A Massachusetts minimum-wage increase would help working families and generate jobs
By Mary Gable
August 21, 2012 - Economic Policy Institute
Issue Brief #340
The Massachusetts minimum wage is currently $8.00 per hour, and a proposal to
increase it to $10.00 is before the state legislature.
Amid persistently high unemployment and the resulting downward pressure on
wages, increasing the state’s minimum wage would provide a welcome lift to the
Massachusetts economy. An increase would also help working families in
Massachusetts make ends meet in the aftermath of the worst recession in
generations.
This issue brief explains why raising Massachusetts’s minimum wage would be a
tool for economic growth and examines the magnitude of these positive economic
effects. Key findings include:
- If enacted on January 1, 2013, a minimum-wage increase in Massachusetts to
$10.00 per hour would give more than 581,000 of the state’s lowest-paid
workers a raise.
- Raising the state’s minimum wage would increase wages by almost $824
million for directly and indirectly affected workers.
- The increase would create roughly 4,500 net new jobs within the first
year.
Raising the minimum wage as a tool for economic growth
The immediate benefits of a minimum-wage increase are in the boosted earnings
of the lowest-paid workers, but its positive effects would far exceed this extra
income. Recent research reveals that, despite skeptics’ claims, raising the
minimum wage does not cause job loss.
In fact, in Massachusetts and other states, minimum-wage increases would
create jobs. Like unemployment insurance benefits or tax breaks for
low- and middle-income workers, raising the minimum wage puts more money in the
pockets of working families when they need it most, thereby augmenting their
spending power. Economists generally recognize that low-wage workers are more
likely than any other income group to spend any extra earnings immediately on
previously unaffordable basic needs or services.
Increasing Massachusetts’s minimum wage to $10.00 on January 1, 2013, would
give a raise to more than 581,000 of the state’s lowest-paid workers.
It would provide nearly $824 million in additional wages
to directly and indirectly affected families, who would, in turn, spend those
extra earnings. Indirectly affected workers—those earning close to, but still
above, the proposed new minimum wage—would likely receive a boost in earnings
due to the “spillover” effect (Shierholz 2009), giving them more to spend on
necessities.
This projected rise in consumer spending is critical to any recovery,
especially when weak consumer demand is one of the most significant factors
holding back new hiring (Izzo 2011).
Though the stimulus from a minimum-wage increase is smaller than the boost
created by, for example, unemployment insurance benefits, it is still
substantial—and has the crucial advantage of not imposing significant costs on
state governments. Thus, a minimum-wage increase is one of the few
budget-neutral ways for state governments, already struggling with budget
shortfalls, to give a shot in the arm to the economy.
Assessing the job creation effects of a minimum-wage increase
In addition to providing a wage increase to hundreds of thousands of
Massachusetts workers, raising the state’s minimum wage would create jobs.
Showing that raising the minimum wage would be a tool for modest job creation
requires an examination of the stimulative effects of minimum-wage increases.
Because minimum-wage increases come from employers, we must construct a
“minimum-wage increase multiplier” that takes into account the increase in
compensation to low-wage workers and the decrease in corporate profits that both
occur as a result of minimum-wage increases. Raising the minimum wage means
shifting profits from an entity (the employer) that is much less likely to spend
immediately to one (the low-wage worker) that is more likely to spend
immediately. Thus, increasing the minimum wage stimulates demand for goods and
services, leading employers in the broader economy to bring on new staff to keep
up with this increased demand.
When economists analyze the net economic stimulus effect of policy proposals
(e.g., tax rate changes that boost income for some and reduce it for others),
they use widely accepted fiscal multipliers to calculate the total increase in
economic activity due to a particular increase in spending. In applying these
multipliers, economists generally recognize a direct relationship between
increased economic activity and job creation. This analysis assumes that a
$115,000 increase in economic activity results in the creation of one new
full-time-equivalent job in the current economy.
Using these same standard fiscal multipliers to analyze the jobs impact of an
increase in compensation of low-wage workers and decrease in corporate profits
that result from a minimum-wage increase, we find that increasing the
Massachusetts minimum wage from $8.00 to $10.00 per hour would result in a net
increase in economic activity of approximately $522 million and would generate
roughly 4,500 net new jobs (see Appendix for methodological details).
Though this would not return the state’s unemployment rate to pre-recession
levels, it would be a substantial boost to the Massachusetts economy.
The benefits of a minimum-wage increase in an economic downturn
Examining the positive effects of a minimum-wage increase in Massachusetts
leads to an overarching discussion of the economic case for increasing the
earnings of the lowest-paid workers during an economic downturn. In the current
economic climate, nearly everything is pushing against wage growth. With 3.4
unemployed workers for each job opening (Gould 2012), employers do not have to
offer substantial wages to hire the workers they need, nor do they have to pay
substantial wage increases to retain workers.
