The discussion surrounding the minimum wage and the economic impact is has continues to be a complex issue with differing viewpoints and insights. Currently, there is a prominent presence of individuals arguing for an increase in the minimum wage, where as others find that a higher minimum wage has various negative outcomes on employment opportunities for low-wage workers. Based on basic economic theory, an increase in the minimum wage, which is higher than the competitive equilibrium wage, leads to a reduction in employment. This is due to the fact that firms will now choose to substitute higher paid, low-skilled labor with cheaper inputs. As well, a higher minimum wage will lead to higher costs for firms, which inevitably means lower demand for labor. Even though this is the basis of the minimum wage discussion, many economists find that this theory fails to hold. Currently, the average minimum wage is $7.25 per hour, but will be increased on January 1, 2018, to a rate of $10.25/hour. This paper will discuss the minimum wage in depth accompanied by the varying viewpoints surrounding the ongoing debate.
First, there are individuals who argue that an increase in the minimum wage will have unlimited benefits. According to the Economic Policy Institute, raising the minimum wage to $15 an hour would provide additional wages of $144 billion over the entire 8 year phase in period. Those that would be the most impacted by this would be women. Specifically, raising the minimum wage would be significant for workers of color since “ 40 percent of African Americans and […] 34 percent [of] Latinos would get a raise” (Economic Policy Institute). Some argue that a higher wage can lead to a shrinking wag gap and overall improved inequality in the labor market, specifically with women, minorities and lower class workers. Tax benefit programs, such as TANF, food stamps and the earned income tax credit, costs taxpayers more than $150 billion a year. With increased wages, workers would rely less heavily on these various programs that provide a large burden to taxpayers. A study done by Alan Stonecipher and Ben Wilcox supports the idea that there are no adverse employment effects due to a higher minimum wage. Stonecipher and Wilcox found that raising the minimum wage has no impact on job loss even though it raises costs for firms. Once a firm offers a higher wage, demand for consumption increases, as individuals now have an increased amount of disposable income to spend on consumer goods. This causes firms to hire more workers in order to keep up with the growing demand; therefore, increasing employment. A higher wage will also assists in attracting applicants while decreasing employee turnover and improving worker productivity. This is because a higher wage provides a greater incentive and opportunity cost to employees; therefore, they respond with lower quit rates and greater effort. This can ultimately help offset the increased cost to firms, by reducing hiring and training costs and increasing revenues. As well, Stonecipher and Wilcox found that when looking at the states where the minimum wage was increased over a one-year period, job growth has been higher than in the states that didn’t increase the minimum wage. This drove them to the conclusion that a higher minimum wage “does not result in job loss and there is some evidence that suggests employment levels rise quicker after the minimum wage is increased” (Stonecipher & Wilcox). The culmination of the above data sheds light on one side of the minimum wage debate, in which a minimum wage has a positive impact on employment, and doesn’t result in job loss. Those who support an increased minimum wage often compare the minimum wage over the years. When adjusted for inflation, the minimum wage has lost approximately 25 percent of its purchasing power. If one were to adequately adjust the current minimum wage for inflation, it would be below what it was decades ago. According to the Economic Progress Institute, if this was done, the minimum wage should be around a level of 11 dollars (Cooper). This raises the question of whether the minimum wage is below economically desirable levels, as it fails to take into account the rise in the cost of living, year after year. If the wage were raised, living standards in the labor market could be improved drastically. These poor living standards can be seen when examining poverty. At the current average minimum wage level of 7.25 per hour, an individual’s income fails to cross the federal poverty line. According to the Federal Reserve Bank of San Francisco, “a single working adult with two children earning the federal minimum wage of $7.25 and working full-time earns about $14,500 a year, well below the U.S. poverty threshold of $19,073 for a family of this size (Neumark). University of Massachusetts Amherst economist Arin Dube focuses on this issue by using minimum wage statistics to uncover that raising the minimum wage by approximately 10 percent would reduce the number of people in poverty by approximately 2.4 percent. His findings support the idea that an increased minimum wage brings about positive responses, specifically a decline in poverty among lower income members of society. Those who support the minimum wage find it to be a beneficial policy in support of the working poor. However, others may argue that the minimum wage is a less effective tool.
