The Realities of Increasing Minimum Wage

Why This is Important

The idea that minimum wage may be increased by federal law has become a hot topic of late. There are a lot of strong opinions out there about whether increasing the minimum wage is a good idea or not. Hundreds of studies have been conducted by both sides of the debate to prove their points. The problem with these studies is that there does not seem to be a consistant method. Whichever side does the study seems to be able to prove their point, even when it contradicts results of other tests. This can make the whole debate confusing. I am going to address some of the facts regarding minimum wage and how if affects the economy. I will be sharing some of my own thoughts on the subject as well but I want to focus mainly on the facts.

This topic is of particular interest to me because I am a human resource professional and major. However, since a change in the minimum wage will impact the economy as a whole, it is a topic that should be of interest to all of us. Now, I am not an economist and so I did some research in order to prepare for this article. In order to give credit where it is due, I will list some of the links to the articles I researched in the adjacent column. I am also going to hyperlink others so that you can see which facts came from which articles.

Source

Facts About Minimum Wage Increases

The current minimum wage is $7.25. About half of the workers earning this wage are teenagers, who live at home with parents, or second wage earners for whom it is a second source of income. The other half of employees making this wage are people who are raising families and struggling to get by. This, of course, is unfortunate and this is why minimum wage has become such a big deal. Many feel that the $7.25 minimum wage amount has not kept up with inflation and is putting families at a disadvantage when they enter into minimum wage jobs.

But does increasing the minimum wage really help these employees? Or are there better, more economic ways to solve this problem? There are two sides of this argument. Not to get political but, in general, liberal economists feel that increasing minimum wage is the only way to solve this problem. It will be an immediate fix and the studies may liberal economists have done show that there would be an overall positive effect on the economy. They feel that as minimum wage earners make more they would buy more and that this would boost business and allow companies to hire more workers, therefore decreasing unemployment. Conservative economists look at this a little differently. They point out the increasing minimum wage may actually increase unemployment, as well as the prices of goods. If this occurs it would, obviously, make our economy worse and we would be in this recession for an even longer period of time.

I have researched both sides of the argument. My findings are below.

Supply and Demand Chart

 As supply goes down, demand goes up, raising the price and vise versa.
As supply goes down, demand goes up, raising the price and vise versa. | Source

Based on what you know right now, Do you think we should raise minimum wage?

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Effects of Raising Minimum Wage

As a business major, one of the first subjects I studied was economics. I took a basic class but I taught a principle that is very important and that has been one of the central arguments in the minimum wage debate. That is the principle of supply and demand. If you are not familiar with this principle, don't worry. Supply and demand is a principle that says that if supply for a product increases, demand for that product will decrease and vice versa.

As an example, lets look back a couple years when there was a pumpkin shortage in the United States. There were not enough pumpkins to make pumpkin pie filling and for several months, grocery store selves were empty. Since there was not enough to go around, the demand for pumpkin pie filling when up. Since the demand was high and the supply was low, grocery stores raised their prices on this product. Now that there has been an increase in pumpkins, the supply of pumpkin pie filling has gone up. This has led to a decrease in the demand for these cans of goodness because, those who want some can easily obtain it. Since there is now more supply then demand, the price of pumpkin pie filling has decreased in order to meet the lower demand.

I bring this up because this principle applies not just to goods and services but to businesses and budgets as well. Companies, whether they are big or small, are in business to make money. They want to have an increase in profits every year, or at the very least, they want to break even. That is not so different from any of us as employees. We want the same thing for our household budgets. Well, 70% of a company's expenses go to employee pay and benefits. This means that if wages for employees increase, a company's demand for employees decreases. What does that mean for those making minimum wage? If the minimum wage is raised from its current amount of $7.25 to the proposed amount of $9-$10 an hour, some of these employees may lose their jobs.

Not only that but as minimum wage increases, there will also be an increase of new applicants looking for jobs. This will lead to two problems. The first is that there will not be enough jobs for all these applicants so unemployment will increase. The second problem is that some of these applicants may have more skills than those already employed. Companies may then cut their less skilled workforce in order to hire better skilled applicants. If this occurs then those workers that need the increase the most will be out of a job all together.

Even if companies keep there workers, as some economists suggest, they will still need to cut hours as the increased cost of minimum wage along with other laws effecting business costs will be high. This will be especially true for smaller companies who may have trouble staying afloat as it is (see the graph below showing increase costs for companies).