It is important to note that despite the weak overall condition of the U.S.
economy, corporations can afford to increase the wages of the lowest-paid
workers. Since 1973, corporate profits have continued to soar as American
workers have become more productive. Corporate America even has recovered the
losses of the 2008 crash, with profits once again growing much more quickly than
productivity and wages. Yet in Massachusetts and nationwide, most
workers—especially the lowest-paid workers—have not shared in this prosperity.
Figure A reveals this disconnect. It shows that real corporate
profits peaked in 2006 at more than 200 percent growth since 1973, while the
real value of the Massachusetts minimum wage in 2011 was just 1 percent higher
than in 1973. Meanwhile, workers’ productivity increased almost 100 percent
during the same period. Increasing the minimum wage in Massachusetts would help
raise the lowest-paid workers’ earnings to reflect their increased
productivity.
Figure A
Change in productivity, corporate profits, and the Massachusetts
minimum wage, 1973–2011
Source: Author's analysis of data from the U.S.
Department of Labor, the Bureau of Labor Statistics, and the Bureau of
Economic Analysis
Even conservative economists suggest higher wages might help speed the
recovery. American Enterprise Institute scholar Desmond Lachman, a former
managing director at Salomon Smith Barney, told The New York Times,
“Corporations are taking huge advantage of the slack in the labor market—they
are in a very strong position and workers are in a very weak position. They are
using that bargaining power to cut benefits and wages, and to shorten hours.”
According to Lachman, that strategy “very much jeopardizes our chances of
experiencing a real recovery” (Powell 2011).
Furthermore, the national unemployment rate is currently 8.3 percent and is
not expected to return to pre-recession levels for several years. In
Massachusetts, the unemployment rate is 6.1 percent and, as Figure
B shows, the state’s “jobs shortfall,” or the difference between the
number of jobs Massachusetts has and the number necessary to return to the
pre-recession unemployment rate, is 148,100. That number includes the 43,500
jobs Massachusetts has lost since December 2007 plus the 104,600 jobs it would
have needed to add to keep up with the 3.2 percent population growth the state
has experienced in the 55 months since the recession began.
To close this gap within three years, Massachusetts would have to create 5,500
new jobs every month. In the past year, Massachusetts has added 42,800 jobs,
enough to cover less than eight months’ worth of necessary growth. At that rate,
it would take Massachusetts more than three years to return to the pre-recession
unemployment rate. Considering the past year’s sluggish job growth rate, a
minimum-wage increase that creates about 4,500 net new jobs would help
strengthen the recovery.
Figure B
Massachusetts jobs shortfall, January 2000–July 2012
Source: Author's analysis of Bureau of Labor
Statistics Current Population Survey, Current Employment Statistics, and
Local Area Unemployment Statistics data
Conclusion
The multiple positive effects that would result from a higher minimum wage in
Massachusetts are clear: It would boost the earnings of working families hardest
hit by the Great Recession, spur economic growth, and create about 4,500 net new
jobs. In an economic climate in which wage increases for the most vulnerable
workers are scarce, raising the minimum wage to $10.00 is an opportunity that
working families in Massachusetts cannot afford to lose.
Appendix: Methodology
An analysis of the stimulative impact of raising the minimum wage in
Massachusetts draws on the macroeconomic multipliers calculated by Moody’s
Analytics Chief Economist Mark Zandi (2011), which estimate the one-year dollar
change in gross domestic product (GDP) for a given dollar reduction in federal
tax revenue or increase in spending. Averaging the stimulus multipliers of the
Earned Income Tax Credit (within the parameters of the American Recovery and
Reinvestment Act, or ARRA) and Making Work Pay (ARRA’s refundable tax credit for
working individuals and families) gives a reasonable fiscal stimulus multiplier
for the spending increase due to the increase in compensation of low-wage
workers. This value is 1.2, which means that a $1 increase in compensation to
low-wage workers leads to a $1.20 increase in economic activity.
The calculation of the stimulative impact of the minimum wage, however, must
also account for the offsetting shift from employers. We assume employers pass
on some of the minimum-wage increase to consumers through increased prices
(somewhere between 20 percent and 50 percent). Thus, we calculate the offsetting
multiplier effects as a weighted average of Zandi’s multiplier for an
across-the-board tax cut (1.04, as a proxy for increased prices) and a cut in
the corporate tax rate (0.32).
The minimum-wage multiplier is between:
1.2 MW consumer spending increase multiplier – [0.32 corporate tax rate
cut*(1-0.5 price pass-through) + (1.04 across-the-board tax cut*0.5 price
pass-through)] = 0.53
(representing the case where 50 percent of the minimum-wage increase is
passed through to prices)
and
1.2 MW consumer spending increase multiplier – [0.32 corporate tax rate
cut*(1-0.2 price pass-through) + (1.04 across-the-board tax cut*0.2 price
pass-through] = 0.74
(representing the case where 20 percent of the minimum-wage increase is
passed through to prices).
