The Fate of the Federal Minimum Wage — We can’t keep doing what we’re doing. So now what?
By Preston Larson, Parker Lester, & Leo Masic
The mere utterance of the words “minimum” and “wage” conjures up images of teenaged fast-food fry-cooks flipping burgers to squeak by. Ever since FDR instituted the first minimum wage in the ’30s, economists, pundits, and the public have debated ad nauseum about its purpose. Should a minimum wage be enough for someone to live comfortably? Should it be increased? Should it even exist at all? Does it help or hurt the economy?
Minimum wage policy affects far more than just high schoolers in after-school jobs. It has profound impacts on diverse communities, including women, people of color, and essential workers. And it turns out that the way things are now is unsustainable. The good news is there’s a lot of promise in increasing the minimum wage: more lavish spending, improved employee retention, and a boost to upward mobility for folks in lower-income brackets.
Let’s take a deep dive into the issue: where we are, where we should go from here, and the nuance of it all.
Diagnosis
When the minimum wage was implemented in 1938 as part of the Fair Labor Standards Act, then–president Franklin D. Roosevelt proclaimed that the wage was meant to provide enough for “a decent living.” This marked the first time that the federal government had enshrined in law that work required at least some sort of monetary compensation. Since then, the minimum wage has jumped in lurches and leaps — 22 times, to be precise. The last time the federal wage was increased was in 2009, while the 50 states have determined their own minimum wages. Many states peg their minimum wage to the federal rate, while 29 others have gone beyond that: California’s rate, for example, is at $14 per hour.
Today’s $7.25 federal minimum wage falls far, far short of providing FDR’s promise of a decent living. Indeed, much of the discourse around the minimum wage has revolved around whether it should provide enough to meet a family’s basic needs: in other words, housing, food, and overall financial independence. In other words, should the minimum wage be a living wage? Considering a living wage in the US would come north of $16 per hour, the current rate falls short. But that’s considered just fine by those who don’t consider the minimum wage necessary to meet all of one’s basic needs.
Economists disagree on whether the minimum wage has helped or hurt the economy. In 1992, a survey of economists found that 79 percent believed the minimum wage increases unemployment among young and low-skilled workers. Yet, in 2014, over 600 economists penned a letter to Congress stating their support for an increased minimum wage, citing that 28 million workers would receive higher wages. These economists also indicated that recent evidence shows little to no adverse effect on unemployment rates.
These two contrasting examples epitomize the diversity of views that experts have just on what the minimum wage is (or isn’t) good for. Studies have shown both positive and negative outcomes of minimum wage increases, so there isn’t a clear consensus from economists even though the issue has been examined in depth for decades. At the end of the day, it’s pretty difficult to separate the effects of the minimum wage from everything else that affects employment — like recessions, technological advances, and changes in global trade. More recently, an examination of employment change in states that raised the minimum wage in the early 2010s shows that employment increased in all but one of them.
Regardless, the status quo impacts are clear: not only do full-time workers earning the minimum wage not earn a living wage, but they also actually fall below the poverty line for a family of two. To be sure, not many people are earning just $7.25 per hour: 1.9 percent of workers in the US earn minimum wage, down from 13 percent in 1979. However, there are much greater proportions of workers who fall between a minimum wage and a living wage. Furthermore, almost 90 percent of workers who would be affected by an increase in the minimum wage are older than 20 — dispelling a common misconception that most minimum wage earners are teenagers.
The current minimum wage exacerbates income inequality — precisely because it does not give poor folks enough to get by. This is especially pertinent in 2021: Congress has never let the federal minimum wage stay put for so long. Since the last rate increase in 2009, the purchasing power of the minimum wage has declined 17 percent. And, compared to 1968, minimum wage workers have 31 percent less purchasing power today.
The income inequality resulting from inadequate wages has real impacts in more than just financial realms. For instance, suicide is intertwined with financial difficulties like job loss, low incomes, or debt. It turns out that increasing the minimum wage by $1 decreased the suicide rate by around 4 percent among adults 18–64 years of age with a high school education or less. This is significant: life expectancy of the wealthiest 20 percent of Americans has increased since 1990, while life expectancy for the poorest 20 percent has declined in the same period. This shows raising the minimum wage may help equalize life expectancy between the poor and the rich.
Knowing that getting the minimum wage right (or not) carries profound implications for the economy, vulnerable and marginalized populations, and businesses big and small, where do we go from here?
