Here are some questions and answers on the minimum wage proposal being considered by the DC Council, part of a regional effort to raise wages for the lowest paid workers in our economy.
- Why $11.50 By 2016?
- Should The Minimum Wage Rise With The Cost of Living?
- Will There Be Fewer Jobs With A Higher Minimum Wage?
- How does the $11.50 wage impact benefits?
- Why Increase The Tipped Minimum Wage?
What Makes $11.50 The Right Number for DC?
Given the fair market rent for a two-bedroom apartment in DC is at least $1,400 a month, a worker allocating the recommended 30 percent of her paycheck to housing would need to earn at least $27 an hour—but that’s not how economists approach setting a reasonable minimum wage. DC’s current minimum wage is $8.25 an hour, one dollar above the federal minimum wage.
Other local economic benchmarks are commonly used, such as setting a wage that would boost the earnings of the lowest 10 to 15 percent of workers.
A reasonable middle ground might be to boost between the lowest 10 and 15 percent. As shown in the chart below, 15 out of 100 DC workers earned $11.53 an hour or less in 2012. Adjusting for inflation, that 15 percent would get a boost if the wage went to $12.50 by 2016. The $11.50 wage by 2016 would likely help between 12 and 13 percent of workers.
|Hourly wage distribution, Washington, DC, 2012, with projections through 2020|
|(Dollars per hour)|
Center for Economic and Policy Research analysis of Census data. Wages refer to workers living in DC. Inflation projections from CBO, CPI-U-RS.
This is lower than the percentage of workers across the U.S. who would benefit from the proposed increase to the federal minimum wage introduced in Congress, known as the Fair Minimum Wage Act of 2013. This bill would raise the minimum wage for 16 percent of workers in the U.S. by setting a $10.10 minimum wage by July 1, 2015.
Another approach taken by economists is to look at half of the average wage. As the chart above shows, that would be $12.40 in 2012, and $13.45 adjusting for inflation by 2016.
A worker earning $11.50 an hour would earn $24,000 a year — hardly enough to afford the median two-bedroom apartment but enough to make work pay a bit more. The DC Council should support a wage of at least $11.50 an hour by 2016 and index for inflation thereafter.
Or consider what the 1968 minimum wage of $1.60 would be if it had only been adjusted for inflation: In 2016, that wage would be about $11.40.
Each of these benchmarks points to $11.50 by 2016 as a reasonable wage increase.
Should The Minimum Wage Rise With The Cost of Living? Mayor Gray Says No, The DC Chamber Says Yes!
In a letter sent last week to Mayor Gray and DC Council Chairman Mendelson, the DC Chamber of Commerce expressed support for an increase in DC’s minimum wage and to have the wage rise with the cost of living in the future. That’s encouraging, because it shows the business community recognizes the importance of making sure workers in DC can earn a decent living.
It's even more encouraging because the economist commissioned to study the issue by the Chamber, David Neumark, is a reliable critic of increasing the minimum wage. His new report acknowledges research support from another organization aligned with that way of thinking, the Employment Policies Institute. Nevertheless, Neumark's report acknowledges many ways in which a minimum wage increase would help low- and moderate-income DC residents, and as noted, the Chamber ultimately recommends a minimum wage increase.
Neumark recommends that the minimum wage rise with the cost of living by tying it to the Consumer Price Index. Right now, DC’s minimum wage is frozen, which means that purchasing power of the wage declines each year. Neumark advocates for the minimum wage to be indexed to the CPI for several reasons. For businesses, indexing creates a steady, predictable wage increase and eliminates the economic shock that comes with sporadic bumps in the minimum wage.
Will a higher wage help or hurt workers?
The minimum wage is one of the most studied topics in economics, and over the last two decades, the majority of research has found that a moderate increase in the minimum wage does not lead to discernible reduction in employment. Instead, the higher cost of labor reaps rewards for businesses in higher productivity of workers, lower turnover, and increased spending, which cycles back to their businesses.
Opponents of a minimum wage increase often repeat an argument that the higher labor costs will lead to employment reductions, but since the 1994 study of David Card and Alan Krueger on the fast-food industry in New Jersey and Pennsylvania, that job loss myth has been refuted time and again by academic studies.
