In his State of the Union address last week, Barack Obama called for the United States to raise its minimum wage to $9 an hour. The proposal has triggered discussion around the country, with reactions falling along broadly partisan lines.
This is a subject that should be of particular interest to Texas, which is notorious for having a lot of minimum-wage jobs.As it happens, my forthcoming book, Big, Hot, Cheap, and Right , tips the minimum wage as one thing Texas could do to help the working poor. So let me take a moment to explain why I made that case —and why raising the minimum wage might not be such a good idea in other states.
Before that, though, let’s summarize the national argument. The traditional argument against raising the minimum wage is that it would be bad for business, with consequences for everyone. Employers might hire fewer people, raise their prices, or be driven out of business altogether. Supporters generally dispute this. Alan Krueger, the economist who heads Obama's Council of Economic Advisors, made his name with work showing as much: when New Jersey raised its minimum wage, the state's fast-food restaurants didn't have layoffs as a result. (Pennsylvania, which neighbors New Jersey and didn't raise its minimum wage, was the control subject in this natural experiment.) If that’s the case, raising the minimum wage would be a way to help workers without disrupting the private sector.
Historical evidence suggests that the relationship between the minimum wage and employment is more complicated than either side says—and that history can only tell us so much. In December, I asked Richard Fisher, the president and the CEO of the Federal Reserve Bank of Dallas, whether Texas could raise the minimum wage. His response was pragmatic and contextual: businesses are already facing a serious question mark about their cost structures due to the implementation of the Affordable Care Act.
Even if we could perfectly predict the direct effects of raising the minimum wage, the implications are debatable. In an interview with the The American Prospect, for example, economist Arindrajit Dube explained that his research has found that raising the minimum wage generally doesn’t have an adverse effect on the number of people employed, but it could reduce turnover in minimum-wage jobs. That could have a disproportionate impact on certain subsets of people who are looking for minimum-wage work—young people come to mind. They have less work experience (and they are, particularly in Texas, disproportionately Hispanic rather than Anglo, which would exacerbate another equity issue).
So with that in mind, let’s talk about Texas. There are four reasons why Texas should take a closer look at the minimum wage.
First of all, although the trope that Texas is only creating McJobs isn't true , it is true that Texas has a lot of minimum-wage workers. (About twenty states set the minimum wage higher than the federal standard ; Texas is among the states that has the federal minimum wage by default.) In 2011, according to the Bureau of Labor Statistics, about 8 percent of the state's workforce earned at or below the federal minimum wage. That's one of the highest rates of minimum-wage workers in the country, and well above the national average of 5.2 percent . It also helps explain why Texas's poverty rate exceeds the national average , even though Texas has had relatively low unemployment for years. The state's unemployment rate is about 6 percent right now. If 17 percent of Texans are living in poverty, it's not because that many people can't be bothered to work; it's because a minimum-wage job doesn't necessarily put you above the federal poverty line.
Widespread poverty is, of course, a problem. One way to address it would be to mitigate the effects of poverty by providing a bigger safety net. That's not, however, likely to be the Texas way. If Texas wants to have fewer people living in poverty, it's going to need the working poor to earn more money. Raising the minimum wage isn't the only way to help them do that, and it’s probably not the best way, especially over the long term. But a wage hike would make a meaningful difference for workers who are barely scraping by, particularly in a state that has a relatively low cost of living.
Secondly, Texas has less to fear from raising the minimum wage than most states would. As discussed above, it’s hard to predict how raising the minimum wage would affect employment, and employees. And Texas can’t afford to be cavalier about the potential for adverse consequences; no state can. This is, however, a state that has been outpacing the nation in terms of job creation for years. It’s a state where a growing population has created greater demand for restaurants and retail, which is why a McDonald's in Midland was recently trying to recruit employees by offering them a 401(k). It’s also a state where the most important industries—the ones that are driving our economy, today and in the future, are things like energy, technology, and manufacturing, which don't rely on minimum-wage labor in the first place. If any state can afford such an experiment, it’s Texas.
Third, raising the minimum wage would be good for the state’s budget. People who don't make much money in the first place tend to spend any extra money they earn. (Economists refer to this as the "marginal propensity to consume,” and it explains why sales taxes are considered regressive .) Texas, remember, is one of only four states without a state-level income tax. That means it relies heavily on the sales tax for its general revenue funds. If Texas hiked the minimum wage, it would see an increase in sales tax receipts. It’s no Eagle Ford Shale, but neither is it pocket change.
Finally, raising the minimum wage would be in keeping with Texas’s values—and would be the policy equivalent of smashing a pie in the face of those national critics who