One of the most important aspects of the debate over economic policy is the effectiveness of the Minimum Wage and the prospects for its increase. The ongoing debate over the minimum wage is an important facet of the country’s economic future and helps to determine its economic competitiveness. Proponents of the minimum wage increase argue that the benefits of having a higher rate outweigh the costs. Opponents of a higher minimum wage, on the other hand, argue that a higher minimum wage is, in fact, harmful to the economy overall. The objective of this report is to discuss the effects of the minimum wage and to analyze the respective positions of both sides of the argument.
The first federal minimum wage law in the United States came into effect in 1938, through the Fair Labor Standards Act, which set the minimum wage at a rate of $0.25 an hour (roughly $4.13 in today’s dollars). In addition, the Fair Labor Standards Act also banned the use of child labor and set the maximum workweek at 44 hours (Grossman). Over the ensuing years, the minimum wage has been gradually increased to different levels. The most recent increase occurred in 2009, when the federal minimum wage rose by about 10%, from $6.55 to $7.25. Over the last several months, there have been various proposals discussed that would boost the federal minimum wage once again. The most prominent proposal came from President Barack Obama. In his recent State of the Union Address, President Obama suggested a $10.10 federal minimum wage, which would amount to a 40% increase from its current level. The proposed increases in the minimum wage ignited a large number of discussions on both sides of the political spectrum, with Democrats favoring the increase and Republicans nearly universal in their skepticism of such a plan. Furthermore, most economists cannot reach a consensus regarding the effectiveness of such a move.
Proponents of an increase in the minimum wage argue that a higher wage would not have a huge effect on businesses and would not lead to an increase in prices of goods. According to recent data compiled by the Center for Economic and Policy Research (CEPR), there is no direct evidence to claim that an increase in the minimum wage would have an adverse impact on employment. That data contradicts the argument used by opponents of increasing the minimum wage that any increase would have a detrimental effect on employment and economic growth. Furthermore, the same research shows that a hike in the minimum wage would not have a huge impact on the prices of goods and services provided by companies. For example, assuming that the minimum wage is to be increased by 10% over a 2 year period, the prices of goods would only increase by roughly 0.18%. Those increases in prices are negligible when compared to the overall gains in purchasing power for many workers.
Another argument in favor of increasing the minimum wage is that an increase will help to reduce the poverty rate. For example, if the minimum wage was to be increased from $7.25 to $10.10, it is estimated that the number of people who live below the poverty line will reduce by about 4.6 Million. In addition, the average incomes of the bottom 10% of earners are expected to increase by $1,700 per year due to such a raise. The belief that an increase in the minimum wage can reduce poverty is shared by many economists, even those who are skeptical about the results of the minimum wage on businesses. For example, minimum wage opponent David Neumark wrote in 2011 that an increase in the minimum wage by 10% would reduce poverty among 21-44-year-olds by 2.9%.
Proponents of increasing the minimum wage argue that the current minimum wage is too small when compared to the overall cost of living. While the federal minimum wage is $7.25 and is as high as $8.00 in states such as California, the minimum wage is often not enough for people to keep up with the cost of living. A worker who works 40 hours per week at $7.25 an hour can expect to only earn $15,080 per year. In contrast, the federal poverty line for a two-person household is $15,130. According to a study by Amy Glasmeier, the cost of living in various cities ranges from $12-15 per hour in smaller cities and up to $20 per hour in larger cities. Often, people who earn the minimum wage have to rely on working multiple jobs in order to keep up with their financial demands and continue to scrape by on a meager lifestyle.
Another argument from proponents is that raising the minimum wage will help to reduce income inequality. For example, the income rates of the top 1% of earners rose by a whopping 275% between 1979 and 2007 while the bottom 20% only saw an 18% increase during that comparable period. If the minimum wage had kept up with the productivity increases during that time, it would be $21.72 today, according to research by the Center for Economic and Policy Research (CEPR). Over the last several decades, income inequality and class distinctions have become a major societal issue in the United States and the stagnation of the purchasing power of the minimum wage is partially to blame. According to data provided by the Economic Policy Institute, the federal minimum wage had reached a peak in overall purchasing power in 1968 and since has declined by close to 23% over the past four and a half decades.
Furthermore, it can be argued that a higher minimum wage can also help to reduce gender inequality. When considering who earns the minimum wage, women made up roughly 64% of overall minimum wage earners in 2012. In addition, the minimum wage for tipped workers is $2.13 per hour and women comprise approximately 72% of all tipped employees. Furthermore, women are disproportionately paid a lower wage than men. The economic inequality between men and women is a serious economic concern that the U.S. continues to face and could weaken the economic prospects of the country in the years to come. An increase in the minimum wage could have a positive effect on the economic prospects of women and decrease the inequalities regarding gender than many women face on a daily basis in the workplace.
In the debate over increasing the minimum wage, there are numerous economists who take the position that a hike in the minimum wage is, in fact, harmful to the economy and not beneficial to the very workers that it is intended to help. Opponents of increasing the minimum wage often argue that a higher minimum wage will have a drastic impact on the economy. Opponents often argue that a higher minimum wage will have an effect in reducing employment among low-skilled workers, create an undue burden on businesses, harm U.S. economic competitiveness and increase consumer debt.
