Introduction
The federal minimum wage is a contentious socio-economic and political issue that has been debated since America entered the modern historical age. The first minimum wage was established at the state level as far back as 1912, but it was not until the policies of the Great Depression that Congress established the first federal minimum wage as part of the Fair Labor Standards Act. The current federal minimum wage stands at $7.25 (Smith). This limit is seen as a vital number, as the modern service economy strongly relies on minimum wage workers and these employees are active contributors to the economy. However, it also serves as an economic and policy tool that can have an impact on the country’s macroeconomic status quo. The minimum wage should not be raised as it will create unbearable economic pressure on businesses, resulting in a market failure scenario, that is characterized by unemployment, reduced hours or benefits, and a socio-political backlash that would require government intervention and spending to stabilize the macroeconomic situation.
Background on the Issue
As mentioned, the minimum wage currently stands at $7.25, last being raised in 2009 during the Obama administration when Democrats controlled both chambers of Congress. The federal minimum wage has been raised 22 times since its induction in 1938. Until the 1960s minimum wake increases kept up with productivity growth and inflation, resulting in workers growing alongside the country which was increasing its economic growth. There have been popular demands to increase minimum wage, including the famous 1963 March on Washington. One popular perspective of evaluating minimum wage is its purchasing power in relation to inflation. Therefore, the minimum wage in 2020 dollars has less purchasing power than the respective minimum wages in the period of 1950 to 1980. Minimum wage is raised approximately every 7-10 years given the dynamic of the last 50 years (U.S. Department of Labor). The current gap of almost 12 years without an increase is the longest in history, with economists suggesting that due to inflation, those $7.25 are worth 17% less in purchasing power than a decade ago, and 31% compared to 1968 (Smith). Despite this, this paper argue that it is not a competent decision to raise the minimum wage at this time.
Economic Argument
The economics to minimum wage are inherently complex beyond what the majority of the public perceive them as. Given that the federal minimum wage is a nationally mandated wage, any such decision will cause tremendous impacts both on a macroeconomic and microeconomic level, leading to market shifts that can be unpredictable. Every company that is affected by the minimum wage increase in any form will react it, finding another ‘channel of adjustment.’ Therefore, the first economic argument against minimum wage hikes suggests that there are negative employment outcomes as a result of such policy. Over decades various studies have highlighted that unemployment may increase by as much as 2.8% (Bauducco & Janiak 57). For the sake of transparency, the unemployment claim has been disputed back and forth, with more of the recent literature arguing that minimum wage does not have enough of an impact to solely cause massive job loss. However, even taking that into account, businesses have to account for rising staff costs that stem from minimum wage increases. Some patterns that have been proven is that businesses began to modify schedules, cutting hours, and decreasing benefits. There are indirect consequences of this as well such as workplace conditions, insurance quality, and hiring practices. Overall, even though the minimum wage is federally mandated, it offers no support to cover the costs, so the pressure falls on the businesses.
There are other macroeconomic factors to consider for minimum wage increases. There is the argument that the artificial limit will result in growing inflation, as a result of cost-push inflation. Furthermore, it can disrupt the labor market, even if hourly wage and minimum wage workers consist of only a small portion of the workforce. The argument suggests that labor is sold on the market in supply and demand, with the price similarly set by the supply and demand equilibrium. The minimum wage sets an artificial floor to this curve, distorting the market. A rapid hike such as going from $7.25 to $15, even gradually, will push the labor market into a spin tail. While potentially those who are employed are better off at the expense of employers, but it has an overall negative impact on society as there is no longer an equilibrium. Jobs that someone was willing to do for $7.25 and businesses were willing to pay that price will be gone, and so are those products and services (Kwak).
Social Argument
The social argument against raising the minimum wage ties in closely with the economic one, but more focused on the individual and households rather than businesses. A blanket approach to policy in hopes of fixing poverty in risky and incompetent. In a perfect theoretical scenario, increasing wages will lead for benefits for the poorest and help them to take a step out of poverty. However, the realities of the economy described earlier indicate a different picture. Those who will benefit from the increased wages are those remaining in their jobs, the majority of others will lose employment or see significant decreases in hours and benefits, including some vital ones such as childcare. Businesses will have to match the rate to the level of experience and education that a worker has, leaving many new job seekers, younger individuals, and elderly without much opportunity to find a position or hours. As a result, their net earnings per year will likely decline, actually taking away economic and other opportunities from the lower class to progress. There are also side-effects that are unaccounted for such as individuals remaining on welfare for longer and increased rate of high-school dropouts to enter the job market (Joint Economic Committee Republicans).
