What happens when a higher minimum wage is enacted (raising a price floor on the price of labor)?

In economic studies the minimum wage is an example of a price floor. A price floor is the absolute minimum price at which a good or service can be sold.

The market equilibrium price is where the supply of a good or service meets the demand for it in the marketplace. The minimum wage price floor is enacted so that the suppliers (current or potential employees in this case) will not sell their labor below the designated price even if the demanders (employers) are willing to hire them for less.

In economic theory, a price floor creates a surplus in the market place because there is more supply than demand at the set price. This theory applies to the market for labor as well. However, this supply and demand model may not fully portray the dynamic nature of the labor market, leading to a debate on the implications of raising the minimum wage. No matter which side of the debate economists are increasing the minimum wage is complex and may vary by company and industry.

Pro arguments for increasing the minimum wage

Raising the minimum wage would increase economic activity and motivate job growth.

· Economists from the Federal Reserve Bank of Chicago predicted that a $1.75 rise in the federal minimum wage would increase aggregate household spending by $48 billion the following year, boosting GDP and leading to job growth.

Increasing the minimum wage would reduce poverty.

· A person working full time at the federal minimum wage of $7.25 per hour earns $15,080 in a year, which is 20% higher than the 2015 federal poverty level of $12,331 for a one-person household under 65 years of age but 8% below the 2015 federal poverty level of $16,337 for a single-parent family with a child under 18 years of age.

A higher minimum wage would reduce government welfare spending.

· If low-income workers earned more money, their dependence on, and eligibility for, government benefits would fall.

The minimum wage has not kept up with inflation.

· The federal minimum wage is not indexed for inflation, as a consequence its purchasing power has dropped considerably since its top in 1968.

Improvements in productivity and economic growth have outpaced increases in the minimum wage.

· According to a study by the Center for Economic and Policy Research (CEPR), the federal minimum wage would have been $21.72 per hour in 2012, instead of $7.25, if the minimum wage had kept pace with increases in productivity since 1968. The Economist stated in 2015 that “America as a whole is an outlier among advanced economies where GDP per person is $53,000, minimum wage around $12 an hour should be paid to workers.

Increasing the minimum wage would reduce income inequality.

· Among the 34 Organization for Economic Cooperation and Development (OECD) member countries, the United States has one of the highest levels of income inequality

Increasing the minimum wage would increase worker productivity and reduce employee turnover.

· Increases in wages are associated with increased productivity, according to many economists, including Janet Yellen, PhD, Chair of the Federal Reserve.

The current minimum wage is not high enough to allow people to afford everyday essentials.

· According to a 2013 poll by Oxfam America, 66% of US workers earning less than $10 an hour report that they “just meet” or “don’t even have enough to meet” their basic living expenses, and 50% say that they are frequently worried about affording basic necessities such as food.

Arguments against increasing the minimum wage

Increasing the minimum wage would force businesses to lay off employees and raise unemployment levels. The Congressional Budget Office projected that a minimum wage increase from $7.25 to $10.10 would result in a loss of 500,000 jobs.

Raising the minimum wage would increase poverty.

· A study from the Federal Reserve Bank of Cleveland found that although low-income workers see wage increases when the minimum wage is raised, “their hours and employment decline, and the combined effect of these changes is a decline in earned income… minimum wages increase the proportion of families that are poor or near-poor.”

A minimum wage increase would hurt businesses and force companies to close.

· 60% of small-business owners say that raising the minimum wage will “hurt most small-business owners,” according to a 2013 Gallup poll.

Raising the minimum wage would increase the price of consumer goods.

· A 2013 article by the Federal Reserve Bank of Chicago stated that if the minimum wage is increased, fast-food restaurants would pass on almost 100% of their increased labor costs on to consumers and that other firms may do the same.

Teenagers and young adults may be shut out of the workforce if the minimum wage is increased. Minimum wage workers are disproportionately young.

· According to the Pew Research Center, persons in the 16- to 24-year-group make up 50.4% of minimum wage earners, despite representing only 13.7% of the workforce as a whole.

Raising the minimum wage would disadvantage low-skilled workers.

· From an employer’s perspective, people with the lowest skill levels cannot justify higher wages.

Increasing the minimum wage reduces the likelihood of upward mobility.

· Don Boudreaux, Adjunct Scholar at the Cato Institute, explains, “the minimum wage cuts off the first step of the employment ladder, and it’s that first lowest paying rung that provides the skills and experience workers need to reach the next rung and to continue climbing their way to a better life.”

The free market should determine minimum wages, not the federal government.

· A survey by the Small Business Network found that 82% of small businesses agreed that “the government should not be setting wage rates.” market-determined wages result in more employment opportunities for unskilled workers, increased profits for companies, and lower prices for the consumer.

Conclusion

Whether the minimum wage is increased, or not companies are already using more robots and automated processes to replace service employees. Companies will continue to use automation to avoid hiring people in unskilled positions altogether.

Oxford University researchers stated in a 2013 study that “robots are already performing many simple service tasks such as vacuuming, mopping, lawn mowing, and gutter cleaning” and that “commercial service robots are now able to perform more complex tasks in food preparation, health care, commercial cleaning, and elderly care.” With this trend in mind economic theory related to minimum wage needs to be revisited in the 21st Century.