MINIMUM WAGE

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Isabel Jurado-Blanco 1 Does Increasing Minimum Wage Help Workers? Isabel Jurado-Blanco Santa Fe College

Isabel Jurado-Blanco 2 Does Increasing Minimum Wage Help Workers? One of the most disputed arguments in America is whether the minimum wage should be increased to $15 per hour. According to the Labor Law Center, the average minimum wage for workers in America is $7.25 per hour. The legislature that is being considered suggests that the minimum wage be increasing as the years go by until it reaches $15 by 2025. Vast research has been done to understand whether increasing the minimum wage in America is the best choice for its citizens. However, before getting into the evidence let’s understand why and how America had its minimum wage established. According to the Legal Information Institute, the federal minimum wage was formulated by Congress in 1938 under the Fair Labor Standards Act (FLSA). It was originally set at $0.25 per hour and has been increased by Congress 22 times, most recently in 2009 as it went from $6.55 to $7.25 an hour as stated in the U.S. Department of Labor. The minimum wage was originally made to alleviate the post-depression economy and protect the laborers in the workforce. This hourly payment for labor was designed to make a minimum standard of living to care for the health and well-being of the workers and prevent people’s exploitation. However, as the monetary value drops with inflation, the minimum wage is said to not be enough to sustain the minimum standard living conditions of a person. Because of this, most people support a $15 federal minimum wage. The Pew Research Center conducted a study and surveyed 5,109 adults. They concluded that “about 62% of U.S. adults surveyed say they favor raising the federal minimum wage to $15 an hour, including 40% who strongly back the idea. 38% of adults, however, opposed the proposal. But what side of the coin is correct? Advocates of a higher minimum wage explain that the current national minimum wage of $7.25 per hour is too low for anyone to live on and therefore should be increased to $15 per hour.

Isabel Jurado-Blanco 3 These people believe that the increased minimum wage will aid in the creation of jobs and the growth of the economy. These proponents also reason that the declining value of the minimum wage is one of the primary causes of wage inequality between low and middle-income workers. Also, they explain that increasing the minimum wage would increase worker productivity. The opponents of the raise suggest that if the minimum wage is increased, businesses will not be able to afford to pay their workers more, will be forced to close, lay off the workers, and reduce hiring. Moreover, the increases have shown that it will become more difficult for low- skilled workers with little to no experience to find a job. Adversaries of this wage increase claim that poverty levels would rise, young adults may be shut out of the workforce, high school enrollment rates would decrease, and drop-out rates rise. Let’s start with why raising the minimum wage would spike job growth and improve the economy. In 2013, the Economic Policy Institute stated that “minimum wage increases from the current rate of $7.25 an hour to $10.10 would inject $22 billion net into the economy and create about 85,000 new jobs over a three-year phase-in period” (Cooper, 2013). So, imagine what it would do if the minimum wage was raised to $15 an hour. It would be twice the amount. Furthermore, economists from the Federal Reserve Bank of Chicago predicted that a $1.75 rise in the federal minimum wage would increase total household spending by $48 billion the following year, hence boosting the gross domestic product (GDP) and leading to job growth. Moreover, the Congressional Budget Office shows that the income gains resulting from the wage increase to $15 an hour are substantially greater than the reduction in income from job losses, lifting nearly a million people out of poverty, and therefore improving the economy. However, there is the belief that raising the minimum wage would force businesses to lay off employees and raise unemployment rates. In October 2020, the Employment Policies

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Isabel Jurado-Blanco 4 Institute released a study about the state employment impact of a $15 minimum wage. In this study, economists William Even and David Macpherson explain that, if enacted, the Raise the Wage Act would result in a loss of 2 million jobs or even more. Also, there was a survey made to 1,213 businesses and human resources professionals, where 38% of employers who currently pay minimum wage said that they would lay off employees if the minimum wage was raised. 54% explained that they would decrease hiring opportunities. It should also come into consideration that 1.7% of the 77 million hourly employees even earn the minimum wage, and just 395,000 are over the age of 25 and earning entry-level wages for entry level work like waiters and cashiers. With the effects of the pandemic and the current economy, the raise of a minimum wage would prevent many businesses, especially small businesses, from offering employment opportunities because they would not have the budget necessary to pay another employee. Increasing the minimum wage would also increase labor costs for small business owners, making it harder for them to keep employees and hire new ones. Next let’s talk about how a higher minimum wage could reduce the inequality between low- and middle-income earners. The Economic Policy Institute explains in a 2019 article that by establishing regular, predictable increases to the minimum wage that are linked to overall wage growth, the proposed legislation improves the ability of the minimum wage to reduce income inequality. A rise to $15 an hour would reverse decades of growing pay inequality between the lowest-paid workers and the middle class and indexing future increases would prevent any future growth in that gap. Moreover, the Federal Reserve Bank of Minneapolis published an article highlighting Brazil’s ability to increase the minimum wage and seeing a drop in income inequality. There was a study mentioned where the Brazilian Ministry of Labor and Employment copied Brazil’s labor market and stimulated the effects of a minimum wage hike like the one