One common argument among proponents of the minimum wage is that an increase in the minimum wage will help the poor. However, according to the American Enterprise Institute, an increase in the minimum wage will do little to help the poor improve their standard of living and will reduce employment levels among lower skilled workers. Research indicates that a 10 percent increase in the minimum wage can reduce employment among low-skilled workers by roughly one to three percent. The proposed 40 percent increase can have an even greater effect on employment. In addition, studies by the AEI show that nearly all minimum wage jobs are held by teenagers from middle-class backgrounds who seek part-time employment. Furthermore, additional analysis by the AEI shows that only 10 percent of minimum wage earners came from households below the poverty line in 2007.
Another argument that can be used against raising the minimum wage is that a higher minimum wage can have a negative impact on economic growth and competitiveness. Those who are skeptical to a hike in the minimum wage feel that the effects of a higher minimum wage are especially felt on those who are seeking employment in entry-level jobs. A recent study by the Congressional Budget Office speculated that if the minimum wage were to be increased to $10.10 per hour, a job loss of over half a million could potentially occur. That belief is further corroborated in a study by David Neumark. In his study, Neumark uses a panel approach analyzing data regarding its effects and found that a higher minimum wage, in fact, increases unemployment.
It can also be argued that a higher minimum wage can lead to companies deciding to outsource their jobs to areas with considerably lower labor costs. One of the major economic problems that the U.S. faces are the outsourcing of jobs to countries overseas with lower costs of labor and prevailing wages such as China, Mexico, Brazil, and India. One can draw a direct correlation between a higher minimum wage and the outsourcing of jobs. As businesses seek to expand their profits, a higher minimum wage can ultimately affect their profit margins. In order to make up for their loss in revenue, a business may decide to transfer most of their jobs to an area where the minimum wage is considerably less. The practice of outsourcing is a common practice by many major businesses and is a major factor in the loss of a competitive edge in many economic indices by the U.S.
Opponents of increasing the minimum wage also argue that a higher minimum wage will discourage people from finding work in the U.S. by limiting the negotiation power for higher wages by prospective employees. A major work ethic philosophy in the U.S. is that one should find work at a rate that the free market determines as fair for one’s skill level. Though there are mandates on business by government, such as a minimum wage, people often lack the bargaining power to negotiate a fair rate for their skills and are trapped at the lowest wage level. Due to their lack of negotiation powers, people often decide not to seek employment and in turn, increase their reliance on government assistance programs such as food stamps and various forms of welfare. With the current financial status of the U.S., further demands on its entitlement system can potentially have a devastating effect on its economic future in the years to come.
Proponents of increasing the minimum wage argue that a higher minimum wage will lead to higher economic growth and more consumer demand. While most evidence shows that a hike in the minimum wage can boost consumer spending in the short term, overall a minimum wage increase can lead to consumers taking on more debt on the purchase of durable goods. According to a paper by Daniel Aaronson and Eric French, most adult workers at the very bottom end of the wage scale spend an additional $700 per quarter in response to a $1 wage hike. Most of the additional spending is paid for through forms of credit. When factoring an increase in the minimum wage from $7.25 to $10.10, a worker in the bottom of the economic scale would spend an additional $1,995 per quarter on consumer goods, again mostly paid for by increasing their personal debt.
Through the analysis of both sides of the debate over the minimum wage, it can be concluded that a clear position regarding its results is not reachable. When going over the data gathered by economists over many decades, it seems that the minimum wage affects many groups in entirely different ways. The effects of the minimum wage tend to be negative, as a higher minimum wage can potentially reduce business profits and harm economic competitiveness. On the other hand, a higher minimum wage will provide a myriad of benefits to workers such as the ability to keep up with the ever-rising standard of living and allow for a reduction in economic inequality. With regards to the proposed legislation on increasing minimum wage to $10.10, a compromise position can be reached that can satisfy the demands of both employers and workers. An example of a compromise would be to increase the minimum wage to $10.10 at a more gradual rate. Furthermore, such a plan could also call for granting companies several incentives such as tax credits or a slight reduction in their income taxes if they hire more employees. A proposal such as that would reduce the potential adverse effects of a large minimum wage hike on business and also allow the workers at the bottom of the economic scale to have a chance to improve their standard of living.
In conclusion, the debate over the minimum wage is one of the more controversial economic debates in the U.S. today. Much like with other debates, the dispute over the minimum wage is split along political lines. Those in support of a higher minimum wage explain its merits and illustrate its positive results, while opponents of a higher minimum wage take the contrary position. In addition, proponents of both sides of the minimum wage debate take many different positions and go over numerous arguments to back up their respective beliefs. Furthermore, many economists have not reached a conclusion regarding the ultimate effect of the proposed minimum wage increase. As time goes on, the true effects of the minimum wage increase may become more apparent and a conclusion regarding the future of the wage can be reached.