Briefly mentioned earlier, but raising minimum wage theoretically leads for businesses to raise prices of goods and services. Most businesses are operating at thin margins as it, a higher minimum wage will lead to inflated staff costs which will have to be covered with higher product costs. It creates a cyclical economic effect which is overall negative for the lower class. In other words, an increase of minimum wage will lead to decreased working hours or lost jobs, combined with higher cost of living, will push populations further into poverty. While the Congressional Budget Office (CBO) does believe that almost 1 million people will be lifted out of poverty as a result of raised minimum wages, at the same time 1.4 million fewer workers will be employed (Bourne). Another element to consider is that many of those poorer neighborhoods where companies employ minimum wage workers, those consist of small and family businesses rather than corporations (the reason for food deserts), so putting economic pressure on them and leading to closings or raised prices, can have long-lasting social impacts.
Political Argument
The discussion around minimum wage is increasingly partisan and political than any time before. To present the political arguments against minimum wage, it is necessary to mention those that support because it is these that have such significant popular support. The first, is that raising minimum wage is a ‘picture perfect’ example of distributional social policy. It has widespread support because, as discussed in the next section, it creates an illusion of wealth for the lower and middle-class. The political argument here against pushing against minimum wage hikes, is that it is better to implement targeted initiatives that aim to provide the lower class with tools and education to raise their economic welfare, rather than a blanket approach with so many potentially negative outcomes (Wilson 247). Simply channeling wealth through superficial means has proven largely ineffective in addressing the inequality gap.
The second argument that is presented by proponents is that the market is essentially forcing the minimum wage hike. Companies are having tremendous power over workers and depress wages, leading to a market failure scenario, which the wage hike can shift through economic efficiency. However, the political argument against this is, the U.S. economy is known for its market-free economy, that does not have a high level of government intervention, especially with actions that force companies into specific actions. While minimum wage does exist, it does not mean it should be abused as a tool. In fact, many companies have shifted to offering higher than minimum wage on their own to their hourly workers, ranging from McDonalds to Amazon. This is demonstrative that that the laissez-faire economic approach is effective and the minimum wage intervention would be inappropriate.
Counterarguments Supporting Minimum Wage Increase
The primary argument supporting raising the minimum wage is based on the previously mentioned inflation. Since inflation is on average between 1.5-3% annually, then eventually the minimum wage loses its purchasing parity. Proponents of increasing it argue that those relying on minimum wage work, which are usually the poorest and least educated individuals and households, are pushed further into poverty. Furthermore, even though only 1.5% of workers at minimum wage, as many as 73.3 million employees are paid hourly in the U.S. The argument is just because they are not paid $7.25 does not mean that 8, 9, or 10 dollars per hour is enough, as the proposed increase to minimum wage currently is to $15 per hour to have an appropriate purchasing power (Smith).
Unlike the arguments presented earlier, proponents suggest that businesses will benefit from the increase by increasing worker productivity, more motivated by higher wages and reduced absenteeism and turnover in the hourly wage jobs (which is in fact a significant issue). Economists supporting the raise argue that there is no discernible evidence suggesting job loss due to increased wages, as job creating is dependent on much broader macroeconomic factors. In fact, it is likely to stimulate the economy and provide the support for those local businesses as consumers spend more. Since predominately low-wage workers benefit from the increase, these are the consumers that are most likely to put income back into the economy. Studies suggest that every $2.55 increase in minimum wage generates earnings of $40 billion that increase the GDP and employment (Scott). Also, analyzing the current status quo where companies with hourly workers are struggling to find employees in the post-pandemic era, a minimum wage increase will help to fill these service positions, thus allowing businesses to earn more as well.
Proponents argue that the current approach of infrequent and modest minimum wage increases contributes to the inequality between the bottom and other classes. To be fair, minimum wage should be directly indexed to growth to median wages which have been increasing significantly, and not just due to inflation. Supporters argue that even if the work hours for low wage workers were to slow, these employees could still break even or earn more while working less. It means that some workers may find time to find new jobs or dedicate time to education or family. The minimum wage increase is as much economic as it is socio-political, as Democrats typically supporting the initiative argue that tens of millions could be helped, and alongside other policies such as safety nets, tax credits, and job training, increasing minimum wage can be a vital step towards reducing pay inequality and raising up those below the poverty line (Acemoglu et al.).
Discussion
One of the primary issues with the argument on raising minimum wage is that it is very speculative and also highly politicized. First, in terms of speculation, this is not the first time that minimum wage has been raised, yet outside of the cumulative earnings that low wage workers may earn, there is very little other data provided, either intentionally or lack thereof. The impact on the whole economy remains relatively unclear, especially with such a drastic raise as proposed to increase to $15 over 4 years. Many proponents prefer to cite the success of jurisdictions where minimum wage was raised significantly over minimum, places such as California, New York, and Washington. However, what is being ignored are the tremendous price hikes that have occurred. As found by Cooper et al., along with minimum wage increases, nominal spending and prices rise as well, particularly in categories of food, restaurants, and locations that hire the most hourly wage employees (5). While undoubtedly New York has always been expensive, it is virtually unlivable now with minimum wage job, and even salaried professionals are struggling. This is occurring in other locations, and there is a notable economic migration (albeit not just due to prices, but factors such as taxes) to ironically those states that support the minimum wage at its current or slightly elevated levels.