Isabel Jurado-Blanco 5 experienced in Brazil. Their results showed an increase from the 1 st through the 80 th percentile of the earning distribution. The increase resulting being largest for low-skilled workers and gradually declines for higher-earnings groups. To argue for the contradictory side, the Texas Public Policy Foundation explains in a 2017 article that “despite people’s good intentions of raising the minimum wage to help improve the economy and reduce income inequality, the minimum wage is just an arbitrary floor for labor services that ultimately harms the people it’s intended to help”. In other words, no matter what the minimum wage is in law, the actual minimum wage is always zero since an unemployed person or someone looking for a job earns nothing. There was a study made where the minimum wage was increased gradually to $15 in Seattle, and it was found that it hurt the low-skilled workers. During the first phase of the implementation from 2014 to 2016, lower skilled workers saw their earning drop by an average of $1,500 in 2016 alone. These results do not support the upward redistribution of income from raising the minimum wage, which is the opposite of increasing the earning for lower-skilled workers. Here the rich will get richer and the poor poorer because the minimum wage would cut off the first rung of employment ladder and it’s that first lowest paying rung that provides the experience and skills necessary to reach the next rung successively to obtain the best life they could have. This affects mostly the low-skilled workers since it will be harder for them to get a job because businesses will look to employ the most skilled workers for their business’ advantage. Moving forward with the next point, we will focus on why raising the minimum wage increases worker productivity and therefore there is a reduction in employee turnover. Since people are getting paid more, they are more willing to work harder to maintain the job and not

Isabel Jurado-Blanco 6 lose it since there is always people looking for employment. D Phil, Professor of Economics at the London School of Economics, “communicates that as the minimum wage rises and work becomes more attractive, labor turnover rates and absenteeism tend to decline.” This aids to eliminate the retraining costs of any new employee, which is equal to about 16% of the employee’s annual salary. Raising the minimum wage would mean that employees are more invested in their jobs and are less likely to have disciplinary problems like arriving late to their shift. Also, “the quality of service would increase, and the firm may be able to increase its prices to compensate for the higher pay,” explains the Center for American Progress in their 2021 economics report. There is another argument, however, that explains that increasing the minimum wage would also increase inflation. If the people are being paid more, then they can pay for higher prices on consumer goods and housing costs. This is termed wage push inflation. “To maintain the same corporate profits or to still have some after an increase in wages, employers must increase the prices they charge for the goods and services they provide”, explains Will Kenton in a macroeconomics article in Investopedia. It is a never-ending cycle. As wages rise, businesses will raise their cost of goods and services, which will then need higher wages to compensate, and the cycle will repeat. Also, there is another fact. It has been said that “although the federal minimum wage has been the same for over 10 years, prices meanwhile have gone up. Under the Raise the Wage Act of 2021 , the minimum wage would be indexed to the median wage after reaching $15 as a solution to this issue. However, the value of $15 has also changed over time” explains David Cooper, an economic analyst at the Economic Policy Institute. Anna Stansbury, a PhD scholar, explains that in “2025 $15 would be worth about one or two dollars

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Isabel Jurado-Blanco 7 less in today’s dollars,” which makes this fight for $15 minimum wage unnecessary or ineffective in the long term. After careful consideration of the advantages and disadvantages of raising the minimum wage to $15 by 2025, it can be said that raising the minimum wage would cause more harm than good to society. Raising the minimum wage would initially spur economic growth and employment, however, this is only temporary because as the minimum wage rises, businesses are not able to sustain having so many employees and paying them all equally. Consequently, the businesses will be forced to lay off employees, which in the long term will increase unemployment rates. Furthermore, increasing the minimum wage may reduce income inequality, but we are explained that the minimum wage is always zero because an unemployed person does not earn anything. Raising the minimum wage would cause lower-skilled workers to lose money instead of earning it because it creates more disparity between low-income earners and high- income earners than there already is. Moreover, as the minimum wage increase improves worker productivity, it also creates higher inflation rates through a never-ending cycle. Inflation will always exist no matter what and increasing the minimum wage would also increase businesses’ prices on their products and services to have a corporate profit. Finally, the minimum wage increase would not make a difference because by 2025 a $15 raise would be considered $1 or $2 less than today’s $15 value. More research must be conducted to provide a better solution to the issue at hand as raising the minimum wage will not help our society at all.

Isabel Jurado-Blanco 8 References Cooper, D. (2013, December 19). Raising the federal minimum wage to $10.10 would lift wages for millions and provide a modest economic boost . Economic Policy Institute. https://www.epi.org/publication/raising-federal-minimum-wage-to-1010/

MINIMUM WAGE

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