Should we Reform the Minimum Wage?

moneyHow much do you make an hour? Is it less than $10.10? If so, you should be concerned with this issue. The federal minimum wage, or the lowest wage an employer can pay you by law, has been in the news recently due to President Obama announcing his executive order raising the minimum wage from $7.25 to $10.10 an hour for federal contract workers “because if you cook our troops’ meals or wash their dishes, you shouldn’t have to live in poverty.” In doing so he encouraged and challenged congress to do the same for the American public as “today, the federal minimum wage is worth about twenty percent less than it was when Ronald Reagan first stood here.” To put this in perspective, according to the Employment Policies Institute “throughout the 1960s and 70s, a full-time, year-round minimum wage income was above the poverty line for a family of two, and in the 1960s it could keep a family of three above the line.” This is a serious matter. Poverty weakens our nation and “reduces productivity and economic output.” The issue is however not without its complications. The minimum wage policy is hotly debated among economists as to whether an increase would overall positively or negatively affect the economy when considering all factors, not just poverty. I believe there is strong evidence to suggest that raising the minimum wage would improve the American economy by increasing real wages and consumer spending.

What makes this issue so controversial is how hard it is to predict the outcome of such a policy change. Does increasing the minimum wage have a net positive effect on the economy? The answer to this is not clear cut as there are numerous factors that affect the economy (i.e. GDP) such as changes in real wages (income adjusted for inflation), employment rates, consumer spending/confidence, and price of goods.

A great place to begin is case studies of cities that had a significant increase in their minimum wage. These studies analyze the cities’ job growth before and after the policy change to determine if wage hike has positively or negatively impacted employment. Wage increase affects employment numbers because it increases the percent cost of employment in comparison to other overhead costs a company incurs. This forces a company to decide to either reduce internal spending or increase revenue in order to accommodate the wage hike. The most famous case study is by Card and Krueger, which found the minimum wage increase in New Jersey, produced a net increase in job creation, compared to its neighbor Pennsylvania who did not increase their minimum wage. In San Francisco, where the current minimum wage is $10.74, the University of California – Berkley found that over the past 10 years of incremental wage increase there has been no noticeable decrease in employment numbers. Further, the Center for Economic and Policy Research states that after reviewing employment numbers for San Francisco and Santa Fe (both with high minimum wage) “the results…support the view that a citywide minimum wages can raise the earnings of low-wage workers, without a discernible impact on their employment.” These studies lead to the conclusion that an increase in the minimum wage does not decrease employment.

However, employment rate is just one factor of economic growth. If you want to analyze all factors it’s easier to look at the Employment Policies Institute study. The EPI study found that “raising the minimum wage to $10.10 an hour by 2016 would increases [real] wages by $35 billion and the resulting increase in consumer spending would mean a GDP boost of $22.1 billion, which would support about 85,000 new jobs.” The EPI goes on to explain that “because low-wage workers are much more likely to spend extra earnings, raising their wages can boost economic activity when consumer spending is low.” In other words, because consumer spending is a primary factor in economic growth, raising the minimum wage is a means of boosting economic outflow. The EPI is the not the only study that supports wage increase. If you look at a study by the Chicago Federal Reserve Bank, they found that “raising the minimum wage to $9 an hour would increase consumer spending by $28 billion…increasing GDP by 0.2 percent.” These 2 studies firmly prove that increasing the minimum wage has a positive effect on the economy by increasing key factor such as real wages, job growth and consumer spending.

Nonetheless, there is still resistance to enacting new policy despite evidence supporting positive economic growth. There are 3 major arguments against increasing the minimum wage.

First, opponents claim that raising wages will force companies, especially small businesses, to decide between reducing profits or cutting jobs; none of which is good for the economy. As Sen. Marco Rubio claims “the impact of minimum wage usually is that businesses hire less people.” While this makes logical sense of the surface, overall this is simply not the case. A study by the Fiscal Policy Institute shows that “employment grew 1.5% more quickly in high minimum wage states.” This makes sense because, as previously noted, increasing wages provides expendable income for employees to spend, which in turn spurs job creation as demand for goods rises. Additionally, a research study published in The Journal of Economic Issues concluded that “there seems to be no discernible correlation between minimum wage increases and a rise in business failures.” This shows that businesses are able to absorb the costs of increased labor without having to sacrifice their profit margin. Combined, these studies disprove the theory that higher wages drive companies to significantly reduce employment or profits.