The truth of the matter is that minimum wage is significantly political, and it is a significant part of Democratic policy in their ‘fight for the poor.’ However, the issue is that minimum wage increase simply creates an illusion of wealth, but in economic reality does little to decrease the inequality gap, not without a range of other highly expensive policies. In the words of Alan Manning, “The bottom line is that there is not much evidence that the minimum wage is currently a job killer in the United States, and so there is room for it to go up. Raising the minimum wage, however, is not a particularly effective tool to combat poverty and share the benefits of growth” (par. 3).
The minimum wage hike is a “blunt instrument” in his words because it is both not targeted towards poverty increase and it often causes just as much harm as it does good. Employers are forced to reduce hours and sometimes delay new hiring, while prices typically increase in those very businesses where low-wage employees work and shop. The issue of minimum wage has become more of an ideological rallying cause, even changing the name to “living wage” suggesting that wage is directly associated with what they perceive as a decent standard of living. However, economics does not behave this way, and if all policy was guided by ideals, i.e. a single mother of two making a minimum of $20 per hour, then if businesses had already not closed or laid off workers at the $15 minimum wage, they would in this hypothetical scenario.
Then, there is the issue of COVID-19, which has devastated the economy. Particularly small businesses, the service sector, and industries where wages and productivity are low were the most affected. The ongoing pandemic and volatile economic situations indicate that it is a risky time in the next few years to raise the minimal wage (Ip). Small businesses and the struggling service sector will be left bearing the cost. While yes, fast food corporations may be able to bear the cost, the typical American ‘mom-n-pop’ shops that are already barely holding on, will be wiped out. The issue is that the corporations that hire low-wage employees have already raised their wages to meet market needs. Meanwhile, small businesses are not doing so because they do not want to, but because they can’t. However, they also employ and offer services that corporations usually do not. Therefore, a rapid minimum wage hike at this time will have the effect opposite of what it is intended to do, and instead of helping struggling Americans, it will destroy the very core of American business.
Overall, decision to approach minimum wage should take a less ideological approach but consider the economic arguments. It may be potentially an appropriate thing to do in the future, but once again, this is an economic tool more than political in reality. A compromise should be found that avoids radical raises of minimum wage, and works closely with states and businesses to implement the minimum wage as a tool for the benefit of the working population.
Conclusion
The minimum wage debate is more relevant now in the economic recovery in the aftermath of the COVID-19 pandemic than ever before. However, at a time of such an unstable and struggling economy, this is not the correct policy position to undertake at the federal level. In fact, the market is seeing its own corrections as private companies are offering much higher competitive wages at the standard jobs to attract the much-needed workforce. In the end, the minimum wage is meant to be a guidance, a protection against exploitation of workers. Given that it has been since 2009 since the last raise, it will likely be raised eventually as the other side to this debate also has fair points. Nevertheless, it should be done gradually, with proper timing as to not disrupt the markets, and with common agreement.
Works Cited
Acemoglu, Daron, et al. Economists in support of a federal minimum wage of $15 by 2024. Economic Policy Institute.
Bauducco, Sofía, and Alexandre Janiak. “The Macroeconomic Consequences of Raising the Minimum Wage: Capital Accumulation, Employment and the Wage Distribution.” European Economic Review, vol. 101, 2018, pp. 57–76, 10.1016/j.euroecorev.2017.
Bourne, Ryan. “The Case against a $15 Federal Minimum Wage: Q&A.” CATO Institute, 2021.
Cooper, Daniel, et al. “The Local Aggregate Effects of Minimum Wage Increases.” Journal of Money, Credit and Banking, vol. 52, no. 1, 2019, pp. 5–35, doi.org/10.1111/jmcb.12684.
Ip, Greg. “A Pandemic May Be a Risky Time for a Higher Minimum Wage.” The Wall Street Journal, 2021.
Joint Economic Committee Republicans. “The Case Against a Higher Minimum Wage.” Senate, 1996.
Kwak, James. “The Curse of Econ 101.” The Atlantic, 2017.
Manning, Alan. “The Truth About Minimum Wage.” Foreign Affairs, 2018.
Scott, Robert C. “Raising the Minimum Wage: Good for Workers, Businesses, and the Economy.” Committee on Education and the Workforce Democrats.
Smith, Kelly A. “What You Need to Know About the Minimum Wage Debate.” Forbes, 2021.
U.S. Department of Labor. “History of Changes to the Minimum Wage Law.” Wage and Hour Division.
Wilson, Shaun. “The Politics of ‘Minimum Wage’ Welfare States: The Changing Significance of the Minimum Wage in the Liberal Welfare Regime.” Social Policy & Administration, vol. 51, no. 2, 2017, pp. 244–264, 10.1111/spol.12286.