Interview with Jeannette Wicks-Lim

Mandated Wage Floors and the Wage Structure: Analyzing the Ripple Effects of Minimum and Prevailing Wage Laws (2005)

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This interview was conducted by Adam Hersh, a U Mass Ph.D. student and Research Assistant at PERI.

Why did you choose UMass for graduate school?

Two reasons. First, UMass' economics faculty represents a wide range of theoretical approaches. I knew that I wanted to explore economics from a heterodox perspective and was not married to any particular approach to economics when I applied—after all, at the time I had only taken a handful of undergraduate economics courses. It was important to me that UMass offered choices so that as I developed my understanding of economics, I would not be confined to only one point of view but could explore different schools of thought. Second, when I was applying I learned that an economics research institute was in development—PERI—that could provide graduate students with opportunities and support to do research. I've been lucky to take advantage of this place!

How did you pick your dissertation topic?

The question I chose to research is whether establishing or increasing mandated wage floors causes employers to provide wage increases beyond those required. These non-mandated raises are often referred to as “ripple effects” or “spillover effects.” One reason employers may provide such non-mandated raises is to preserve the wage structure in their firm. Workers may be concerned not only with their wage level, but also with their wage relative to other workers. Thus, tensions can arise when these relative wages change. As a result, employers may raise the wages of not only those workers required by law to receive raises, but also workers earning wages above the wage floor.

The question grew out of my interest in doing research related to economic policy. Early on, I got involved in research projects connected in some way or another to policy questions. It was in the context of the living wage work I was doing with Bob Pollin and Mark Brenner that I really started to focus on ripple effects. It was hard to evaluate the overall impact of living wage laws without a good handle on whether these laws would produce just the wage raises that were mandated or if there was a broader effect. So, there was a clear need for a solid answer to the question of what ripple effects look like.

Also, I felt that standard labor economic theory left a lot to be desired in dealing with questions of wage determination. Factors that are usually considered more social or political than economic—such as race and gender discrimination, the right (and ability) to bargain collectively—are either not well integrated or not well developed into economic theories of wages. Understanding better how politically determined rules for our economy, such as mandated wage floors, affect how wages are set fit well within this broad area of interest.

Finally, the importance of this question was affirmed by a somewhat unlikely source, my partner. Working at the time for an institution where there was tension over compensation issues she was, along with her coworkers, keenly aware of her “relative wage position.” One night when I was talking about living wages, my partner asked me, “If I knew that the wages for a group of people at work were going up all of a sudden, I'd expect my wages to go up too. Otherwise, it doesn't seem fair.” This reaction drove home the point that the concept of ripple effects is rooted in people's real work experiences and made the topic all the more compelling to me.

You say that you were attracted to UMass by the variety of approaches taught there and that standard labor economic theory left much to be desired. How does the variety of theoretical approaches inform your research?

The basic theoretical orientation that I use is rooted in Marxist economics in the sense that I think of power and control as central issues in many, if not most, economic relationships, particularly within a capitalist economic system. So whatever question I may be researching I am always mindful of how access to power through whatever resources—financial, social, political—plays a role in determining what economic processes are possible, their dynamics, and their outcomes.

I've found particularly useful several approaches because they focus on analyzing the social institutions that are generated by or reinforce existing economic relationships. These include that of the old institutionalists that used to be very prominent in labor economics, feminist economics, and Black political economy. All of these approaches, in my opinion, use in some way or another the basic intuition I got from Marxist economics in order to explain economic phenomena but each focus on their own specific set of social institutions. As a result, each of these approaches provides a different way of studying and understanding how power and control affect our economic relationships, and in that way inform my research.

What surprised you the most in your research?

I wasn't really sure what to expect when I started the project in terms of the magnitude and extent of ripple effects. Theoretically, I could imagine large and small ripple effects both. Interestingly, both proponents and opponents of minimum-wage-type laws have a stake in finding both large and small ripple effects. If they are large, proponents could make the point that there are large benefits to low-wage workers. However, opponents could say that these laws pose an unbearable economic burden for employers. If ripple effects are small, proponents could say that minimum wage laws are a manageable way to help out low-wage workers and opponents could say that these laws are inefficient.

Though living wage laws may increase pay for some workers, by raising costs for employers might these laws have perverse effects on other workers? From a policy perspective, how do you reconcile the income benefits from living wages with their disemployment effects?

I think it is important to first consider whether an employer will actually need to reduce his/her workforce. Whether an employer will actually need to reduce his/her workforce has a lot to do with whether the law increases the costs of doing business significantly or not. The increased costs to employers are typically quite small – on the order of two percent or less of their sales revenues. For employers in the restaurant and hotel industry who are more affected by these laws, increased costs are typically on the order of three to four percent of their sales revenue. So, the fact that most employers face modest cost increases raises the question of whether there are other ways that these costs may be offset—perhaps through increased productivity and lower turnover rates of their now better-paid employees, or perhaps through modest price increases or small reductions in their profit margins. In fact, past research has indicated that minimum wage laws, for example, have not had large disemployment effects, suggesting that employers may react differently to these types of laws from what standard economic theory predicts.

Even for those employers that face more substantial cost increases, it’s important to consider their possible range of responses and then evaluate whether there is still a way to avoid disemployment effects, and if not, see if there is a way to minimize them so that the income benefits more than offset those negative effects.

At the same time that living wage movements are proliferating across the country, there appears to be little support for rescuing the collapsing federal minimum wage. Why do you think such a discrepancy exists?

I think that the living wage movement is clearly a response to the collapsing value of the federal minimum wage. There seems to be a lack of political will, resources, whatever, at the national level to address this. But the roughly 40 percent decline in the real value of the federal minimum since the late 1960s has been a strong motivating factor for people to take on the issue locally. I think that people feel more effective at this level and state and town government officials seem to be more responsive to their constituents than their counterparts at the national level. If the disconnect between the federal minimum wage and a livable wage continues to grow, I think, so too will the political momentum of the living wage movement. Evidence of this is the growth in the campaigns for city- and state- wide minimum wage laws. My guess is that the aim of these local campaigns is to change the federal minimum wage by making it, in a sense, irrelevant. If enough local minimum wage laws are passed, the federal minimum will no longer be the effective minimum for any significant number of workers. And then, perhaps, the federal minimum wage will be raised.

What should everyone know about living wage laws?

There are now over 100 living wage policies in effect. So a rich set of information is developing on how living wage laws work and we need to take the time to evaluate their outcomes. From what I've seen so far, the predictions of large disemployment effects from living wage laws have not been borne out. We should look at what has actually happened to understand why.