Increasing the Federal Minimum Wage
Discussion
The idea of minimum wage has become a polarizing issue across the United States. While there are proponents on both sides of the debate, regardless of the consensus, or later decision on the matter, the adjustment or failure to adjust the minimum wage has expected ripple effects throughout the economy such as increased spending by consumers on the positive side, to increased prices and increased inflation on the negative. Ultimately, the minimum wage could be elevated to levels keeping with current inflation without adversely affecting the economy as a whole, but also will not fulfill the true extent of the desired outcomes some proponents of the idea project.
History
The Federal minimum wage was first introduced in 1938 following the Great Depression. The minimum wage, which was raised as a part of Franklin D. Roosevelts “New Deal”, was one of multiple aspects, like child labor laws, Roosevelt sought to improve. The primary focal point was to stabilize the economy and enact fair labor practices across the United States. Minimum wage in today’s society continuous to be a polarizing issue, becoming a primary issue of debate amongst political candidates. With a large volume of proponents and antagonists of the issue, some topics worth examining include claims regarding poverty and inflation, which from a microeconomics standpoint look to consumer spending and firm behavior.
Effects on Poverty
When viewing the circumstances of poverty and the federal minimum wage, proponents of an increase argue that raising the minimum wage would decrease poverty throughout America due to the increased income. At the same time however, antagonists concur that raising the minimum wage will have ill effect on the poverty level, even arguing that an increase may increase the poverty level due to loss of jobs, as a result of firms trying to recoup costs. In order to examine this issue from an objective lens, it is important to consider and contrast the current poverty level within the United States, with those earning minimum wage. Currently According the Bureau of Labor Statistics (2016), the percentage of Americans living below the poverty line is approximately 12.7% or 40.6 million Americans. Despite this number, only approximately 7.6 million, which equates to approximately 4.9 percent of the labor force are identified as “working poor”, or those who are engaged in the labor force.
In contrast, the current labor force making minimum wage or less, largely speaks to the credence of the argument that an increased minimum wage will reduce and/or eliminate poverty. Currently, of the entire labor force, those that are making minimum wage or less is dominated by youths aged below 25. To place in perspective those in this age bracket make up only approximately 1% of the population, but account for approximately 50% of the minimum wage recipients. This is in grave contrast when breaking down the numbers even further as those aged 16-19 years old account for about 8% with those aged above 25 accounting for 1%.
When evaluating these circumstances, it is easy to reveal that the increase of minimum wage will have little effect on substantially reducing poverty within America, as only 1% of those within the poverty line would see substantial change, and the largest beneficiaries of a minimum wage increase are not responsible for maintaining or supporting a household. This is supported by a review of Connecticut’s latest minimum raise increase by the Economics Policies Institute (n.d), which displayed that approximately 85% of those who benefited from the increase had no dependents, lived with relatives, or alone. This does not, however, preclude the minimum wage idea or its benefits, but fails to support the idea that a minimum wage increase alone will be responsible for diminishing poverty. However, what a moderate increase of the minimum wage does is support increased tax revenue at both the state and federal level, as low-income workers typically have little to no tax liability. This increased tax revenue could be redistributed to address poverty through government sponsored programs, in an attempt to further reduce the poverty levels with results driven from the minimum wage increase. At the same time, an increase of minimum wage would in some cases outweigh the benefits of utilizing government assistance or freeloading and increase demand for jobs, leading to higher productivity within firms based on the prevalence of a more diverse employment pool.
Effects on Inflation
The second point of contention in regards to an increased federal minimum wage and one widely used in response to the decreased poverty argument is that of inflation. This is based on the belief that firms will attempt to pass the cost to consumers or worse be forced to leave the market and lead to job loss. That is, if minimum wage rises the price of inputs (labor) to firms also rises, ultimately requiring them to raise prices that negates the minimum wage increase and leads to higher inflation.
This logic however, negates the fact that as wages increase, demand for products and services also increase. As discussed previously, due to the make-up of the largest demographic of beneficiaries to a change in policy, it is expected the majority of this supplemental income will make it back into the greater economy. Since the percentage of minimum wage employees makes up a disproportionately small demographic of the workforce, it can be safely assumed a moderate increase to the minimum wage, while still raising prices, will ultimately be offset by the increased economic activity. This is largely a result of the prevalence of Monopolistic Competition within the United States.
In a Competitive Market, it could be safely assumed that as price of inputs increase and the supply curve shifts to the left, a new equilibrium price will be established that is above the original. However, since Monopolistic competitors are price makers vice price takers, price is determined where marginal revenue equals marginal cost, or the point where the greatest profit is experienced. Since these firms are already operating above their average costs curve vice the minimum point, this allows firms to absorb some of the costs associated with the raising of the minimum wage vice it all being passed to consumers. This paired with the increase demand for goods and willingness for consumers to purchase, the slight increases to price or inflation would be largely offset proportionately to the wage increase.
These circumstances are further supported by MacDonald & Nilsson (2016), where they examined the increase in food prices in correlation with minimum wage increases. In their research, they concluded that minimum wage increases that are scheduled and occur over time have lower affects than those that are introduced abruptly causing firms to scramble to find solutions vice allowing them to evaluate the increased cost and determine the best course to address them. At the end of their research, they concluded that with each minimum wage increase of 10% food prices only increased approximately .36%, supporting the idea that inflation will be diminished proportionately by the minimum wage increase.
In reference to job loss, today’s low income workers are making approximately 25% less than their counterparts when minimum wage was at its peak, but productivity within the economy has almost doubles according to Cooper, Mischel, & Zipperer (2018). Their work further points out that despite inherent job loss associated with an increased wage, over 97% of the workforce would remain employed and be earning a higher wage, ultimately leading to increased consumer spending, government tax revenue, and firm revenue. Furthermore, evidence supports the fact that the increase may stabilize the job market, due to the high turnover rate within low-wage employment. With the decrease in turnover, while the supply curve for jobs and hours available will ultimately shift to the left due to more stability and increased cost, overall income with minimum wage increased to adjust for inflation will ultimately leave workers better off with an approximate 11% increase in income. With increases to income as well as increased opportunity for leisure, it is easy to see economic activity will increase.
Closing
In conclusion, there are various concerns to take into consideration when addressing an increased federal wage, with two of the most polarizing being inflation and poverty. While from an economic standpoint, there is credence to arguments on both sides, historical data appears to support that an increase of the federal wage may positively impact the economic landscape within America. When Politicians are evaluating how to approach this, it is imperative to look at the empirical data as well as both short-term and long-term economic implications, which seems to support small minimum wage increases over time to reach the desired outcome. Ultimately, it appears to be of benefit to society as a whole to increase federal minimum wage to a wage of approximately $11.87. This would place the minimum wage in line to its peak of 1968 and adjust for inflation.