To raise or not to raise the federal standard for minimum wage, that is the question that economists have been debating for years. The current minimum wage set by the Federal Government is $7.25 per hour. Depending on which states, city or county an employee lives in, the minimum wage may be higher. Based on the points of Cost of Production, Marginal Revenue Cost, Marginal Resource Cost, Poverty, and Spillover Wages I will prove that the federal minimum wage of $7.25 per hour should not be raised.
The costs of production for a firm refers to the costs they incur when manufacturing a good or providing a service. Production costs can include raw materials, supplies, labor and fixed costs, such as rent, electricity, insurance, and advertising. The cost of production is the starting point to a business setting their prices. With increased production costs, there is no real winner. If minimum wage is raised, the cost of production will also increase which will in return cut into the business’ profits. There are a few ways that a business can keep the minimum wage from cutting into their profits. One way for the business to help with rising production costs due to increased minimum wages is for them to lay off employees. If the cost of hiring an employee increases, but the marginal revenue product does not change, then the business will have to lay off employees. Laying off employees will lower their production costs and consumers will not have to pay higher prices. A business must optimize their labor by hiring the numbers of workers until the marginal revenue product equals marginal resource cost. The marginal resource cost is the additional cost incurred as a result of utilizing one more unit of a variable resource, such as labor. The marginal revenue product is the additional revenue generated as a result of utilizing one more unit of a variable resource, such as labor. Basically, if an employee is making minimum wage of $7.25 per hour, his or her production per hour must make an additional $7.25 per hour of revenue. As the marginal resource cost or wage per hour increases, the quantity of resources (employees) decreases. The main issue with less employees is the production of the product will also decrease, lowering supply. Another way for a business to help with rising minimum wages is to increase prices to the consumers for their good or service. When the price for a product or service increases, the quantity demanded decreases but the supply increases causing a surplus. In order to bring that price back to the equilibrium, the business must decrease their price and lay off employees. The last way for a business to offset increased production costs or minimum wage increases is to decrease benefits provided to those employees or lower their working hours, all while keeping up with the same rate of production. If the employees are required to keep up with the same rate of production, it could result in a substandard product. If minimum wage were to increase, consumers, business owners and the lower wage earners would be the ones to lose.
On June 24, 2009, minimum wage was increased by the last of the three .70 per hour that was directed by the Fair Minimum Wage Act of 2007. The first .70 per hour increased occurred on July 24, 2007 from $5.15 per hour. The second .70 per hour occurred one year later on July 24, 2008 and with the last .70 per hour going into effect on July 24, 2009. The government states that anyone making an income below their poverty threshold is considered in poverty. In 2017, according to the United States Census Bureau, a family of four including two children under the age of eighteen are considered in poverty if the family makes less than $24,858 per year. Many supporters of the minimum wage increase believe increasing the minimum wage will be beneficial to those who are below the poverty line. According to Formby, Bishop and Kim “many low-income families do not contain a low-wage worker.” Because these low-income family do not contain a low-wage worker, more than 85% of these families did not see any benefit from the $2.10 increase that occurred between 2007 and 2009. Formby, Bishop and Kim presented that if an expansion in the Earned Income Tax Credit (EITC) or an increase in the Federal Insurance Contributions Act (FICA) rebate would be better alternatives than a minimum wage increase. These authors stated that the EITC and FICA would put more money into the wallets of those who need it most. They proved that 1.95 million people living below the poverty level would be taken out of poverty should an EITC expansion transpire. Formby, Bishop and Kim also proved that “2.5 times more Americans would escape poverty with an EITC expansion than with the FMWA.” In 2006, the poverty rate was at 12.3%, shortly after in 2007 the first of the minimum wage increases occurred and the poverty rate increased by .2% to 12.5%. The following year, 2008, the poverty rate increased .7% to 13.2% and the minimum wage increased another .70 per hour. In 2009, when the last of the .70 per hour minimum wage increases occurred the poverty rate rose again but by 1.1% to 14.3%. The same occurred in the early 1990’s when the poverty rate was at 13.5% and in 1991 the poverty level increased to 14.2% with an increase in the minimum wage being .45 per hour. These facts alone prove that a minimum wage increase does not effectively pull households out of poverty. Many people that live in poverty do not have a job, therefore a minimum wage increase does not benefit them. There are many minimum wage earners, such as teenagers, that do not live with families under the poverty level. Most of the time, minimum wage earners have the least amount of experience, therefore raising the minimum wage will reduce the demand for this type of labor. Economists, Joseph Sabia and Robert Nielsen, looked at different methods of sufferings. They wanted to know if the wage earner had issues paying for housing or medical bills, have they missed a rent payment or not able to fix their home, did they go without medical insurance and not able to go to the doctor, or could they put food on the table. Based on Sabia and Nielsen’s findings they found no substantial proof that an increase in minimum wage reduced the stresses of a low-income family paying for housing, medical or food. They also found that over 54% of those who are poor or undereducated are between 16 and 64 years old and they do not work, which means that only about 46% of the poor are working. Also, those that have missed a housing payment, about the same rate of 54% of those do not have employment.
There are no winners when it comes to minimum wage increases, it can be expensive for both the employer and the employee. Businesses will have employees that are earning minimum wage and slightly above minimum wage. For instance, if an employer has two employees, one is making $7.25 per hour, while the second is earning $7.75 per hour because he/she has been employed longer and received a yearly raise. If an employer is mandated by the government to increase the employee’s minimum wage earnings by .70 per hour that will put them at $7.95 per hour, which would be higher than the employee with seniority. The employer will be forced to increase the senior employee’s wage by .70 per hour as well to $8.45 per hour. This is considered a spillover wage.
The question does arise for the qualifications of those that state they believe that minimum wage should be increased. The articles used for this paper, state reasons why minimum wage should not be increased, as the ones that it hurts are the employers and the consumers. The low-wage earners are not being hurt by receiving a higher wage, they see no difference, their status quo remains the same. Based on the article written by the Employment Policies Institute, those that advocate for higher minimum wage reference 15 well-known economists as well as an additional 650 that agree with those well-known economists. The EPI looked further into the list of 650 economists revealed that about 60 percent of those economists in agreement do not specialize in labor economics and some do not even hold the job title of an economist.