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The Minimum Wage Controversy

As wage growth remains stagnant across much of the wealthy, industrialized world there has been a renewed movement to attack inequality by raising the minimum hourly wage rate. This suggestion has been particularly prominent in the United States, where both of Hillary Clinton’s major primary competitors support more than the doubling the federal minimum wage to $15 an hour. Many major cities across the United States are in the process of raising their respective minimum wages to this threshold, including Seattle, Los Angeles, San Francisco, and recently New York. Despite the growing political popularity of minimum wage hikes, the economic implications remain unclear. This is partially due to uncertainty in why wages aren’t rising naturally and partially due to a lack of evidence on the implications of such a large increase in minimum mandated wages.

The United States is not alone in questioning the stagnant state of wages. As nations across the rich world wonder why average pay is not rising along with economic recovery. For the past several years many economists speculated this was due to slack in the labor market, as unemployment figures were still reeling from the Great Recession. Another possible reason unique to the U.S. could be rising medical costs and thus stagnant wages as firms increase insurance payments. In parts of Europe unemployment statistics may hold the answers, as youth unemployment in places like Spain remain above 49%. Yet in the U.S. unemployment has fallen to a seven year low. Republican presidential nominee Jeb Bush has suggested that perhaps there are too many Americans in part-time work – though he phrased it slightly more aggressively – and because of this we have not seen wages rise substantially for quite some time.

The argument most commonly presented against raising the minimum wage, or having a minimum wage at all, is that it distorts the labor market and can lead to unemployment. If it costs more to hire each worker firms may simply hire fewer workers or pass the costs on to consumers in the form of higher prices. Both of these problems tend to be regressive as poorer individuals are far more likely to work in low-skill jobs that pay minimum wage as well as to frequent such establishments as consumers. On top of simply hiring fewer workers, the argument goes, that some firms may even lay off people simply to replace them with machines that can not go on strike for higher wages or more benefits. Grocery store clerks are all too aware of the danger automated checkouts pose to their jobs, and as technological innovation continues more and more low skill jobs may disappear. For the workers occupying these positions it can be often be difficult to find a new job.

At the center of the argument in favor of higher minimum wages is a study carried out by Card & Krueger (1992) in which they analyzed the effects of a minimum wage hike in New Jersey with bordering Pennsylvania. They found that despite the minimum wage increase, restaurants on New Jersey’s side of the border actually saw increased employment figures. Supporters of higher wages also argue that increased pay can improve worker morale, thus boosting productivity and reducing worker turnover, which can save firms money on recruitment and training. Advocates also argue that higher wages will save the government money in the form of welfare benefits, New York state alone spends $700 million a year in public assistance for fast food workers. Furthermore, workers are thought to spend a large portion of their new salary instead of save it, supposedly boosting local economies. The evidence for many of these points is unsubstantial, but intuitively these arguments make sense.

In addition, there is a moral argument to be made in this debate. Advocates of the $15 minimum wage say that all workers deserve certain standard of living, and on the current federal minimum wage of $7.25 this is not possible in most of the country. Others counter by suggesting that low-skill jobs such as fry-cook are not meant to be lifelong careers, and that it is simply unfair for a cashier to demand an annual income greater than that of many nurses, bakers, bank tellers, taxi drivers, or farm workers.

If the true goal is to raise the standard of living for the poorest in our societies, as should be the aim when we talk about rising income inequality it seems to me that a middle road should be taken. It is true that economists know little about the long-term impacts of a wage increase as drastic as that proposed in the United States, and because of this lack of knowledge it may cause trouble for the economy, particularly for the same poor workers in low-skilled jobs it is trying to assist. That being said, evidence from around the world seems to suggest that incremental increases in the minimum wage have little to no negative impact on the economy. Thus perhaps the best approach would be combining a gradual increase in minimum wage attached to inflation with policies designed to grow the economy more broadly. This is a more time-tested method of raising people from poverty.

Image License: Some rights reserved by Annette Bernhardt

About Michael Swistara

Michael graduated from McGill University in 2015 with a double major in political science and economics, and currently attends Columbia University where he is pursuing a master's degree. As former Editor-in-Chief of the Political Bouillon, Michael continues to occasionally contribute articles on his favorite topics, including American politics, economic policy, and foreign affairs.

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