Running head: RAISING THE MINIMUM WAGE: THE ECONOMIC IMPLICATIONS Raising the Minimum Wage: The Economic

Implications Introduction: The debate over whether or not to raise the minimum wage has been a long-


standing, contentious issue in recent decades and especially now, given the country¶s current economic climate during the recession which we are currently still in at the moment. Supporters of a minimum wage increase feel that doing so will help the working poor to be more financially independent and spend more money, which in turn helps businesses, and so on. On the other hand, there are those who feel that such an increase, while helping low-income individuals, will make it harder for companies and businesses to survive, due to the fact that owners may have to raise wages and/or the prices of their products in order to make a profit, which could cause them to eventually have to close, with a ³trickledown´ affect to the rest of the economy. In this paper, both sides of this issue will be explored. The U.S. minimum wage as of 2011: Currently, the federal minimum wage is set at $7.25 per hour, which is the most recent increase as of July 2009, the last of the mandated increases set by the Fair Minimum Wage act of 2007. Until Congress passes more legislation concerning future increases, there are no more scheduled increases as of yet. According to the Wage and Hour Division (WHD) of the United States Department of Labor (DOL) there are about twenty states that have minimum wage rates that are set higher than the federal rate. Michigan, which has a minimum wage rate of $7.40 an hour, is one of them. Minimum wage rates go as low as $5.15/hr. in Wyoming (one of four states with a minimum wage rate below the federal rate) up to as high as $8.67 per hour in Washington. In addition, there are four states (Louisiana, Mississippi, Alabama, Tennessee and South Carolina) have no state minimum wage law, which is surprising considering that the South is the poorest region of the country, with the highest poverty rates. History of the minimum wage: In their book Minimum Wages, economists David Neumark and William L. Wascher state that the minimum wage originated out of a desire to control the spread of



sweat shops in the manufacturing industry, where it¶s common for employees to be paid substandard wages that don¶t come even close to covering their standard of living. It was believed that by instituting a minimum wage requirement, sweatshop owners would no longer have an unfair bargaining advantage over their employees, and would have to pay them more fairly. Eventually, the emphasis on the minimum wage shifted to helping low-income individuals and families become more self-sufficient. The United States passed its first federal minimum wage law in 1938 at $0.25/hr. with the minimum wage increasing at regular intervals ever since, bringing it up to its current federal rate of $7.25/hr. The graph below, created by researchers from Oregon State University, is a visual representation of minimum wage increases over the years. The United States is not the only country with a minimum wage law-there is now legislation covering it in more than 90% of the countries around the world. In fact, New Zealand was the very first country to enact minimum wage legislation way back in 1894, with other countries eventually following suit. The red squares represent the actual value of the minimum wage (in 2010 dollars) for years that Congress did not raise the minimum wage to keep up with inflation.

Advantages of raising the minimum wage: One benefit of doing so is that it does help poor families achieve a higher standard of living, and ³while an increase of a few thousand dollars per year will rarely by itself lift a person or a family out of poverty, it does ease the struggle to pay for groceries



or child care or rent, and it adds meaning and dignity to labor´ (Haussamen, 2011). An increase would also benefit the larger community as well. When low income/low wage workers earn more, they have more disposable income to spend at the various businesses in their local area, which in turns allows business owners to spend more money to purchase products/hire more employees for their businesses, and so on. In addition, with such an increase, businesses would be better off, with more productive employees due to ´reduced absenteeism, less turnover, and better morale among employees, as well as reduced recruiting and training costs for employers, all of which contribute to higher productivity´ (Haussamen, 2011). Raising the minimum wage also helps taxpayers, since there is less reliance on government assistance programs, which only adds to the nation¶s debt. Contrary to what those against raising the minimum wage believe, doing so would not reduce jobs as many fear it would, which is the primary objection for those who oppose a minimum wage hike. In fact, according to a study co-authored by University of California Berkeley economics professor Michael Reich, states that have minimum wage rates above the federal rate don¶t show any significant change in economic growth compared to other states (as of 2005) as the following graph indicates.



