Could Salary Bump Mean Economic Slump?

Jan 3, 2014
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This is TELL ME MORE from NPR News. I'm Michel Martin. Later this hour, we will talk about some of the big changes to the American health care system that came in with the new year. We'll find out what you need to know right now and what dates you should keep in mind. That's coming up in a few minutes.

But first, we're taking a look at an issue that got more and more attention and momentum as last year went by. We want to talk about wage levels, and President Obama raised the issue at his State of the Union address last year.


PRESIDENT BARACK OBAMA: Tonight, let's declare that in the wealthiest nation on earth, no one who works full-time should have to live in poverty and raise the federal minimum wage to $9 an hour.


MARTIN: Well, that did not happen. The federal minimum wage remains at $7.25 an hour. But since that speech last year, more than a dozen states decided to go on and are raising their own minimum wages this year, with some states going past the $9 figure.

Yet the debate over whether this makes good economic sense, especially with the economy still in recovery, is continuing. We wanted to hear all the various points of view on this, so we've called, once again, on NPR senior business editor Marilyn Geewax. And also joining us, Bloomberg Businessweek contributor, Roben Farzad. Welcome back to you both. Thank you both so much for joining us, and happy New Year.


ROBEN FARZAD: Happy New Year.

MARTIN: So, Marilyn, as you've told us before, the federal government first set a minimum wage in the mid-1930s during the Depression. The goal was to put sort of more money into people's pockets, lift people out of poverty, but it has to be - it's not tied to inflation. So Congress has to act.

The government last raised the minimum wage in July of 2009. And as we said, you know, President Obama's been urging Congress to raise the minimum wage again. They haven't done that, but a number of states have gone on and done that, and a number of localities as well.

I think it's, like, five localities, including the District of Columbia. What persuaded these places, and why now?

GEEWAX: This whole issue of income inequality has really picked up a lot of steam lately. People are focusing on that because it does seem that wages haven't gone up for low-wage workers. Now keep in mind, the minimum wage sets a floor for wages, but a lot of things are based on that. It's kind of a benchmark.

So if the lowest wage is $7.25, there are an awful lot of people - about 15 million - who make $8, $9, $10 an hour. They're low-wage workers, but they're key to what the minimum wage is. So if you were to raise that from $7.25 to $8, $9, whatever you want to set it at, that would push a lot of people up.

The people who currently are making $8 an hour, they would get a raise, too. They would ratchet up as that floor goes higher. So there are really, literally millions and millions of people who are extremely focused on this issue. They would like to get that raise.

And really when you do polls of voters, it's very popular. It's a surprisingly popular issue. Polls show anywhere from 70-80 percent of voters are in favor of it. So when it gets on a state ballot, on a city ballot, people vote for it because they want workers to get that raise.

MARTIN: Roben, what about the other side of the coin here? We often hear from visible people in the business community who are against it and that they say that this advantages the employed at the expense of the unemployed, that they say it discourages people from hiring.

What else do they say about that? And is the business community really of one mind on this, or are there some sectors that support it and some that don't?

FARZAD: I could tell you it's not as black and white as people wanted it to be either, you know - business is against this and low-wage earners are for this. In reality, if you step back for a minute, this is the era of the $5 foot long, if you watch all those Subway ads, and McDonald's and its dollar menu and Walmart and everyday low prices and whatnot.

They believe that they are doing a service to the American consumer and economy by passing through the benefits of globalization and purchasing power, economies of scale and that you're going to disrupt all that if you mandate that they have to pay their workers higher salaries.

Well, in reality, if you step back from it - because I cover these companies - say Walmart and McDonald's, from a corporate finance perspective, they're AAA rated. They can issue debt at record-low terms, and some of the numbers are astonishing. U.S. fast-food workers alone receive more than $7 billion in public assistance. McDonald's has a help line called McResource that workers can dial into to get instructions on how to get food stamps and welfare.

And Walmart, meanwhile, is the nation's largest private employer. It's also the single biggest consumer of taxpayer aid. You know, where would Walmart be without Medicaid? So the asymmetry of this - there's an element of, you know, heads, they win, tails, the taxpayer loses.

They turn around. They make these outsize profits. They pay them out to executives and to shareholders in the form of dividends, and taxpayers are on the hook.

MARTIN: So but your argument was also, or their argument was - those who are against raising the minimum wage argue that keeping wages low in part allows them to improve the quality of life by offering products at lower prices. Is that their argument?

FARZAD: That's right. Walmart alone, if you look at it as a nation, is China's sixth biggest trading partner. And you hear all this stuff about manufacturing jobs going abroad and whatnot.

And Walmart is correct in saying that we can offer the dividends of globalization immediately to people who come into our stores and can buy an $18 DVD player. You disrupt that benefit by mandating that we have to pay our workers, say, instead of $7.25 an hour, $10.10 an hour, which is what Obama is insisting on.

But I would take that a step further and say, you should call them on this because they are - you know, it's a great soundbite - blue-chip welfare queens. They want to say that this is either for the people or against the people, but it's also very advantageous, the current structure for their shareholders.

MARTIN: If you're just joining us, we're talking about new minimum wage increases that are coming into place around the country. My guests are Bloomberg Businessweek contributor Roben Farzad and NPR senior business editor Marilyn Geewax.