Many take an opposing stance in regards to the minimum wage. Recently, states have been continuously campaigning for a minimum wage increase to $15, known as the fight for 15. States such as Seattle, Washington along with others have succeeded in implementing this change in order to help lower income individuals. However, a recent study from the University of Washington revealed rather negative outcomes regarding the minimum wage increase in Seattle. Specifically, “Seattle’s minimum wage increase reduced the total hours worked by Seattle’s low-wage workforce by about 9 percent while also raising low-wage workers’ wages by only about 3 percent, implying that the costs of this wage hike outweighed its benefits for these workers.” (Ritholz). This study drives home the point that gradual increases in the minimum wage, such as what has been carried out in Seattle, have negative impacts on employment conditions. According the Time Magazine, the majority of minimum wage earners are younger individuals between the ages of 16 and 24 or are secondary earners in a household (Holzer). Therefore, the wage boost isn’t actually targeting poor households, but instead those who are working for supplemental income. Furthermore, when the minimum wage is raised drastically, many believe that large employment losses will occur, especially for those workers with lower skill sets, such as high school graduates and teenagers. Young workers will be the most negatively impacted by an increase in the minimum wage, as “almost half of minimum wage workers are under 25, 19 percent are teens” (Furchtgott-Roth). Currently, the teen unemployment rate is already at an increasingly high rate, around 13-14%, and this is even higher for African Americans and minorities. Therefore, those who need the jobs the most are the ones who are going to be the most impacted by an increase in the minimum wage. Once prospective firms are forced to compensate employees at a higher rate, they won’t find these workers skilled enough to merit a higher hourly wage. A greater minimum wage also pushes firms to search for, and ultimately find, ways to implement other forms of human capital. This includes turning to automation in order to save on variable costs. These higher costs also result in increased prices for goods and services, which could wipe out the increased purchasing power a higher wage has for an individual. Furthermore, economists believe what is known as the “ripple effect” could occur if the minimum wage was raised. This leads to other higher hourly wages being raised in order to maintain relatively even pay scales among workers. Rather than improving income equality, a stagnant wage gap will be formed. On the other hand, what could reduce the wage gap is known as “wage compression”, in which firms reduce or hold stagnant the wages of higher-wage employees in order to compensate for the higher minimum wage cost. Either way, it is clear, an increased wage will fail to solve the issue surrounding wage inequalities in the labor market. Often poverty is a topic discussed in conjunction with wage inequalities. According to The Federal Reserve Bank of San Francisco, raising the minimum wage is ineffective at benefiting poor families, because a large portion will end up being allocated to better off families (Neumark). For example, a teenager who works a minimum wage job may be supported by well off parents who earn high wages. A single mother who earns a minimum wage to take care of her kids will reap the same benefits as a household that fails to fall below the poverty line. The poverty issue is further complicated when a great majority of individuals fail to work time, or even work at all. This illustrates the clear allocation issue that arises from the minimum wage, and the minimal impact it will have on curing poverty among low-income individuals. In regards to wage increases, firms will respond to an increase in the minimum wage by choosing to reduce the amount of hours employees work, the number of employees hired, as well as the amount of money allocated to human capital through forms of training, education, etc. The combined effect of these brings about no real economic progress, especially when it comes to alleviating monetary stress among low-wage earners.
The final viewpoint in relation to the minimum wage, states that slight increases in the minimum wage rate has little to impact on employment. According to a study published by the Center for Economic and Policy research, Doucouliagos and Stanley conducted a meta study, where they examined studies published between 1972 and 2007, in which they measured the impact of minimum wage on teenage employment in the U.S. They found that the “most precise estimates were heavily clustered at or near zero employment effects” (Schmitt). From this, they concluded that minimum wage increases have an insignificant effect on employment. Another study was conducted by Dube, Lester, and Reich, in which they replicated Card and Krueger’s New Jersey/Pennsylvania 1994/2000 study. In their study they compared the employment differences among different U.S counties that had differing minimum wages. The findings from this study found that there is no effect on employment due to a minimum wage increase.
Those who support a minimum wage often state that it brings about increased employment, less employee turnover, increased income equality and lower poverty rates. However, the other side of the argument finds this to be false, as a higher minimum wage results in lower employment, increased prices of goods and services and no change in poverty rates. There’s even a third viewpoint, which supports the fact that the minimum wage has zero effect on overall employment. The minimum wage discussion seems to be one of never-ending empirical evidence from all sides, which will continue to occur as differing approaches, macroeconomic vs. microeconomic, and personal viewpoints keep both sides of the argument open to debate.