Minimum Wage Policy in the United States

The introduction of minimum wages in the United States

The early 1930s were the years of the Great Depression, an economic recession that affected the United States as well as most of the European metropolises. This crisis led many countries to enact social policies or reevaluate those in place to protect workers and stimulate the industry. In France, the radical-socialist (name of the party) government enacted a series of social laws to protect workers and stimulate the labour market, such as mandatory paid holidays, restrictions toward child labour and the implementation of minimum wages. Similarly, the American government, led at the time by President Franklin D. Roosevelt, was looking into boosting the country’s economy through a Keynesian approach of government investment and intervention.

Keynes is an economist who suggested that, in times of crisis, the State should take an important role and invest large amounts of money into the economy to stimulate it. The classic example is the investment in large infrastructures like dams and roads, to create jobs and stimulate the development of the private sector. The State would “get back” its investment later, once the economy has recovered, under the form of taxes and other revenues.

In 1933, they developed the New Deal, a political program that aimed to stimulate the economy while instituting regulations to control labor conditions and the labour market. Such regulations were included in the National Industrial Recovery Act (NIRA), a set of law proposals at the Federal level that promoted, for instance, minimum hours of work per week at a set minimum wage. Despite its popularity among the people, the act was long debated in the political arena. In 1935, several important parts of the proposed legislation were dismantled – judged unconstitutional by the Supreme Court in several cases – including provisions for the protection of workers and on minimum wages [1].

People’s scrutiny over the implementation of this act greatly increased the issue’s importance on the political agenda. The presidential election of 1936 that renewed President Roosevelt’s mandate as the nation’s leader by a large majority of votes seemed to have gathered strong public support for the NIRA and the social policies it promotes. Such political victory encouraged President Roosevelt to argue the role of the Supreme Court on this legislative matter and to suggest changes to the institution. We should note that five of the nine judges were conservatives – a political ideology that had traditionally argued against the social policies of the NIRA – and, as such, it gave ground for the President to argue that the Supreme Court was not “politically neutral” towards this issue. Should such allegations be recognized as true, they would undeniably hurt the trust in the Supreme Court. In May 1937, the case West Coast Hotel v. Parrish saw one of the conservative judges give its support to a resolution that inherently supported the State’s minimum wage policy; it set an unprecedented support for the act [1].

The political joust continued in Congress where Conservatives strongly opposed the adoption of the NIRA without amending most of its social policies. But once again, the democratic support for these policies strengthened its progress on the public agenda as the legislative election of 1938 saw many representatives pro-NIRA getting elected, particularly in Southern states where the President had very little support for the NIRA. This situation, along with some more political intrigues, allowed the minimum wage law to be enacted at the Federal level in June 1938 [1].

The rationale behind an increase in minimum wage

The minimum wage policy was originally put in place as a social policy to protect all workers from potentially abusive behaviours from employers. The context of the Great Depression was a period characterized by a large gap between the number of job seekers and the number of available jobs. The supply of workforce was so high in comparison to the job offers (or the demand for employees) that companies could afford to offer ridiculously low wages and still attract new employees. While it was a natural market situation were companies fought for their survival by minimizing their costs and maximizing their profit, their actions could leave many Americans in a precarious situation. Chaplin’s Modern Times pays a tribute to the workers of its contemporary time. Since this crises affected society as a whole – industrial jobs (that were particularly suffering from the crisis) represented a much larger proportion of the workforce – it seemed fair for many that the Federal government stepped in to protect workers and regulate the industry to avoid a difficult social recovery.

Nowadays, the secondary sector represents a smaller proportion of the workforce and its labour has changed to become more specialized and educated, just like in other sectors – including those employing minimum wage workers [2]. The minimum wage policy supports low income earners in a continued attempt to protect them from employer’s abuse. It also aims to increase the income of lower skilled employees: adjusting their revenue to the cost of living. The demographics of today’s minimum wage workers is representative of particular stigmas: ethnic and cultural minorities are over-represented, most of them are women, they have lower education levels than other workers and are also over-represented in Southern states [2]. Current social and political efforts to promote access to education and the critical situation of stigmatized communities are driving support for this policy, seen by many as a needed social reform [3].

Barriers and windows of opportunity – learning from the past

Much skepticism surrounds the idea to increase minimum wages and this policy has strong detractors. They criticize largely the opportunism and the political agenda behind such policy [3, 4]. Learning from its History, we know that minimum wage is a highly politicized issue that mobilizes every part of a well-governed democracy – the executive government, the legislators and the judiciary sector – in a political game for popularity. This policy has strong political support from the population which seems to make it more of a political issue than a purely economic intervention.

Nevertheless, this policy affects in some ways the economy; however, it is not completely clear how and to what extent it would do so (it is very difficult to judge the effects of this policy precisely). Some argue that, in current post-recession times, the policy would hinder the development and growth of firms [4, 5]. Firms that are still struggling from the aftermath of the 2008 financial crisis (which also hurt the trust of many consumers towards the private for-profit sector, as illustrated well by the Occupy Wall Street movement) would not be able to take it and would have to lay off workers – hurting their productivity [4, 5]. They would also resort to automation and invest in technology to replace low skilled workers. They also argue that the policy would not really affect those whom it aims to help: since the inception of minimum wages, the demographics of its target population has changed and many minimum wage workers actually come from high income households [3, 4]. It was also argued that increasing minimum wage would make teenagers drop out from school or decide not to undertake post-secondary studies as they would be more attracted by basic work at a higher minimum wage (see also a previous post in this blog). However, this hypothesis was strongly nuanced by other reasons motivating “dropping out” such as parents with lower education, no motivation at school, or being at an underdeveloped school [6]. Also, minimum wage workers are older than before [2].

Minimum wage is inherently a very popular policy that has a “political potential” for elections, this is historically undeniable. As a social choice, this represents a unique opportunity for political engagement in a societal debate.

A general consensus in favour of minimum wages

There seems to be a general consensus from international organizations like the OECD and the WTO that increasing minimum wages provides more benefits than harm to society [7]. Increasing minimum wages may give a temporary “boost” until inflation adjusts cost of living to a similar level as before.

For instance, firms are unlikely to move their activities elsewhere on the short-run as they may value the presence of strong institutions (healthcare, food markets, social protection, security) that protects them and their employees, thus helping them secure good working conditions and good productivity. The trade-off for them to leave may be too high. In addition, firms should be able to bear this increase, even at the cost of delayed investment in infrastructure or some lay-offs.

The policy also has a symbolic connotation and might make employees happier and more productive – although there is nothing certain about this on a larger scale [4]. Should you invest willingly more into employees’ wages, you may benefit from a positive Hawthorne effect that would enhance the attachment of employees to your company.