Economic Impacts of Increasing Minimum Wage
The US Federal Government has proposed that the minimum wage be increased from $ 7.25 to $ 10.10 per hour. However, economic analysts differ in opinion about the potential economic impacts of this proposal. The paper analyses various opinions presented in The Wall Street Journal on the effects of raising the minimum wage.
Lee, Pallet, and Morath cite a Congressional Budget Office report, which estimated that a wage increase by $ 2.85 from the current hourly rate of $ 7.25 would result in the elimination of around 500,000 jobs by the year 2016. These job cuts according to critics of the proposed minimum wage increase law will result from the limited number of workers that small businesses will be able to employ and the inexperienced or unskilled labor force that will be locked out of employment as employers will be hesitant to pay them such high wages compared to their level of experience. A San Diego State University economic analyst Joseph Sabia holds a similar opinion. He posits that the effect of wage increases is dependent on the prevailing state of the national economy. If the overall unemployment is 5%, a 10% minimum wage increment would result in a 2.1% reduction in employment among low wage unskilled workers aged below 25 while at 8% overall unemployment rate, a 10% minimum wage increment results in a 4.2% increase in unemployment among that group of workers. Therefore, if the proposed 39% wage increase were implemented at the current rate of overall unemployment, it would result in a 16% unemployment rise among low-wageworkers.
In another article, however, Morath quotes economic analyst John Schmitt who disputes the argument that raising the minimum wage reduces employment among the unskilled labor force. In contrast, he argues that the cost-effectiveness of the increased minimum wage to businesses is negligible in relation to the average size of these businesses. Moreover, in case the wage increase overwhelms businesses, they can reduce the costs by reducing the number of hours worked per employee, reducing the wages of highly paid skilled workers, training and equipping unskilled workers with skills so that their productivity is increased and deservedly earn the raised minimum wage or alternatively, accept low-profit margin in the short run with hopes that it will increase in future.
The positive impact of the wage increase law according to the Congressional Budget Offices report is that it is expected to increase the earnings of around 900,000 Americans and raise them from poverty. Nineteen percent of the wage increase is expected to benefit low-income families living under the poverty line and boost their earnings by a total of $ 31 billion while 30% of the increase will benefit middle and high-income earners. A George Town University professor Adriana Kugler estimates that the numbers that could be saved from poverty by the wage increase could be as high as 2 million Americans. He further argues that a wage increase would reduce the gap between the poor and the rich and end inequality.
Business owners too would benefit from the wage increases. According to Lee, Pallet, and Morath, business owners predict that raising the minimum wage would increase consumers’ income hence they will spend more to the benefit of businesses. This is likely to bring huge benefits to the overall economy, as low-income earners tend to spend a large proportion of their income on consumer goods such as food and clothing. Thus increased consumer expenditure being a determinant of GDP would benefit the economy at large. The increased demand for consumer goods will in turn cause expansion of businesses in this industry for example supermarkets, which will require additional labor force, therefore, creating more employment opportunities, especially for the unskilled labor force. The negative effect of increased consumer income and expenditure though will be increased inflation.
Increased minimum wage according to Numerk however does not necessarily alleviate poverty. He argues that there is no evidence that an increased minimum wage benefits the poor. This argument can be supported by the fact there is a weak relationship between being a minimum wage earner and being from a poor family. Low-wage earners are mostly young adults and teenagers from middle-income families. Most members of low-income poor families are not employed at all and therefore do not benefit from minimum wage increases. Research data indicates that 34% of minimum wage earners come from families whose average incomes are three times above the poverty line and just 17% of them come from poor families. Additionally, during employee layoff, which is often triggered by minimum wage increases, employers prefer to keep young productive workers who mostly come from middle-income families and retrench older unproductive workers who are still paid minimum. These older workers mostly come from poor families. Therefore, the unemployment effect of wage increase adversely affects adult breadwinners from poor families. Minimum wage increase thus heightens poverty rather than reducing it.
Economic analysts are divided in opinion on the economic impacts of increasing minimum wage. The main motive of the government in increasing the minimum wage is to reduce poverty among low-wage earners. However, some economists argue that it will benefit high-income earners than poor citizens, thus, it will fail in achieving this goal. Critics further argue that the minimum wage increase will increase unemployment within the unskilled labor force though proponents are optimistic that it will contribute to increased consumer demand and business expansion, which will create more employment opportunities.
Morath, Eric “Should the Minimum Wage Be Raised? Economists Weigh In” 30 January 2014. Web. 24 March 2014.
Morath, Eric, Palleta Damian, Lee Carol E. “Wage-Rise Report Sees Fewer Jobs, Less Poverty” The Wall Street Journal. 20 February 2014. Web. 24 March 2014.
Numerk, David “Delay the Minimum-Wage Hike” The Wall Street Journal. 12 June 2009. Web. 24 March 2014.