The minimum wage debate is a major policy issue in the USA. For almost two decades, the topic has been a centerpiece of policy discussion and candidate campaigns.
During the last presidential cycle, all the mainstream candidates discussed raising it (Hillary, Bernie, and Trump). Bernie came in with a whopping $15 ideal, while Hillary was hovering around $10-12 (depending on the day). Trump stated he would like to see it increased, but by letting the states and counties handle it.
Now everyone knows what minimum wage is, but most don’t know the economic realities surrounding it.
Followed below are the pros and cons of increasing the minimum wage, along with a neutral section; and finally my own personal thoughts on the minimum wage debate at the bottom.
Minimum Wage Debate – Pros
Alleviate Stress on Low-Income Earners
By increasing the minimum wage, we reduce the stress on a select-group of low-income earners (those that receive minimum wage). This is the obvious benefit that is talked about most.
More people on the lower end get to receive more money, and thus have more money to spend on basic necessities.
However, this needs to take into account the effect on another group. The group of low-income earners that will lose their job because of the price increase.
So whereas the minimum wage will select the “lucky few” of those on the minimum wage spectrum that get to keep their jobs, it negatively affects the low-income “unlucky few” that lose their job because of the price increase.
With more money in their pockets, low-income earners will be able to spend more than before. This increases consumption, which raises GDP. Since GDP is raised, overall societal health is generally considered increasing.
But it also has another interesting effect. There is a thing in economics called the “multiplier effect“.
This means that GDP does not just increase because of the economic surplus of expenditures. It also increases further because of a multiplier.
For example: Low-income earner A gets an extra $100. She spends it on a book that cost $50. Then, the bookseller takes that $50 and spends some of it on a toaster. This continues on repeating down the line. This subsequently raises GDP further (multiplier) while also allowing the remainder of the money to be saved/invested (or also consumed).
So the consumption benefits of an increased minimum wage are clear. It definitely increases consumption (and under certain circumstances, savings).
Up to a certain point, when inflation/price increases are likely to occur as a result.
Less Social Welfare Impact
Since people would then receive more money, they may not be entitled to as many social benefits programs as before.
This has the possibility of offsetting some costs on government programs like food-stamps, housing benefits, and more.
Thus increasing the availability of cash for the government for other expenditures. One would hope to then be able to reduce taxes or increase societal welfare (but it is the government we are discussing after all).
Short-Term Decreased Turnover Rate
This simply means that fewer people will leave their jobs.
It has been proven in quite a few different studies that, given a price hike, most people are more likely to stay at their current job. Which subsequently would combat a high turnover rate industry and make it more profitable to continually invest in that industry’s employees.
However, as the economy adjusts to the increased minimum wage, the turnover rate will return to previous levels. So it’s only in the short term that this effect could happen, as long term the example is clear that the turnover rate returns, likely due to inflation.
Wages Would be Accounted For Inflation
The “minimum wage debate argument” that wages have not adjusted for inflation is true.
Wages have been remaining stagnant, or declining, for many decades. While inflation has steadily risen.
This simply means that while prices of things have increased, wages have not increased. This is problematic on many levels. As it makes each dollar that you earn not worth as much, but you’re earning the same amount of dollars.
By increasing the minimum wage, we would bring it closer to being accounted for by inflation.
The drawback, of course, is that if we raise the minimum wage, inflation is likely to go up. So even if we account for it currently, it will probably just increase. Thus rendering it pointless.
However, at least we could bring it closer to the inflation rate to make it better for the low-income earner to take the inflation-price hike.
Minimum Wage Debate – Cons
Now this is an obvious one. Increase the minimum wage, and many jobs will be lost as employers can’t afford the same numbers in their workforce.
As mentioned above, certain groups of low-income earners will thus lose their jobs and make them even poorer. So while some of the poor will see a better living standard, others will see an even worse living standard.
This wage-hike will also cause competition for these jobs to increase. Likely making it difficult to get into even entry-level positions.
As an example, the Congressional Budget Office estimated that a raise from $7.25 to $10.10 would result in the loss of half of a million (500,000) jobs in the US.
Fewer Hirings – Especially in Rural Areas
Rural areas would be the hardest hit by an overall federal minimum wage hike. As many times the cost of living is lower, so are the wages.
Thus, small businesses will not be able to survive the wage hike and will thus layoff employees.
Likewise, they will hire less. So fewer jobs that would be created if the wage stayed stagnant, will not be. This results in even fewer jobs available than the estimate above, and really hinders the rural individual’s ability to seek employment.
Increasing the minimum wage is easier for big cities where the CoL is higher, but in rural locations it is a harsh mistress. Even a Washington Post columnist Catherine Rampell wrote that it “would likely throw many, many people out of work“.
