A Pandemic May Be a Risky Time for a Higher Minimum Wage

Pandemic’s outsize hit to sectors where wages and productivity are low heightens risks of sharp rise in the minimum wage

By Greg Ip. Excerpts:

"The last federal minimum-wage increase coincided with the deep 2007-09 recession. Jeffrey Clemens, an economist at the University of California, San Diego, compared how employment fared in states where the policy raised wages with states where it didn’t because the local minimum wage was already higher. He concluded the increase significantly hurt employment among high-school dropouts aged 16 to 30."

"The pandemic has accelerated the shift of activity from the physical to the digital realm, from shopping malls to e-commerce, from theaters to streaming video. Digital businesses invest heavily in technology to deliver their products with fewer employees. It is no surprise that Amazon.com Inc. backs a boost in the federal minimum wage to $15: its sales per employee are far above other retailers’, so it can afford to pay more.

Research has found that employers respond to a higher minimum wage in a number of ways. Some had enough control over local labor markets before the increase to underpay workers; those will absorb the higher wage in their profit margins. Some will pass it on through prices. A recent study by Orley Ashenfelter and Štěpán Jurajda found that McDonald’s restaurants that raised pay because of local minimum wages between 2016 and 2020 didn’t tend to close stores or invest more in labor-saving technology such as touch-screen ordering kiosks. Rather, they raised prices.

But Mr. Clemens said companies avoid overhauling their business models when times are good; that changes in recessions when survival is at stake. “The fact the restaurant sector is going to be building itself back up from the ashes of the pandemic means a lot of those choices will be made afresh. I’d expect to see a larger minimum wage increase met with a more substantial shift towards online retail, or…relying less on low paying jobs.”

Indeed, a 2012 study found that 88% of the loss of routine, middle-skill jobs since the 1980s has occurred in and around recessions. Separately, the McKinsey Global Institute noted robot installations shot up after the 2007-09 recession and expects a similar rush to labor-replacing technology now. The firm conducted a survey that found 68% of executives world-wide accelerated investment in automation and artificial intelligence since the Covid-19 outbreak began.

This doesn’t kill the case for a higher minimum wage; much of this investment will happen anyway, and a higher minimum wage could ensure workers share in some of the benefits. It does argue for examining whether alternatives, such as a later or longer phase-in or enhanced aid for the working poor could reduce poverty as much with fewer unintended consequences."