Disadvantages of raising the minimum wage: The main objection that opponents have to this is that employment will be reduced, due to businesses having to cut the hours of their employees in order to stay profitable, not to mention having to raise the prices of their products in order to stay out of the red, which would be especially true for places such as retail stores and restaurants, which employ the vast majority of minimum-wage workers. That doesn¶t sound completely implausible, for when these businesses face extra costs they have to naturally trim expenses somewhere, right? In the case of raising prices, doing so may cause price inflation as businesses try to compensate by raising the prices of the goods being sold, which could potentially be disastrous considering the state of the U.S. economy today, which is still in the midst of a recession. A third option for businesses has been ³turning to automation or reducing service to their customers. Think this is unlikely? Just look at the proliferation of ATMs and self-checkout lanes at grocery stores. McDonald's, one of the most reliable sources of entry level job opportunities, is already experimenting with fully automated self-serve kiosks instead of cashiers. These new technologies, designed to reduce labor costs, eliminate jobs in the process´ (Garthwaite, 2005). Another drastic step businesses have taken is pushing the lowest-earning, lowest-skilled working adults out of jobs altogether, and ³these low-skilled workers are displaced by wealthy teens who did not even participate in the labor force at the lower minimum wage. While there is nothing wrong with wealthy teens entering the labor market, one must question the efficacy and equity of a policy that takes jobs from current low-skilled employees and gives them to wealthy teens with marginal labor force attachment´ (Arcidiacano and Ahn, 2004). These teenagers ³require less training and are an attractive hire for employers seeking to get the most out of their dramatically higher payroll costs´ (Guthwaite, 2005).



Also, a minimum wage increase, in and of itself, is not enough to get a family above the poverty level. In fact, ³most minimum wage workers live in families with incomes well above the poverty level. And over half of those who do work in minimum wage jobs do so voluntarily, on a part-time basis´ (Wilson, 1998). So if there was a sole breadwinner in the family and they were making only minimum wage, an increase of 0.50 or a $1.00 would not be enough to significantly improve their family¶s standard of living. One more reason why raising the minimum wage may not be in our best interest is that such increases could lead to more and more teenagers focusing less on their education and more on working, since ³When the minimum wage rises, it increases the incomes of teenagers with minimum-wage jobs, making entering the workforce more attractive. This, in turn, can be expected to cause some students to spend less time in school and more time working. While the overall number of minimum-wage jobs might decrease, if employers prefer to hire teenagers to low-skilled adults, the number of teenagers enrolled in school would drop´ (Sherk, 2006). Conclusion: While there is nothing in the works in Congress to raise the federal minimum wage again at this time, it helps to be aware of the pros and cons of doing so, and what the economic implications may be as a result, particularly if living in a state where the minimum wage has continued to be raised well above the federal rate. Whether or not the minimum wage will continue to increase will remain to be seen, but how the economy reacts will be the best indicator of what happens from there.

Running head: RAISING THE MINIMUM WAGE: THE ECONOMIC IMPLICATIONS Bibliography 1. Neumark, D. & Wascher, W. (2008). Minimum Wages. Cambridge: MIT Press. 2. Reich, Michael, Lester, William T. and Dube, Arindrajitt. Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties. Web. November 2010.


Retrieved November 21, 2011 from 3. Oregon State University. Minimum Wage history. Web. November 9, 2011. Retrieved November 21, 2011 from 4. Acridiacono, Peter and Ahn, Tom. Minimum Wages and Job Search: What do Employment Effects Really Measure? Web. August 2004. Retrieved November 21, 2011 from 5. Wilson, Mark D. Increasing the Mandated Minimum Wage: Who Pays the Price? Web. March 5, 1998. Retrieved November 21, 2011 from 6. Wage and Hour Division, United States Department of Labor. Minimum Wage Laws in the States-January 1, 2011. Web. 2011. Retrieved November 21, 2011 from 7. Hausseman, Brock. The Benefits of Raising the Minimum Wage. Web. 2011. Retireved November 21, 2011 from 8. Garthwaite, Craig. Raising Minimum Wage Stands to Hurt Low-Income Workers. Web. February 18, 2005. Retrieved November 21, 2011 from



9. Sherk, James. Raising the Minimum Wage Hurts Vulnerable Workers¶ Prospects Without Reducing Poverty. July 25, 2006. Retrieved November 21, 2011 from

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