There has been quite a lot of chatter recently concerning a raise in the minimum wage. Discussion has increased since President Obama’s State of the Union Address this past Tuesday, where he called for a raise in the minimum wage to $10.10 (the current national minimum wage is $7.25, although the number varies by state). The major issue with a wage hike is whether the consequences will be positive or negative for the economy.
The argument for raising the minimum wage centers on the idea that workers who earn the minimum wage will spend more money if the wage is increased. This is because they will need to spend more to cover basic necessities. By raising wages for low-earning workers, policy makers and economists who support the raise are hoping for a spike in consumer spending that will begin to crawl upwards as cash flows increase through businesses. In other words, companies will pay their workers more and, in turn, those workers will spend more.
There is also perceived benefit that such an increase will have a positive effect on a large number of employees. Paul Krugman, of the NY Times, had this to say, “Early this year the Economic Policy Institute estimated that an increase in the national minimum wage to $10.10 from its current $7.25 would benefit 30 million workers. Most would benefit directly, because they are currently earning less than $10.10 an hour, but others would benefit indirectly, because their pay is in effect pegged to the minimum — for example, fast-food store managers who are paid slightly (but only slightly) more than the workers they manage.”
Now that we have listed the supposed benefits of an increase, let us take a look at the potential negative side effects.
Before we get into the economics of the issue, there is something about minimum wage jobs to consider. Most of the positions earning minimum wages are not long-time positions. By this I mean that most people do not seek to remain in these positions for a long time. Of course, there are those that for certain reasons remain at these types of jobs. In some cases, these positions are a second or third job for individuals.However, the majority of minimum wage jobs are only stepping stones to higher paying jobs.
It is a widely accepted economic theory that, all else being equal, an increase in a minimum wage will decrease the demand for labor. It is basic supply and demand. If $7.25 is the current equilibrium point, where demand and supply intersect, than a wage floor above that point will leave a demand surplus. In other words, there will be more people looking for jobs than actual job positions. The logic behind this is also basic; higher wages mean higher costs for employers. In order to retain profits, firms will cut back on the number of positions available to offset the new increase in the cost of labor.
Of course, this is under “perfect” circumstances and the world we live in is far from perfect. For one thing, a surplus of job seekers is already a major issue facing this economy. Another factor that cannot be overlooked is how many companies are still struggling as there is poor consumer demand for goods and services. With this in mind, increasing the minimum wage has a high probability of weakening the economy even further.
Under current conditions, an increase in the minimum wage will reduce jobs. There will be those who benefit from the higher wages; those that keep their jobs. But if companies are having to pay their employees more, they will have to find some way to balance the new cost. The most common way is to increase prices of their goods and services. In effect, prices and unemployment will both increase. This then has a ripple effect through the economy that will negatively effect people who earn much more than the minimum wage.
An increase in the minimum wage is a noble idea, and one that can have positive effects on the economy. Increasing the minimum wage to keep up with inflation and standard of living adjustments should be undertaken every few years. However, the economy and marketplace has to already be in a strong enough position to support increased labor costs. With the US economy still struggling to gain real momentum, now is not the time to be increasing the minimum wage.
Sources for this article: