “raises in the minimum wage will kill employment” just isn’t true. When New Jersey raised its minimum wage and Pennsylvania didn’t, Kruger proved that prices didn’t change. If these fast-food businesses were really under economic pressure by the enactment of the minimum wage, the math says that they would have to raise prices — but Kruger’s survey found that they didn’t.

Businesses will always make self interested decisions within the limits set by policy makers, their local and national economies, and their competition. We all live in a market economy (though not a free market), and so one thing you can be absolutely sure about is that people will always act within their self-interest.

Businesses have enormous operational control to make changes to achieve the value they seek, in pursuit of their self-interest. If the minimum wage rises, maybe they have to cut employee hours or cut employees? Kruger proved otherwise. In fact, Kruger’s study showed that actually, full-time employment rose when the minimum wage was lifted in New Jersey vs. Pennsylvania.

And this is why the $15/hour minimum wage is wrong nationally. Yes, we should have a rise in the minimum wage nationally, $7.25 is not realistic (“poverty wage” not a minimum wage). In Philly, it should be to $12.20, but in San Francisco it should be closer to $17 or $18. Businesses will make the right individual decisions for their individual business contexts, but as Kruger showed, full-time employment rises with a minimum wage rise, because it makes good sense — both for each business and for each employee. This is because of the simple math behind regular work and what it produces from employees.

The simple math behind regular work

There is a strong argument to be made that the best way to attack poverty is not with a raise in the minimum wage, but instead with two key components that are usually controlled by the employer and not the policy maker:

1. Full time employment (40 hours/week)
2. Longevity of employment

The math to do this is first or second grade math. According to the BLS, the average retail worker works just under 31 hours/week. In the leisure and hospitality industry — 26 hours/week. In fast food (listed as “other services” by BLS), it’s just under 32 hours/week. Contrast that with the manufacturing sector of just under 41/hours a week.

Let’s take a small example. Let’s say I make $15/hour under a minimum wage law, but I’m only working 31 hours/week in retail. $15/hour x 31 = $465/week.

Now, let’s compare full-time work under Philly’s $12.20/hour “living wage.” $12.20/hour x 40 hours = $488/week. (By contrast, $7.25/hour x 40 = $290/week.) A manufacturing job at $11.65/hour for 40 hours is almost equal to the minimum wage in retail at $15/hour for 31 hours of work. Why are we pursuing a $15/hour minimum wage and not minimum hour guarantees?

Some businesses will say that part time is necessary and that the government shouldn’t legislate that. Maybe that’s true. But Kruger’s research showed otherwise — that in fact full-time employment rose with a higher minimum wage. So that means that even if businesses’ costs were higher under a higher minimum wage, they still chose to hire more full time employees — at higher hourly rates (and remember that prices didn’t rise in Kruger’s survey).

What’s going on here? This seems to go against the logic we expect from this basic math. There’s powerful psychology at play here. Again, the round-number bias plus what controls policy makers feel they can impose on business owners. Remember that the minimum wage goes back to 1933 with the NIRA, a policy which also set maximum work hours.

The first minimum wage policies were meant to combat an even worse effect in the economy — namely labor exploitation — working too many hours for too little pay. This means that for about 80 years, business owners have been comfortable with government setting minimum wages and controlling maximum hours — but not minimum hours.

Plus, let’s remember that the government established an unemployment safety net system so that laid-off workers would have some income for a period of time until they found a new job. This policy probably promotes businesses to more easily hire employees (compared to Europe or Africa, where the severance requirements are higher), but the flip-side is that employers don’t think much about the benefit of employment longevity (at least for the 50% that make under $15/hour — because of the low training costs).

But here’s where the second factor — longevity of employment — comes into play, and where we start to see both longevity and full-time employment combine to create what I like to call the “X factor of quality low-skilled employees.” Or, from the business owner’s perspective, we could say that the value of each employee rises if they’re full-time, even if their wages aren’t high.

When dealing with humans, there’s always an X factor.

What Kruger proved is that there is an “X” factor in dealing with employees that businesses are keenly aware of, such that if the minimum wage rises, they rely on their employees more than if those same employees earn a lower wage. Essentially — the minimum wage helps apply the elastic pricing principle to the cost of employees, in the psychology of an employer. The commitment that the employer and employee have to each other rises.

Full-time, tenured employees feel more valuable to the business. Consequently, and as a result of working full-time somewhere (along with tenure), employees feel more valued, and thus perform better than with part-time hours at a minimum wage. In economic terms, their productivity rises. This explains why the prices of the food served at the restaurants in Kruger’s study didn’t rise when the minimum wage did, even though full-time employment (i.e. labor costs) also rose. Business were getting more out of their employees at the higher wage — probably more than they were paying for.

When a minimum wage rises, businesses who are operating at their current labor input level, can’t easily change that. So, they’re forced to decide — recombine jobs and how they use labor — or find a way to be more productive with your existing employees at higher wages.

It turns out, as Fair Trade Outsourcing has shown in its own business, that the “X Factor” of employees can be used to your advantage, or as Kruger showed, can be used when the policy environment changes and you need to react. Safe, well-cared for, economically viable employees are just better employees.

We don’t get those types of employees with a shiny number for a minimum wage but lower per-week hours. We get those employees by paying them an hourly rate that doesn’t put them in poverty, by giving them full-time work so they feel valued, and by doing everything we can to promote employee tenure — which keeps them out of poverty (since we have the right wage rate and right number of hours).

In conclusion, with $15/hour, policy makers are being short-sighted. You can’t have a minimum wage without minimum hours. Tune both to your local economic conditions, and you’ll get less poverty and more employment — and more productive businesses. Additionally, we all know, the minimum wage isn’t federally viable — the regional economics of the US are just too different, so one policy doesn’t make sense anyway. Finally, we need policies that promote longer-term employment, especially for lower-income workers.