A Higher Minimum Wage: Not Actually a Bad Policy

Wage Pic Raising the minimum wage will do more good than harm. Income inequality is at historic highs, and the minimum wage is worth less now than 40 years ago—a typical earner makes less than poverty level. Economists split hairs over particulars, but on the whole, an increase will boost low-wage workers’ fortunes, without large negative effects on employment. A higher wage floor will put many hard-working Americans on better footing.

I started thinking about this issue a few weeks ago, when I stumbled on a street demonstration in my home city of St. Paul, MN (see the picture). It was the day after Black Friday and protesters had just marched through the parking lots of Walmart and Target. I was waiting for a bus. They were calling for a higher minimum wage. I decided to look into it.

The federal minimum wage is $7.25 per hour. Many localities set wages above this rate. Washington D.C. just approved upping theirs to $11.50. Sea Tac, a suburb of Seattle, now has a $15 wage floor. New York State, California, and New Jersey recently upped their minimums. Congress has raised the federal minimum wage 29 times since its inception in 1938 (at 25 cents!), most recently in 2007.

Earlier this year two Democrats introduced the Fair Minimum Wage Act in Congress. It aims to raise the minimum wage to $10.10 by 2015. President Obama supports the measure, but Republicans in Congress do not. In general, a large majority of Americans favor raising the minimum wage; businesses are split.

Two-thirds of minimum wage earners are adults, and one in four is raising children. Even with full-time hours, a minimum wage salary pays only $15,080 per year, one-third less than the poverty level. The current minimum wage is worth less now than in the 1960’s.

If intuition tells you that amount is not enough to live on, you’re right. Taxpayers pick up the slack. For example, half of all fast food employees receive some kind of public assistance, $7 billion in total per year.

An increase to $10.10 would affect many who make above the current minimum. The Economic Policy Institute, a left-leaning think tank, estimates that 17 million workers—about one fifth the hourly workforce—would receive pay increases with the new law.

Really smart economists are divided over the effects of an increased minimum wage. A higher wage floor increases incomes, which stimulates spending, and may even drive employment. But it may also force companies to decrease personnel to account for higher labor costs.

Many business leaders feel strongly that a wage floor will hurt workers. "Arbitrarily raising the cost of labor would increase, not reduce, the unemployment rate among young, less-skilled workers," Bruce Josten of the U.S. Chamber of Commerce said in a statement. James McNerney Jr., the CEO of Boeing, even hinted that higher labor costs could force companies to relocate, even though research suggests that most outsourced jobs are high-paying.

Microeconomics 101 teaches that as the price of labor rises, the demand for labor will decrease. No one really disagrees with this. However, studies have shown that in practice, an increase in the minimum wage improves the fortunes of low-wage workers without massive layoffs. Unlike other anti-poverty policies, this one adds nothing to the federal budget. It may even shift some of the burden back to private companies (remember that $7 billion for fast food workers?).

The United States is in a period of vast income inequality. Jared Bernstein of the non-partisan Center on Budget and Policy Priorities argues that the minimum wage “sets an important labor standard: the government will compensate for the sever lack of bargaining clout among our lowest-wage workers by setting a floor below which we won’t allow their wages to fall.”

Yes, we as a society need to have a broader conversation about our inequities, but as its name implies, a fair minimum wage should be the least we do for the most vulnerable in our society.

 

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