Furthermore, according to the National Employment Law Project “66% of low-wage workers are not employed by small businesses, but rather by large corporations with over 100 employees.” These companies have the means to assimilate costs of increased labor as they “have largely recovered from the recession and have reinstituted generous pay packages for executives.” They use a variety of ways to absorb the costs associated with wage increase such as improving internal efficiency, increased demand of goods, lowered employee turnover, and increasing prices. For example, a study found that Walmart “could boost its pay to a minimum of $12 per hour and cover the additional expense by a one-time price hike of just 1.1%, costing the average Wal-Mart shopper only an extra $12.50 per year.” While yes increased prices are not a positive economic affect, the price difference would be statistically negligible. Moreover, I don’t think anyone would mind paying an additional $12.50 to provide working a livable (as in able to cover all costs of living) wage.

Second, opponents also cite that many workers do not in fact earn the minimum wage and increasing this standard will only affect low end workers such as teenagers. The counter to this is two-fold. First, the majority of the workers affected by a wage increase would not be teenager but workers in their 30’s. Economist Arin Dube of the University of Massachusetts-Amherst states that “a shrinking share of low-wage workers is comprised of teenagers… among those earning no more than the federal minimum wage of $7.25 in 2011, fewer than a quarter were teenagers.” Second, many of those who would be impacted by a raise are not actually making the minimum wage but slightly above. This is coined as the trickle up or ripple effect. “An increase in the minimum wage tends to have a “ripple effect” on other workers earning wages near that threshold. This ripple effect occurs when a raise in the minimum wage increases the wage received by workers earning slightly above the minimum wage.” This effect is due to employers needing to adjust their compensation to proportionately reward employees based off merit. These results conclude that, in actuality, increasing wages would affect workers across the board; the majority of whom are not teenagers.

Lastly, opposition routinely cites the recent study by the Congressional Budget Office which states that increasing the minimum wage would decrease jobs by 500,000. While this is technically true, this statistic is taken out of context. The CBO reports that increasing the minimum wage would increase real income (income adjusted for inflation) to 16.5 million workers paid at the minimum but have no net effect on employment numbers. As in, the result of raising the minimum wage is not statistically significant on the factor of jobs. While 500,000 seems like a large number, the total number of jobs currently in the US is 137,699,000 making that a possible 0.3% change in jobs which is not a significant change in the overall job market.

Therefore it is my conclusion that based on a purely economic standpoint, raising the minimum wage would have a positive effect and legislation to increase the federal minimum wage to $10.10 should be enacted. Considering there is substantial evidence from multiple reputable sources, there should be enough data to prove that wage increase is a sound economic policy. Raising the minimum wage strengthens our nation by providing an economic boost and much needed funds to families in poverty. Economic growth benefits all and if we can at least agree on that, we should be able to agree to pass this measure.





One Comment to “Should we Reform the Minimum Wage?”

  1. If raising the minimum is so great, why not raise it to $1,000,000 an hour instead of $10.10? If the poor are so quick to spend more, which in turn is supposed to boost economic growth, then won’t people make millions each day be better than people making only tens each day?

    The problem is a higher minimum wage doesn’t solve anyone’s problems but can increase them for those who are supposed to benefit from it. The reason fast food restaurants, an industry which employs the most minimum wage workers, can sell burgers, fries, and Cokes at low prices is because they can pay their employees a low wage. If we tell them to raise wages, they will have let people go or raise prices (maybe both) to retain previous profits while meeting the required wages. Plus this would ignore that wages for the food industry have out paced labor productivity. So now we’re telling businesses to pay their employees more for less.

    Also, the minimum wage was never meant to be a livable wage (whatever that is). It was to keep businesses from telling potential workers one income and then suddenly dropping it after a few weeks of employment. It was to be the lowest an employer could legally pay someone, not to provide all their needs and wants in one paycheck.

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