A Federal Minimum Wage Increase — Harmful or Helpful?
For years there has been a contentious debate as to whether or not the United States should raise its minimum wage, and by how much. Those in favor of raising it cite: 1) the need to create a “living wage” for entry level workers; 2) an increase minimum wage would infuse additional money into the economy as those workers would spend the income; and 3) it would reduce the number of working people who require additional “social net” assistance. Those opposed cite: 1) undue burden on small businesses who could not afford the cost increase and thus would layoff workers; 2) the increased cost of labor could result in an increased cost of everything and thus muting the impact of the wage increase; 3) that the cost of living varies significantly across the country and one standard for both New York City and rural Montana is unworkable; 4) that private sector supply and demand would handle it and 5) companies would outsource to cut costs. Supporters and detractors of a national minimum wage tend to align more by their personal situational employment rather than any other factor. Polls indicate that lower-income Americans tend to support a higher minimum wage more than the wealthier Americans. Most workers lower on the job ladder support it, as most of the CFOs and Company owners oppose it as it would significantly raise company costs in the short term.
The primary driver behind the increased minimum wage movement is to provide everyone a “living wage,” or a wage at which self-sustainability isn’t an arduous task. A 2013 Oxfam poll shows that 66% of US workers earning less than $10 an hour are barely, if at all, able to afford their basic living expenses, and 50% are worried about affording basic household items like food and laundry detergent. Many workers are forced to consistently skip meals, medicine, or laundry since they are unable to afford household expenses at the end of the payment period.
The second benefit for the minimum wage increase is a corresponding decrease in welfare spending. As salaries increase, the number of people who require services like SNAP (formerly food stamps) decreases, the amount the welfare spending decreases. Studies conducted by the Economic Policy Institute indicate that 1.7 million Americans would be free of needing government assistance. The resulting savings would be around $7.6 billion a year on income-support programs licensed by the government. That study is based on raising the wage to $10.10. At $15, even more would be lifted out of this financial hardship, and more money could be diverted to other causes like healthcare or education.
The final basis upon which people support the minimum wage increase is that they believe it will inject more money into the economy as workers begin to spend more freely with more money. In a study conducted by the Economic Policy Institute, they found that raising the federal minimum wage from $7.25 to $10.10 would allocate “22.1 billion to the [general] economy and create about 85,000 new jobs over a three-year phase-in period.” Those supporting a minimum wage increase have several economic arguments and an overarching moral argument that it is the right thing to do for all citizens.
Those opposed have their own supportive facts as well, making the debate contentious. Specifically, the most prevalent issue is the negative impact the increase will have on small businesses or those with many employees. Naturally, since smaller businesses have labor as a higher percentage of total costs, they would be hit harder by a substantial increase in the federal minimum wage. Gallup polls report over 60% of small-business owners indicated that the raise in minimum wage would severely damage their business, both in terms of money reserve and hiring ability. Additionally, surveys of small business HR professionals claim that 38% of minimum wage employers would lay off workers should the minimum wage increase and that 54% would decrease hiring levels.
The second argument against the federally mandated minimum wage is that it will simply increase consumer costs concurrently. A 2013 study by the Chicago Fed Reserve shows that if minimum wage increases, fast food companies pass on almost 100% of their labor costs to consumers, and a 2015 Purdue study shows that raising the wage to 15$ would cause a cost increase of 4.3% and a product size reduction of 12% (the hamburger would have to be smaller).
The third argument against a national minimum wage augmentation is a differentiation in the cost of living between different areas of the US. For example, in Los Angeles, the $14.25 minimum wage is about 53% of the median LA salary. However, in Florida, the $8.46 minimum wage is still about 51% of the median Floridian salary. The cost of living differs dramatically among areas of the US. Accordingly, many experts suggest changing the one-size-fits-all minimum wage to a series of regional minimum wages, which would allow for constant moderation and change in a more controlled setting. In fact, this system has been adopted in the Bay Area, with cities like Sonoma using a minimum wage of less than $12 but cities like Mountain View, less than 50 miles away, using a minimum wage of over $16.
The fourth reason for opposition is the private sector and supply chain will embark on this slow change themselves. As unemployment is low, companies will have to pay entry level workers more to attract and retain them. Competition is how most companies have increased their wages over the decades. Even now, in the time of the coronavirus, Target has increased its wages to $15 per hour, and, feeling pressured, Walmart followed suit and raised their minimum wage to $12 per hour.
The final problem at hand is substantial outsourcing. According to the Statistic Brain Research Institute, as much as 44% of companies that outsourced in 2015 did it to control costs. Since a higher minimum wage inevitably increases hiring costs, groups against the minimum wage cite this study as an indicator of inevitable job loss. Similarly, a 2014 study by Campbell Harvey, PhD, and J. Paul Sticht shows that 70% of CFOs would increase contracting, outsourcing or moving their entire production lines outside of the US should the minimum wage be raised to $15. There has been a distinct lack of studies to the contrary, and empirically, outsourcing has drastically increased as a result of a higher minimum wage. Anti-minimum wage experts point out how in countries that raise the minimum wage just 10% or 15%, there is a noticeable increase in outsourcing, but since the proposed American change is a 39% increase, many job experts are worried.
Thus, there clearly are valid arguments supporting both points of view. In that sense, at any point in time or geographical location, some of these arguments will have greater weight than others. But it is important policymakers should understand and weigh all implications of the increase.