Prescription
Given the destructive nature of a $7.25 minimum wage in the American economy for low-income earners, it is necessary to understand a minimum wage policy’s socioeconomic implications. Women, Black, and Hispanic Americans are disproportionately affected and bear the brunt of the low wages. The American economy was founded and built with slavery as a vital backbone for a significant geographic location of the country. In many ways, America has not shed the racist notions of the pre-Civil War economy. That is apparent in the low-paying jobs that high-minority communities are typically known for having, thus perpetuating the inability these people have to mobilize in the economy generally. In the current state of the economy, and specifically with a minimum wage of a mere $7.25 an hour, women and minorities have historically been shuffled to these underpaid jobs as their economic value has not been considered viable. Long-overdue policy shifts have not curbed social classes and biases derived from this lack of economic regeneration to accommodate a reasonable living wage for these disenfranchised demographics. However, in light of the new Biden administration, there have been recent attempts to stave off the growing economic inequalities.
The United States must pass current legislation elicited through the Raise the Wage Act of 2021 that would raise the wage to $15 an hour by 2025 to heal this immense economic inequality. From 2026 onward, the wage would increase yearly to keep consistent with monetary inflation so that prices for consumption in the market will not become unruly for low-income earners again. The federal tipped minimum wage, which jobs are predominantly held by women and minorities, would also see a bump that would reach the standard minimum wage by 2027. Approximately 21 percent of the US workforce would see lifted pay, and 59% of workers whose total family income is below the poverty line would see upward economic mobility. The gender and racial wage gaps would be shifted after years of perpetuation and slow inaction from policymakers.
Implementation of a $15 minimum wage would also allocate valuable economic opportunities to essential workers who have risked their health for the good of the American public during the COVID-19 pandemic. Researchers found that risk increased substantially in their roles as grocery store clerks, nurses, and post workers — pay remained stagnant. Ostensibly, in an entirely free performing market, these positions would have been compensated generously for their sacrifice through differential payment. Unfortunately, workers are restricted to low wages for their diligent work because of a substandard minimum wage and high competition for their roles as unemployment in the US soared. Sordid working conditions and an elastic job market have revealed to many of these essential workers that what their duties are and where they come from was irrelevant in that higher socioeconomic classes perceived them as expendable resources despite the imminent risk of infection of COVID-19.
Thankfully, stimulus checks from the CARES Act and other legislation flooded the bank accounts of many Americans. While temporary relief from poverty was viable for a brief period for these essential workers, the lack of economic mobility left them stunned as congress failed to pass supplemental assistance. A higher minimum wage would cut out the need for the federal government to stimulate the economy as the lower socioeconomic classes would already be recipients of the capital they require from the private sector through employment. The low minimum wage did not give these low-income workers the savings necessary to undergo months of unemployment or furlough during the crisis.
Indeed, a concern that stems from a policy that would raise the wage is who would ultimately foot the bill to implement this policy. The answer is complicated, and most eyes are on small businesses that would have to brunt the responsibility of paying their employees higher wages. However, research has shown that the increase in wages for minimum wage workers would lead to more consumption within the economy writ large. When lower-economic classes feel that they have the financial capability to spend, then they will. This leads to a regeneration of wealth and capital in the service industries that require financial help, thereby rejuvenating small businesses themselves.
Some believe that an increase in the minimum wage hurts small businesses, but research does show that reality is more nuanced. Many small businesses claim that the minimum wage will impact them adversely. What is found is that a substantial portion of workers in the service and retail industries have such high turnover rates that it costs a significant amount to recruit, onboard, and train new employees. These indirect costs of low-wage jobs misdirect capital that should be directed to investing in the employees that ideally should be hired for the positions that will employ workers long-term. In terms of business performance, high wages lead to less employee turnover compounded with better customer service, leading to higher sales and more substantial customer satisfaction. On its face, the wage increase seems daunting for small businesses; unfortunately, research surrounding the reality of its effects is largely unknown. However, pay increases in economic environments will offset the financial burdens set by paying to manage turnover.
The economic rejuvenation resulting from higher wages for lower-income families is vital for upward mobility. The money spent by these socioeconomic classes stays in the community and benefits the businesses that so desperately seek assistance from the federal government. Research finds that it is costly to be poor in our country. The poor buy cheaper cars that require more frequent maintenance, buy more inexpensive foods that will result in hospital visits and poorer health, and live in areas where they pay too much rent on homes that aren’t worth what they pay.