Another issue that goes along with supply and demand is that if companies have to increase payroll, they will also increase their prices to make up the difference. Studies have been done to show that prices could increase as much as 4% if minimum wage goes up to $10 an hour. Now 4% does not initially sound like a lot. However, normal inflation in the United States is usually around 3%. In that light, a 4% increase is actually pretty large. With this type of price increase, the increased minimum wage might not help employees as much as hoped because they could not buy as much with the money they are making

So the two biggest problems with raising minimum wage are a potential increase in unemployment and a decrease in buying power.These issues may make it more difficult for minimum wage earners to live, not less. I know what you are thinking, what are the alternatives?

This graph shows one of the consequences of minimum wage increases and other laws that affect business costs.
This graph shows one of the consequences of minimum wage increases and other laws that affect business costs. | Source

There are better ways

Since there is so much debate over minimum wage, many may not realize that there are other options available to help those who need more income. I will address the two most popular here.

One option is to eliminate minimum wage all together and institute a free market economy. Some reject this option, claiming if this happens, companies will under pay their employees. This would not likely be the case however. The principle of supply and demand would come into pay again. See, without minimum wage, employers would have to compete for the best workers using pay. Those companies who paid low wages would lose top workers to companies that offered higher rates. In order to retain their employees they would then have to raise their rates. Studies have also shown that there are big benefits for countries that do not have a minimum wage. The main benefit is that the unemployment rate is much lower. For example, in Switzerland, where is is no minimum wage, there is an average unemployment rate around 2%. In 2003 their unemployment rate reached a five year high of 3.9%. We in the United States have not seen unemployment rates that low since 1938, before minimum wage was first instituted. In fact our current unemployment rate is 6.2% which is the lowest we've seen in five years. Not very impressive for the land of opportunity. Eliminating minimum wage would also allow companies in different parts of the country to pay according to the cost of living which can vary greatly, even within the same state. There by making pay more fair overall.

Another alternative to raising the minimum wage would be to raise the earned-income tax credit. This is a credit, given at tax time to working families who are considered low income. One of the benefits of this tax credit is that those who want to receive it have to be employed so the unemployment rate would go down. Since it is a payment from the government, it would also allow low income families to have some of the extra income they need.


Source

In conclusion

The debates and studies on minimum wage are complicated. Both sides of the argument have very compelling arguments.

However, when we take a close look at the facts and at basic economics it is clear that raising minimum wage could do more harm than good. With any major decision it is important to look at all your options and then go with the one that is the best.

Increasing minimum wage is a good option but only for the short term, as shown in the facts I presented above. Our politicians need to study out options that will be good for the long term. Those are the things that will help low income families the most.

Some additional facts about minimum wage

  • About two thirds of minimum wage earners get a 10% increase in pay during their first year on the job. That may not sound like much as far as dollars and cents but percentage wise that is huge! The average American worker gets no more than a 3% increase every year, just enough to keep up with inflation. An other words, workers who start off at minimum wage do no stay there for long.
  • If minimum wage increases to $10.10 per hour by 2016, one million workers will lose their jobs due to lay offs and automation.

How much do you feel this information helps you understand the minimum wage debate?

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4 comments

RTalloni profile image

RTalloni 2 years ago from the short journey

Since these conclusions seem obvious, one has to ask what's really behind the rise in minimum wages. Thanks for putting this out there for discussion!


Katya Drake profile image

Katya Drake 2 years ago from Wisconsin Author

Your welcome RTalloni. Thank you so much for taking the time to read my Hub! Thanks for your great comment as well!

It is very true, with so many other options out there, you have to wonder; is the government just looking for a quick and easy fix, even though it's ineffective? Or is there something else going on?


PegCole17 profile image

PegCole17 2 years ago from Dallas, Texas

Some business philosophers say that minimum wage is the bottom rung of the ladder, only a stepping stone into gaining business experience for better jobs and opportunity. Unless you plan to stay in that job forever, perhaps some additional training or education is needed. With more skills and experience, comes the abilities to do more, thereby, earn more.

"You get paid not for the hour, but for the value you bring to the hour."

I can see from your profile that you subscribe to gaining more education in addition to your current responsibilities.


Katya Drake profile image

Katya Drake 2 years ago from Wisconsin Author

Thank you for your comments PegCole17. I do subscribe to gaining more education in addition to working in order to better one's station in life.

I like that you pointed out that minimum wage jobs are meant to be temporary. That is true too. I did not talk about it too much in this Hub but that is another danger to raising minimum wage. It can, if minimum wage is raised high enough, take away someone's ambition to do better. It also true that we get paid, or should get paid, for the value we bring to an hour of work, not for the hour itself.

Thank you again for your thoughts. They are very insightful!

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