Marilyn, you were telling us that whatever point of view you have on this, you can generally find a study to support that point of view. But I'd like to know - but these kinds of studies are coming out all the time, and you were just making us aware of a new one. What are some...

GEEWAX: Right...

MARTIN: What's some of the new information coming out?

GEEWAX: There've been studies for decades looking at the minimum wage, and as Roben was pointing out, there are all kinds of conflicting points of view. You could say it holds down prices, but it does this or that. But if you look at all the studies over time, the majority of them would come to the conclusion that a higher minimum wage, as long as it's not too high, is generally fairly helpful to the economy because it puts money into people's pockets.

They can spend it. That helps stimulate the economy. And there was just a study that was released earlier this week from the University of Massachusetts Amherst. An economist there took a look at what would happen if you raised the minimum wage to $10.10 an hour, and his conclusion was that nearly 5 million people would be lifted out of poverty by getting those higher wages.

So, you know, the most recent studies are suggesting it would help reduce this income gap and lift some people up. But, you know, it really also - it's fair to point out that some of this just can vary so much depending on where you're at. If you're in North Dakota where the unemployment rate is less than 3 percent, a higher minimum wage is - can be fine. It'll help people get more money, and they can find an apartment or whatever.

But if you are in a low-wage part of the country where the economy's very slow, if the federal government says, the wage has to go higher, maybe the business owner, she looks around and decides, I'll just work longer hours myself instead of adding one more employee. So it can be complicated, and it can vary by region.

MARTIN: I was going to ask Roben this as well, is there a small business-big business divide on this? In that, there are big businesses who could perhaps absorb a wage increase and who are benefiting from these tax breaks as you were just describing, versus sort of small business people who have maybe one or two or however few employees who would either invest in technology or just work longer hours themselves.

I mean, is there - do you feel in the business groups, those who advocate for and represent big business versus small business, do they have a point of view difference on this?

FARZAD: Michel, that is an important question because as I said before, big businesses, they can absorb costs. They have purchasing powers. If you think about what McDonald's - McDonald's alone controls the potato crop in this country.

Potato farmers must listen to what Illinois is saying in corporate headquarters of McDonald's. What they do in terms of beef and buying powers and - corporations broadly, if you want to look at Procter & Gamble, the big consumer products company, Colgate-Palmolive, dairy yogurt companies.

One thing that people aren't talking about is that they have these certain dark arts at their disposal. Over the past 10 years, if you compare - and this is germane to this conversation - what an average cup of Dannon yogurt looks like now versus what it did 10 years ago or a bottle of Head and Shoulders versus what it looked like 10 years ago. They don't necessarily have to pass costs down to the end customer in a weak economy.

What they can do is cut corners and erode your purchasing power in another way. In the end, they are public companies. They have to report quarterly results, and they are not going to just take the hit in terms of profitability. There are other things they could do that ultimately hit the end consumer.

MARTIN: Marilyn, why do you think this is and remains such a contentious issue? I mean, you've told us a number of times on this program as we've continued to follow this issue over the course of the year that actually this fight actually surfaces, like, every couple of years, and it's always contentious.

GEEWAX: It's always...

MARTIN: Why is that?

GEEWAX: It is going on for three quarters of a century now and no end in sight. And the reason for that is that it's so deeply philosophical in a way. We can talk about all these economic studies and look at numbers and all that, but in the end, it really is about, what is the role of government?

You know, there are a lot of business owners who say, we are consenting adults, my employee and I. We will make our own decisions about what the pay level is. If you don't like what I'm offering you, walk out the door. Nobody's holding you here.

So you could say that just on a purely philosophical basis, wages should be negotiated between the employer and the employee. And it has nothing to do with what people in Washington are doing.

MARTIN: And it inhibits freedom, and it sets kind of an artificial value of labor that should...

FARZAD: But...

GEEWAX: Right...

MARTIN: But let her finish her point...

GEEWAX: But there's another way of looking at that, and that is that in this country we do have the federal government set some standards. We don't have child labor. We - I mean, if you ask most Americans, do you want to see kids working on machines when they're 10 years old?

They would overwhelmingly be in favor of child labor laws. They're overwhelmingly in favor of an eight-hour workday. They want overtime for more than 40 hours.

There are standards that the government does set and - you know, whether it's health and safety or wages or hours - there are roles that the government plays in that. So this is a philosophical debate between two different ways of looking at government.

MARTIN: OK, Roben, what about you? Final thought from you on this. Why do you think this remains so contentious over the years?

FARZAD: Because especially now, you talk about two economies - one where Wall Street is really loving life, where the stock market is an all-time high and unemployment remains chronically high at the same time. People are feeling underemployed by and large.

And they look around and say, I didn't expect to be making this little this late into the game. And the nightly news starts off with the Dow at another record. You're thinking, where's the love for me?

I think it's also incredibly important to ask in this debate the same people who are funding the Chamber of Commerce and big business who are saying that an increase in the minimum wage would be ruinous, they're the same ones who support, on the side, agricultural subsidies.

MARTIN: OK. We have to leave it there for now. Obviously, this debate will continue, and we'll continue to have it. Roben Farzad is a contributor to Bloomberg Businessweek, with us from Richmond, Virginia. Here in our Washington, D.C. studios, Marilyn Geewax, NPR senior business editor. Thanks so much to both of you. Transcript provided by NPR, Copyright NPR.