There are many studies, so highlighted are a couple “meta-studies” that review other research:
- “Why Does the Minimum Wage Have No Discernible Effect On Employment,” John Schmitt, Center for Economic and Policy Research, Feb. 2013
Schmitt conducted an extensive review of the last decade of research on the minimum wage. He concludes that almost all the studies show little or no employment loss. He attributes the small impact that to the fact that other adjustments are made in areas such as productivity and efficiency that absorb the wage costs. As stated in his report: “Economists have conducted hundreds of studies of the employment impact of the minimum wage. Summarizing those studies is a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers.”
- “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties”, “Arindrajit Dube, T. William Lester, and Michael Reich, The Review of Economics and Statistics, November 2010
One of the most rigorous studies on the on-the-ground impact of minimum wage increases across the country over the last decade, the authors analyze employment and earnings data from over 500 counties in the U.S., controlling for other economic factors affecting local labor markets in order to isolate the effect of the higher minimum wage levels. The study shows that higher minimum wages did not reduce employment. As stated: “For cross-state contiguous counties, we find strong earnings effects and no employment effects of minimum wage increases.”
Many low-wage employers are big businesses such as national retailers and quick-service food chains, which have the ability to absorb the increased labor costs. There is a common concern that these quantities of scale do not apply to our small businesses, which can be a foundation of our neighborhoods and commercial corridors.
Consistently, surveys done by the National Federation of Independent Business — a national group representing small business — show that labor costs are one of the smaller concerns. In its recent October trends report, only 5 percent of businesses cited labor costs as a big problem, whereas red tape and government bureaucracy, taxes, and sales ranked in the top three.
Don't DC Servers and Bartenders Make A Good Living? I Tip 20 Percent!
Restaurateur Jeff Black might be seeing an uptick in job applications to his DC restaurants, Black Salt and Pearl Dive Oyster Bar, since Black told the Washington Post that servers at his establishments make between “$85,000 and $150,000 annually.”
That’s because tipped restaurant workers at most DC establishments earn far less than that and have not seen their earnings rise much over the past decade. Keep in mind, tipped workers include bussers and bar backs who assist servers and bartenders. They only earn a percentage of tips, and the percentage is not standard across the restaurant industry. Yet even the median wage for DC workers who identify themselves as waiters and waitresses was only $9.23 per hour in 2012, including both tips and hourly pay, according to the Bureau of Labor Statistics. Jeff Black’s restaurants are an outlier, as the chart below shows.
And wages for DC’s tipped restaurant workers have not kept pace with DC workers in general. The median wage for all DC workers was $29.79 per hour in 2012, equal to $62,000 annually. While the median wage has jumped nearly $10 over a decade for all workers, the median wage has remained relatively flat for tipped workers.
If you’ve never worked in the restaurant industry, you might not understand how DC’s tipped minimum wage and “tip credit” works. Actually, it’s surprising to many who do. Under DC law, restaurants are required to pay workers who receive tips at least $2.77 an hour. If tipped employees do not earn the city’s minimum wage of $8.25 per hour over the course of a work week through the combination of tips and the tipped minimum wage, employers must make up the difference. In other words, tips need to average at least $5.48 per hour over a work week or employees are entitled to some or all of the “tip credit.”
The tipped wage was put into place to provide stable income for workers who rely on gratuities, which can fluctuate depending on the type of establishment you work for, the times you work, and various other factors, including the weather. Nationally, tipped workers have twice the poverty rate of the average worker and are more than three times as likely to rely on food stamps.
On the federal level, the tipped minimum wage was initially set at 50 percent of the regular minimum wage and then bumped up to 60 percent before being frozen at $2.13. Many states opt to have a higher wage, however.
Unfortunately, DC falls into the bottom half of states when it comes to the tipped minimum wage. Maryland, for example, ties its tipped minimum wage to 50 percent of the state minimum wage. So if you work on one side of Western Avenue NW you get $3.63, but across the street in DC you earn only $2.77.
And seven states, including California and Minnesota, do not differentiate and mandate even servers, bussers, and bartenders earn the regular minimum wage plus tips.
The full DC Council should reconsider an amendment proposed by Ward 3 Councilmember Mary Cheh, which would raise the tip credit for restaurants to 50 percent of the minimum wage. That matches the same percentage in the state of Maryland. Cheh's amendment failed in committee, though some members said they might vote for it if they had more information. I am happy to provide any councilmember with more information!
The goal of raising the minimum wage is to help ensure that workers can earn a decent living. Given the low pay of many restaurant workers in DC, raising the tipped minimum wage is an important part of achieving this goal.