Increases the Incentive to Outsource
Because of the increased price of wages, many companies will seek out locations that enforce lower minimum wages.
This is already a big challenge, that I mentioned in my article “How Outsourcing, Immigration, and Trade Have Destroyed American Jobs“.
Duke University interviewed hundreds of CFOs who stated that increasing the minimum wage would cause 70 percent of respondents to outsource some of their operations.
Increased Prices of Goods/Services
To offset the costs of a higher minimum wage, many companies will also push that cost onto the consumer. This is generally considered as a topic of price inflation.
For these companies to ensure the same profitability, they will be forced to tackle the increased costs. Whether that comes with layoffs, lost jobs, hiring halts, outsourcing, or increasing their prices, depends on the company itself.
But usually, it’s a combination of them all.
Purdue University found that a $15 minimum wage would bump food prices up by 4.3 percent.
And remember, that is just food costs. All industries maintaining a workforce of minimum wage earners would be affected.
One source studied that if the minimum wage was increased to $15, it caused rental prices to increase by $173!
All this together means a huge chunk of the money that just got increased from a raise in the minimum wage, would just be going to offset the raising prices.
Difficulty For Upward Mobility
Seth Zimmerman, a professor of economics, stated: “minimum wage laws can lead to labor market rigidities that make it more difficult for people to move up the economic ladder. These rigidities can decrease relative mobility and… can decrease absolute upward mobility as well.”
Which in non-economic lingo simply means that it will potentially make it much more difficult to advance or get promoted in your career. Which makes sense from a financial standpoint.
If a business can’t support it’s minimum wage earners already, they sure won’t be jumping up and down to promote them and be forced to pay even more.
Other Cons Worth Mentioning
There are a few peculiar negatives to an increased minimum wage that often don’t take the front-and-center section of the conversation.
- Companies will give fewer hours to low-income employees
- Fewer benefits offered by companies because of the price-hike
- Reduction of full-time status to part-time status to save on benefit costs
- And high paid earners are likely to see suppressed wages or reduction of salary increases
But they are definitely things to keep in mind when determining your stance.
Minimum Wage Debate – Neutrals
More Taxable Income
Since more people will be earning more money; more income will be sent to the government. Obviously, in the form of payroll taxes.
This could be construed as a pro or a con in the minimum wage debate depending on your political stance toward government taxation.
Pro: Government has more money to spend on expenditures.
Con: Government has more money to spend on expenditures.
There is also inconclusive evidence to support this position. While income will definitely go up, what happens to those who lose their job and no longer pay any payroll tax at all? The people that become forcibly unemployed as a result? The people that use more social benefits as a result (versus those who get off the benefits)? Or the high-income earners that won’t see pay increases and thus contribute less in taxes in the coming months/years than they otherwise would have?
There would need to be a study done on if there is actually more money going to the government, including these (and other) factors.
So this one is definitely a neutral.
Increased Technological Advancement
The “robots will take our jobs” position.
As income goes up, employers will probably seek to invest more money into technologies that can replace them. This will render them able to not take the full brunt of the minimum wage increase, while also keeping productivity in line.
This could be a good thing or a negative thing, depending on your outlook.
Pro: Better technology, more innovation and likely more tech-related jobs.
Con: More people will lose their jobs as automated processes or machines can take them over. Thus, more unemployment and even poorer low-income earners.
So fewer jobs versus more technological advancement. Can be thrown in either direction in this debate.
So What’s My View on The Minimum Wage Debate?
This is my view exactly:
Graduated increases (every other year), to a reasonable level (not $15), directed per state, per city.
It is true that it is difficult to live on minimum wage currently. It is also true that it has not been adjusted for inflation.
The minimum wage should see some hike, but not like what politicians like to say. They just use easy catch-phrase slogans, and try to push a federal agenda.
Federal intervention in an economic reality such as minimum wage won’t fix anything. It will just cause more problems.
This is why it has to be by city, county, and state.
Increase it gradually (EX: .25cents a year or .50cents every other year) over the course of time to a set amount.
I can’t give you a set amount, because it should vary by living area.
Someone working minimum wage in low cost of living, rural Mississippi should not be making the same as a minimum wage earner in New York city.
That’s why it should be directed per state, per city.
Take any city or county, adjust for inflation and cost of living, find a reasonable amount to increase it by that it won’t hurt the jobs-economy, and do it gradually over the course of many years. Or even decades.
It has been shown by many studies that small increases don’t affect the market as badly. They have time to adjust and find cost-cutting measures or ways to increase productivity.
This is why I support this path to increasing the minimum wage, and no other.
Minimum Wage Debate – Infographic
Check out the infographic I made summarizing some key points. Feel free to share it where-ever, all I ask is if possible send a link back to this article if you do so.