The Potential Impact of a $15 Minimum Wage
Introduction
The movement started in 2012 outside a McDonald’s in New York City with “several dozen protesters chanting: ‘Hey, hey, what do you say? We demand fair pay’” (Greenhouse 2012). The demand for a $15 per hour national minimum wage in 2012 seemed outlandish to politicians on both sides of the aisle, but since then, it has developed into a coherent movement (Fight for $15) with many states and politicians such as President Biden endorsing the increase. Despite its prevalence, the question remains: should we increase the national minimum wage to $15 per hour?
The Argument For
Central to any argument around raising the minimum wage is increased equality. The current federal minimum wage of $7.25 negatively affects people of color who make up a disproportionate share of workers who are severely underpaid. On average, African American and Latino workers are paid 10–15% less than their white counterparts with the same characteristics. By raising the minimum wage to $15 an hour, the racial wealth gap will decrease as Black and Latino workers will receive the largest benefits — about an additional $3,500 annually for a year-round worker (EPI 2021). This increase in wage will not only help families living paycheck to paycheck but help rebuild low-income communities.
Furthermore, raising the minimum wage may not affect employment numbers to the degree that some believe. This is due to the fact that “in big cities where wages (and living costs) are naturally higher, $15 won’t be a problem at all” (Smith 2012). Markets tend to be much more competitive in urban areas due to the proximity of similar brands. This drives up the cost of labor, so a change to $15 will not be a substantial increase from current wages. On the flip side, in smaller towns where wages and living costs are lower, the effect will not be as dramatic as some believe. In a recent study, Jose Azar et. al, found that “while increases in the minimum wage are found to significantly decrease employment of workers in low concentration markets, minimum wage-induced employment changes become less negative as labor concentration increases, and are even estimated to be positive in the most highly concentrated markets” (Azar 2019). In small towns, employers are powerful because there is very little available labor. These “highly concentrated markets” produce conditions that are not correlated to an increase in unemployment. In his study, Azar also “found that raising the minimum wage had the most positive effect in labor markets dominated by just a few large employers” (White 2020). In 2015, Seattle adopted the highest minimum wage in the nation at $15. Contrary to the belief of some economists, there were minimal negative effects on employment. Workers “saw a significant increase in their wages and only a small percentage decrease in their hours, leading to a healthy bump in overall pay” (Scheiber 2018). With Seattle as a case study for the potential effects of increasing the minimum wage, an argument can be made that increasing the minimum wage may not negatively impact employment worldwide and even actually positively impact it in some environments.
Some economists believe that raising the minimum wage will not only increase the quality of life for low-income workers, but will have no negative impact, and for a few, even a positive one. However, there are many opposed to President Biden’s proposed change.
The Argument Against
Those who oppose a minimum wage increase often cite its possible negative effect on employment. In 2019, the Congressional Budget Office estimated that 1.3 million workers would become jobless if the minimum wage was increased to $15 per hour (Swagel 2019). Even a nationwide change to $12 per hour would put an estimated 300,000 employees out of work. In a 2014 Express Employment Professionals survey, 38% of employers who paid their employees minimum wage said they would have to let some of their employees go to cover an increase to $10.10 per hour. 54% of the same group of employees said they would have to reduce their hiring efforts if the changes went into effect (Kast 2014). One can only assume that these percentages would be much higher for a proposed change to $15 per hour. Keynesian economic theory also demonstrates the impact of an increased minimum wage. A minimum wage is a form of a price floor as it forces employers to spend a certain amount on labor. If an increased minimum wage is passed, the cost of labor moves from Wc (market-clearing wage) to Wm (minimum wage). Moving to the x-axis, this drops the quantity of labor from Ec to Em which results in unemployment (Phelan 2019). This is because as the price of labor increases the supply of jobs will decrease as employers will be unable to pay past a certain level.
Therefore, many economists assume that raising the minimum wage would likely force many employers to lay off employees and spike unemployment levels.
An increased minimum wage also has a profound impact on businesses. When employers are forced to pay their employees higher salaries, they must increase the cost of their products or services. In a 2013 Chicago Fed Letter, Daniel Aaronson, vice president and director of microeconomic research, and Eric French, senior economist and research advisor, believe that “firms employing minimum wage workers or using intermediate inputs requiring minimum wage labor also pass close to 100% of the higher labor costs on to consumers in the form of higher prices” (Aaronson 2013). This increase in price will not only affect consumers but businesses as well as they will deal with lower consumption.
Conclusion
The debate over increasing the national minimum wage remains as contentious as ever. Despite the recent push for $15 per hour, economists and politicians remain divided on the impact of this potentially groundbreaking policy. With efforts to include a $15 minimum wage in the relief, we may soon see change.
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