The figure above shows the split where hourly compensation begins to plateau and productivity (the means to pay employees wages generally) continues to rise. This explains the disparity in payment and the accrual of wealth for high-income earners. This stagnation has had a multiplicity of effects on low-income earners, from poor quality education to limited options for proper health care. Raising the minimum wage to $15 an hour would walk back these previously mentioned negative externalities that low-income earners face. The overall quality of life would be healthier as economic mobility would at long last become a possibility for these individuals.
It is immoral to place these burdens on these lower-socioeconomic classes and result in more difficult means of survival for these people and their families. Indeed, there is a moral imperative that those who make up the least wealthy classes have what they need to stay out of the perpetual cycle of poverty, especially in one of the most affluent countries in the world. It must be understood that through legislation like the Raise the Wage Act of 2021, the inequalities would be met with compensation and economic stability for hundreds of thousands of Americans.
Concession
The most common arguments against raising the minimum wage have to do with the number of jobs available to low-wage workers: as wages rise, employers choose to employ fewer workers. In an extensive literature review by David Neumark and William Wascher, they found, “In sum, we view the literature — when read broadly and critically — as largely solidifying the conventional view that minimum wages reduce employment among low-skilled workers”. This is a classical view and presents some of the most substantial opposition that the people making the littlest will have no job instead of a low-paying job. The below graphic shows how demand and wages correlate. W and L or wage and equilibrium employment are where the Supply and Demand curves meet in the middle.
Textbook analysis posits that any minimum wage increase will shift the equilibrium to the left (i.e. lmw and mw). This provides higher wages for the workers who keep their jobs but lessens overall positions in the market. There are two reasons for this, according to this article. “First, employers substitute away from the now more expensive labor and toward other inputs (such as capital). Second, because costs are higher with this new input mix, product prices rise, which further reduces labor demand. These two effects lead to lower employment — Lmw”. While much of the research supports the idea that the amount of low-wage jobs will decrease when the minimum wage increases, there is much disagreement about the extent of the drop. Most studies agree that the overall benefit to those making minimum wage exceeds the effect on job availability.
Another solid argument is in regards to companies pushing automation to replace former low-wage jobs. While the effect of this would not be immediate, automation could be sped up and push out a significant amount of the labor force years after a minimum wage standard is enacted. The hours available to current workers may have to be cut so that businesses can meet their budgets. This would result in a net loss for current workers working fewer hours for less pay overall. The cost of automation is high initially, so most small to midsize companies would not be able to shift quickly. Larger companies would likely be able to change as they have the capital to automate. Machine learning is burgeoning and, if perfected, could displace many low-skill workers. Studies show that automation has been a significant reason for growing inequality since the 1980s and could worsen, replacing more low-wage workers.
This argument falls somewhat flat as companies are already looking to automate as much as possible. While a higher minimum wage may push larger firms to increase automation, small and midsize firms would be slower to automate jobs. The effect would not be immediate and could create more skilled jobs in the process while still raising wages for those who keep their jobs.
Many say to let states decide minimum wage due to the different living standards in the United States. However, the federal minimum wage is meant to provide a base from which states can then exceed if they choose. The minimum wage has not kept up with inflation, and it has not changed since 2009. This base level of pay is not meeting the lowest earner’s needs. The Raise the Wage Act of 2021 would bring the minimum wage up gradually to $15 an hour and maintain the same rate as inflation, and it is not instantaneous by any means.
There are many arguments against a minimum wage: a high minimum wage standard could incentivize people and especially small businesses, to hire illegal immigrants for their labor needs. This already happens, with people making far below minimum wage and being paid in cash, but this could become more prevalent. Some argue that minimum wage jobs are meant primarily for young people and are not supposed to support a family. The truth is that only 1 in 5 are teenagers. Raising the minimum wage can lull people into staying at a dead-end job for too long, only to find themselves unmarketable. Someone can be getting along fine at $15 an hour, but then their circumstances change, and they find themselves stuck. This is a possibility but is dependent upon personal choices and cannot be managed with economics.
Conclusion
The minimum wage provides a certain quality of life for even those in unskilled jobs at the bottom of the socioeconomic ladder. It has stayed static since 2009, while the cost of living and housing prices have skyrocketed. This stark contrast shows the inequity of our current system and perpetuates the inequality against Women, Black, and Hispanic Americans. The COVID-19 pandemic has drawn much attention to the plight of the “essential worker” and shown the precarious and often desperate situation they are in. While many worry that any minimum wage hike will provide fewer jobs overall, as long as the overall benefit lifts those at the bottom, a modest drop in jobs available would be a net benefit to society. Some action must be taken to provide a better quality of life for those making just $7.25.
Could you live off that?
