State Laws Credited with Raising Wages of Lowest-Earning Employees

By Robert Freedman01.13.2020

A recent opinion piece by former federal officials Gary Cohn and Kevin Hassett in The Wall Street Journal credits the 2017 Tax Cuts & Jobs Act for boosting wage growth for the lowest-earning sector of the workforce. However, analysts who’ve researched the issue separately say much of the credit goes to state and local minimum wage laws enacted in the last two years.

Cohn, chair of the National Economic Council in 2017-18, and Hassett, chair of the Council of Economic Advisors in 2017-19, say nominal wages over the last year for the lowest-earning workers increased 7% and, for those without a high school diploma, 9%. 

They credit improved productivity as a result of the extra capital employers had available after tax cuts to spend on new plant and machinery.

"This extra capital improved productivity and wages and, as expected, did so especially for those in lower-paying jobs," they said. "The numbers are striking."

Ernie Tedeschi, head of fiscal analysis at Evercore ISI and an economist at the U.S. Department of Treasury in 2012-13, agreed wages for low-wage earners are seeing a big boost. He estimates the median wage reached $11.80 an hour last year, making it historically high, even adjusted for inflation. But, he says, minimum-wage laws were a factor. 

"Increases to minimum wages at the state and local level have put 0.4 percentage points of upward pressure on this recent growth," he said in a January 3 piece in The New York Times. "Absent that pressure, wage growth ... over the last two years would have been 3.5 percent" and not the 3.9% he said was recorded. "That’s still a fine result," he said, "but it’s a bit cooler than the unadjusted data suggest."

Heidi Shierholz, senior economist at the Economic Policy Institute, cites two causes for the higher wages: growth in the economy, which has reduced unemployment to about 3.5%, driving up competition for workers, and the minimum wage laws, which were passed in 25 states in the last two years.

These laws, she said, are a "really meaningful part of wage growth for low-wage workers," she said. "That is absolutely, undeniably true."

Another analysis, published in the Washington Post last week, supports this view. The analysis separated wage growth by states that increased their minimum wage in recent years and those that didn’t and found wages grew 1.5% faster where the minimum wage was raised.

"The data suggests that people are not just getting paid more because there is more competition for their services," the Post piece said. "They are getting paid more because laws now require employers to pay them more."

Regardless of what’s driving the gains, wages for the lowest-earning workers is heading up and organizations expecting to increase hiring at minimum-wage levels can expect to pay more.

Reprinted with permission from CFO Dive, an industry publication operated by Industry Dive that reports on the latest news and developments in the CFO industry.