Taking into account the fiscal stimulus multiplier range of the minimum-wage
increase (0.53 to 0.74) and the increased wages (“wage bill increase”) of
directly affected workers, we can calculate the GDP impact of the proposal to
increase Massachusetts’s minimum wage to $10.00.
The GDP impact is between:
$823,911,180 wage bill increase*0.53 minimum-wage multiplier (low) =
$432,553,370 GDP impact (low)
and
$823,911,180 wage bill increase*0.74 minimum-wage multiplier (high) =
$610,518,184 GDP impact (high).
We use the general rule that it takes a GDP increase of $115,000 to create
one full-time-equivalent (FTE) job and a GDP increase of $127,000 to create a
payroll job. Then, calculating the impact of an increase in the Massachusetts
minimum wage to $10.00 on January 1, 2013, the number of FTE jobs created is
between:
$432,553,370 GDP impact (low)/$115,000 GDP increase per FTE job = 3,761 FTE
jobs
and
$610,518,184 GDP impact (high)/$115,000 GDP increase per FTE job = 5,309
FTE jobs.
The number of payroll jobs created is between:
$432,553,370 GDP impact (low)/$127,000 GDP increase per payroll job = 3,406
payroll jobs
and
$610,518,184 GDP impact (high)/$127,000 GDP increase per payroll job =
4,807 payroll jobs.
Full-time-equivalent job measurements take into account both the increase in
the number of payroll jobs and the increase in work hours for those who already
had jobs by calculating the equivalent number of 40-hour-per-week jobs that
would be created by the GDP boost. Measuring the number of payroll jobs strictly
shows the number of jobs (not measured by hours). Thus, an increase in the
minimum wage in Massachusetts to $10.00 on January 1, 2013, would create, over
one year, a conservative estimate of roughly 4,500 jobs (whether measuring FTE
or payroll).
Endnotes
A proposal (S. 951) to increase the Massachusetts minimum wage to $10.00
per hour over two years passed the state’s Joint Committee on Labor and
Workforce Development in March 2012 and is currently before the legislature.
This analysis instead assumes an increase in the minimum wage to $10.00 goes
into effect on January 1, 2013.
See the recent EPI paper The benefits of raising Illinois’ minimum
wage: An increase would help working families and the state
economy (Hall and Gable 2012) for a description of the definitive
studies on minimum-wage increases and the absence of disemployment effects.
According to the author’s analysis of 2011 Current Population Survey
Outgoing Rotation Group microdata. This total includes directly affected workers
(those who would see their wages rise because the new minimum wage would exceed
their current hourly pay) and indirectly affected workers (those who would
receive a raise as employer pay scales are adjusted upward to reflect the higher
minimum wage).
According to the author’s analysis of 2011 Current Population Survey
Outgoing Rotation Group microdata. This analysis assumes 0.4 percent population
growth (the Massachusetts projected annual average growth rate from 2000 to
2020, according to the U.S. Census Bureau). The model assumes no wage growth
from 2011 survey values prior to the proposed minimum-wage increase on January
1, 2013. The increased wages are the annual amount of increased wages for
directly and indirectly affected workers, assuming they work 52 weeks per
year.
In a recent poll of 53 economists by The Wall Street Journal,
the majority (65 percent) cited a lack of demand as the main reason for a lack
of new hiring by employers (Izzo 2011).
A recent analysis by the Center on Budget and Policy Priorities projects a
$1.3 billion budget shortfall in Massachusetts in fiscal year 2013. At 3.8
percent of the general fund budget, this shortfall is much smaller than those of
the states with the most severe budget gaps. However, it could cause the state
to cut government services and public-sector jobs at a time when doing so would
be particularly harmful to the economy (McNichol et al. 2012).
In a paper on the methodology used to estimate the jobs impact of various
policy changes, the Economic Policy Institute’s Josh Bivens found that $115,000
in additional economic activity results in the creation of one new
full-time-equivalent job, and $127,000 in additional economic activity results
in the creation of one new payroll job (Bivens 2011).
According to the author’s analysis of Current Population Survey Outgoing
Rotation Group microdata and Zandi (2011).
This calculation uses Current Employment Statistics and Local Area
Unemployment Statistics data from the Bureau of Labor Statistics. It provides an
estimate in line with EPI’s national-level estimate of the jobs shortfall, which
combines Current Employment Statistics and Current Population Survey data. This
estimate is based on the dates of the national recession, not those of the
Massachusetts recession.
While this paper presents multipliers rounded to two decimal places, the
calculations use the exact multiplier.
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