Raising Minimum Wage
Intermediate Microeconomics In the 2014 State of the Union address, President Obama called on Congress to raise the minimum wage from $7.25 to $10.10 per hour (The White House, n.d.). Many arguments stand both for and against the $2.85 per hour raise, all of which cite the affects it may have on employer costs, household income, and the economy as a whole. The majority of the arguments, however, point toward the major economic benefits that are capable if such a raise occurs.
The federal government put into place a minimum wage in 1938. Nominal minimum wage values have increased intermittently ever since, starting at $0.25/hr, growing until it reached its current $7.25/hr. It has increased the most recently in three $0.70 increments, from $5.15 to $5.85 in July 2007, to $6.55 in July 2008, and to $7.25 in July 2009, where it has stayed for the past six years. In more recent years, various cities and states have made their own decisions to raise their minimum wages. For example, in 2015, San Francisco raised its minimum wage to $12.25 per hour, with plans to raise it further, to $15 per hour in 2018. In 2016, California will raise its state-wide minimum wage to $10 per hour, making it the highest state’s minimum wage (Smith, 2015).
There are four major arguments against the raise of minimum wage – job loss, less job availability for low-skilled workers, lack of poverty reduction, and higher prices for consumers. In the Southern Economic Journal, experts stated that “nearly 1.3 million jobs will be lost if the federal minimum wage is increased to $9.50 per hour” (Sabia & Burkhauser, Minimum Wages and Poverty: Will a $9.50, 2010). Because of the higher labor costs that a higher minimum wage will require of employers, many believe that those employers will cut back on labor itself, by pursing massive layoffs and cutbacks. That same idea feeds the idea that those lost jobs will often be taken away from the lesser skilled workers who still want jobs. A 2010 study by Michael Hicks found that the last time minimum wage was increased, roughly 550,000 part-time jobs were lost, which accounts for 310,000 teenagers who lost their part-time jobs (Hicks, 2010). A similar study done by the CATO Institute also showed that an increase in minimum wage has no effect on poverty rates, and that restaurants have shown direct correlation between higher wages and higher consumer costs (Wilson, 2012).
There are major counter-arguments against the logic behind the studies that result in anti-minimum wage raising ideals. Many make claims that the researchers are biased by their industries, or that the data itself doesn’t hold up in the real world. Some, however, have taken the information from years of surveys and compared it to the expected effects. Researchers took into account restaurant employment differences from 1,381 United States counties with varying minimum wage levels, for every fiscal quarter between 1990 and 2006. Their conclusion was that “The large negative elasticities in the traditional specification are generated primarily by regional and local differences in employment trends that are unrelated to minimum wage policies.” (Volsky, 2013). Researches such as this are continuously looking to show that data may not have been as accurate as the original researchers thought it to be.
There have been two dominant wage levels that have been studied the most – the $10.10 per hour wage that President Obama suggested in his 2014 State of the Union address, and a more conservative $9 per hour rate that many experts suggest as a less drastic raise. The $10.10 option will clearly have more effect on the economy. The Congressional Budget Office (CBO) estimates that about 16.5 million workers (Congressional Budget Office, 2014) would receive the raise in hourly wages. The CBO reached four major conclusions from their studies about the $10.10 minimum wage. First, once the leveling of the wage market happens, an overall real income would rise by $2 billion dollars across all workers. Second, about 900,000 people would be moved above the poverty line, by boosting average family income by 5 percent. Third, families whose income was anywhere from the poverty line to three times that level would also receive an increase in income, above $12 billion. Similarly, roughly $2 billion would go to the families who earned from three to six times the poverty level. Finally, a decrease of income would be felt by the families who earned six times the poverty threshold or more, which would lower the average family income by 0.4 percent (Congressional Budget Office, 2014). These results reinforce the barrier between those families and individuals who earn the majority of the money in our country’s economy today. Many argue that this a reason that the top earners in our society will stop raises like this from passing.
Any raise in minimum wage would have more effects than just the incomes of other families. Increasing the federal minimum wage would affect the federal budget as a whole, by directly and intentionally increasing the wages the government paid to their hourly employees, and by indirectly boosting the prices of goods and services purchased by the government. Federal spending and taxes would also be indirectly affected, through the increased level of income taxes paid by those who would receive higher wages, and also by the decrease of benefits paid by the government, because less people would require those benefits (Cooper, 2013). The CBO concluded that the federal budget would see a small decrease in budget deficits for several years, but later see a small increase in deficits thereafter (Schmitt, 2013).
The goal of the minimum wage law is not to raise or lower unemployment, nor should it be – many researches suggest that it really can’t. Its purpose is to protect those who might not have the power or resources be able to protect themselves. And there’s little doubt who is the in need of protection in this context. Overall, there are evidence based arguments for both sides of the controversy around the rise of minimum wage, no matter the amount it is raised. Society will only know for sure which side is accurately predicting the result after the changes happen and they affect the economy to their full potential. References
Congressional Budget Office. (2014, 02 18). The Effects of a Minimum-Wage Increase on Employment and Family Income. Retrieved from Congressional Budget Office - Nonpartisan Analysis for the US Congress: https://www.cbo.gov/publication/44995
Cooper, D. (2013, 12 19). Raising the Federal Minimum Wage to $10.10 Would Lift Wages for Millions and Provide a Modest Economic Boost. Retrieved from Economic Policy Institute: http://www.epi.org/publication/raising-federal-minimum-wage-to-1010/
Hicks, M. J. (2010, 02). Who Lost Jobs When the Minimum Wage Rose? Retrieved from Ball State University Center for Business and Economic Research: http://cms.bsu.edu/-/media/WWW/DepartmentalContent/MillerCollegeofBusiness/BBR/Publications/MinWage.pdf
Sabia, J. J., & Burkhauser, R. V. (2010). Minimum Wages and Poverty: Will a $9.50. Southern Economic Journal, 592-623.
Sabia, J. J., Burkhauser, R. V., & Hansen, B. (2012, January). Are the Effects of Minimum Wage Increases Always Small? Industrial and Labor Relations Review.
Schmitt, J. (2013). Why Does the Minimum Wage Have No Discernible Effect on Employment? Center for Economic and Policy Research.
Smith, C. (2015, 06 19). Minimum Wage History. Retrieved from Oregon State University: http://oregonstate.edu/instruct/anth484/minwage.html
The White House. (n.d.). Raise the Wage. Retrieved from The White House: https://www.whitehouse.gov/raise-the-wage
Volsky, I. (2013, 02 14). Why Employers Won’t Fire People If We Raise The Minimum Wage To $9. Retrieved from Think Progress: http://thinkprogress.org/economy/2013/02/14/1594181/no-firing-minimum-wage-raise/
Wilson, M. (2012). The Negative Effects of Minimum Wage Laws. Policy Analysis of the CATO Institute.