Inside Davis' "Seductive" Plan to Boost Minimum Wage in Texas

A recent rally in New York to raise the minimum wage of fast-food workers: It's a controversial idea that's popular among many politicians, including Texas gubernatorial candidate Wendy Davis.
A recent rally in New York to raise the minimum wage of fast-food workers: It's a controversial idea that's popular among many politicians, including Texas gubernatorial candidate Wendy Davis.

Amid the storm of fast-food worker protests for better pay, Democratic candidate for governor Wendy Davis announced late last week her plan to boost Texas' minimum wage to $10 per hour, which is generally how much national cost-of-living studies say is necessary for struggling workers to have improved quality of life.

Meanwhile, while Texas business organizations are crying out against the motion. Davis' GOP opponent Greg Abbott was predictably one of the first to speak out, saying a boost to minimum wage would hurt job growth and tarnish the "Texas Miracle" reputation. Bill Hammond, CEO of the Texas Association of Business, also thinks the "long arm of government" shouldn't be mandating wage raises.

"We see the minimum wage as a starter or training wage," says Hammond. "So if we were to boost the minimum wage overnight, the starter jobs would basically be eliminated." But Dr. Mike Davis, an SMU economics and business professor, says the issue is not so simple.

Dr. Davis says plenty heads of household in Texas, not just young people, make minimum wage and scrape by with each paycheck every month. It's a complicated issue, one with both potential economic ramifications and benefits for minimum wage households.

Despite the hype and popularity among voters, Dr. Davis says, an increase in state minimum wage is a deceptively easy political move. "What we know about minimum wage laws is that they have a couple of impacts," he says. "They help people who get a raise, there's no doubt about that. But they also increase unemployment."

Dr. Davis says raising the minimum wage has the potential to cause inflation. If employers are forced to raise employees' salaries, the cost will eventually be have to be made up elsewhere. More likely than not, that means increased prices on goods and services, which would in turn create another need for higher minimum wage -- in other words, it's a nasty cycle that, Dr. Davis says, can't be solved with any single law or solution.

The Economic Policy Institute is one of the foremost proponents of raising the national minimum wage. Dave Cooper, an economic analyst with the EPI, agrees that the cost of raising employees' salaries will have to be made up by employers, but says that the bulk of the cost will likely be absorbed organically and there will be little, if any, need for increased prices.

"One way employers can absorb that cost is the reduction of turnover," says Cooper. "We find that turnover goes down, because you find that people aren't pressured to go find other, higher paying jobs." Cooper says worker productivity also typically goes up. "They maybe feel better about their job, maybe can quit the second job. And if that is not enough, then yes, employers may have to resort to some price increases. But all evidence shows that the price increase would be very small."

And for a complex, mathematical issue, it's personal to many Texans. Cooper says that while most $7.25 workers are young, the majority of $8 and $9 hourly workers are struggling adults who would greatly benefit from a raise. And raises would likely go up proportionate to the workers' current raise: If a McDonald's teenager cashier currently makes $7.25 and an older manager makes $10, the manager's salary would likewise go up if the cashier's wage was raised.

"In Texas only 10 percent of workers that would be affected by wage increase are teens," Cooper says. "The majority are women, and 32 percent are parents. They are parents to 1.8 million children in Texas. So 1.8 million children in Texas would have a parent benefit from wage increase. That's about a quarter of children in Texas."

Cooper also says that while $5 billion would be spent in additional wages to workers in Texas, it would likely have a positive stimulus effect. Workers would be likely to spend more, which translates to about $3.1 billion in state GDP. "The minimum wage at the federal level has been way too low for too long," he says. "At its high point in the 1960s the minimum wage was the equivalent, adjusted for inflation, of about $10 per hour. So what Wendy Davis is proposing is to get the wage to what it was 45 years ago. That seems like a pretty reasonable thing to do if we think of the wage as a basic living standard for our workers."

In any case, it's an issue that continues to be divisive among economists, and one that is simultaneously used as a powerful political tool. "It's an interesting political issue, because it sounds great and tends to be fairly popular. As a political issue, proposing an increase in minimum wage law is very seductive to politicians," says Dr. Davis. "If Ms. Davis says we should pass a law that everyone should have a higher minimum wage, people don't see a potential cost associated with that. So it tends to be seductively popular."


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