Remember when a Big Mac used to cost 75¢? Or how about when you could buy a can of soda for a nickel? Naturally, price levels increase over time (this is often called inflation), and in order to keep up with their constant rise, our wages have followed. However, many workers are dissatisfied with the pace that their salaries have grown relative to global prices, reinvigorating the debate over what the optimal minimum wage should be.
The conversation over minimum wage, a timeless subject of political discourse, seldom tends to spill over partisan lines, making compromise difficult and generally incremental. The minimum wage directly affects millions of workers and impacts the economy at a very high level, so let’s take a deeper look at the prevailing arguments put forth on each side of the debate so we can inch closer to achieving financial fluency.
So What is it?
Minimum wage is the lowest salary a worker can be legally paid per hour under federal law. States, cities, and individual districts can mandate higher minimum wages than federal law requires, but they cannot force workers to work for less than the federal minimum wage rate.
Today, federal law mandates a minimum wage of at least $7.25 per hour. However, 29 of 50 states have minimum wage rates higher than this. At $12.50 per hour, D.C. leads the pack, followed by Washington, California, and Massachusetts which require a wage rate of $11.50, $11, and $11 respectively.
In order to keep up with rising inflation and living costs, the government periodically decides whether the minimum wage rate should be increased or not. However, the debate over just how much it should be is a fiercely complex one, as both sides believe adopting their policy is best for the labor market and the American economy as a whole. Proponents of a higher minimum wage aim to help lower class citizens pay for the rising cost of living, while opponents argue raising the minimum wage will increase unemployment. Yet the minimum wage affects our economy in a myriad of ways, so what exactly are policymakers to do?
Pros of a Minimum Wage Increase
Keep up with Rising Inflation
The main argument for an increase in the minimum wage is that the current federal rate has not grown proportionally to our country’s inflation. The minimum wage in 1968 was $1.60, which is equivalent to $11.40 in 2018 dollars. This means, when adjusting for inflation, minimum wage workers made 60% more in 1968 than they do today!
Furthermore, people have less buying power today than they did 50 years ago, particularly the lower class, which is comprised of a greater proportion of minimum wage workers who find it difficult to keep up with the rising cost of living.
Reduce Income Inequality
Growing income inequality is the one of the most critical issues facing the United States economy today. In fact, the gap between the rich and poor has grown in nearly every statistical category over the past 30 years. By breaking down the percentages of wealth in the US by income classes, we can take a closer look at this immense difference. In 2015, the salary of the top 10% of Americans ($312,536) averaged more than 9 times the other 90% ($34,074). And when compared to the top 0.1% ($6,747,439), the other 90% receive almost 1/200th of their rich counterparts. Clearly, income inequality is a massive and continuously growing problem in the United States. And by increasing the minimum wage, studies have shown that lower class citizens will be helped the most. By increasing the minimum wage, we are directly taking money from large business and putting them into the pockets of our low-income workers, thus shortening the gap between low and high-income workers.
Decrease Dropout Rates
We at Rapunzl value smart investments, and the smartest and least risky investment in the world is investing in our youth’s education. By investing in the minds of our future leaders, we are inherently investing in their future value and ability to be productive members of society. However, high school dropout rates continue to increase as more teenagers are forced to find low-paying jobs to support their families and the increasing cost of living. A 2014 study found that raising the minimum wage in California to $13 an hour would increase the income of 7.5 million families! With wages that directly correlate with rising prices in our country, more teenagers would not have to drop out of school and be forced to support their families. Education is the most important thing for our nation’s youth, and we must take any measure available to ensure that every one of our children can afford to learn.
Spur Economic Growth
While the effect of increasing the minimum wage ripples across many different sectors of the economy, its biggest impact lies in spurring aggregate demand and economic growth. In simple terms, by giving more money to workers, those workers will then spend more money across the economy, thereby boosting sales and adding more jobs. A recent study by the Chicago Fed found that a $1.75 increase in the minimum wage would increase spending by nearly $50 billion in just one year, leading to a subsequent rise in GDP and job growth. Higher wages lead to more spending, which leads to more sales and growth.
While we outlined only several different points in favor of a wage hike, there are many additional effects we haven’t covered. There are clearly many compelling arguments for a raise of the minimum wage, however we must understand both sides of the argument in order to make the most educated decision.
Cons of Minimum Wage Increase
One of the most common and soundest arguments against increasing the minimum wage is that the salary hike will lead to a subsequent increase in unemployment. A recent study by Forbes found that if the minimum wage were to be raised to $15, roughly 6.6 million jobs would be lost. In a similar study, the Congressional Budget Office estimated that if the minimum wage was raised to $10.10, nearly 500,000 jobs would be lost. The reasoning here is that by forcing employers to pay their workers 25-50% more per hour, employers will have to cut costs, and labor is a primary cost for most businesses, meaning less-essential employees may get the boot. While some of the lost revenue can be made up by forcing the customer to pay a little more, transferring costs to the consumer is a last resort for many business owners, making this is a major concern with regard to raising the minimum wage.
In addition to firing some workers in order to pay others the new higher minimum wage, employers might also simply invest in more machines. Robots and AI have no need for a minimum wage, so by spending more now to enlist the help of an automated worker, employers are getting rid of human workers in need of consistent pay for robots that, we are simply assuming here, have no families to feed. This is a growing concern as the complex technology of automated machines continues to advance. By raising the minimum wage, many are concerned it will speed up the process of transitioning from human to exclusively robotic workers.
Although several studies predict that many jobs will be lost by raising the minimum wage, some experts argue that the jobs gained simply through the economic growth of putting more money into the economy will make up for it. A recent study by the Economic Policy Institute predicts that raising the minimum wage to $10.10 would lead to 85,000 new jobs in the next 3 years. Although this does not completely make up for the loss of 500,000 in the Forbes study, it at least helps somewhat. Jobs will clearly become more competitive as salaries increase and supply decreases, therefore, higher-skilled, low wage workers will reap most of the benefit from this increase in pay. But with their advantage comes the disadvantage of younger, less experienced workers who will bear the brunt of increased unemployment.
Discrimination Against Young Workers
Since the demand for jobs will increase with a rise in wages, and the supply of jobs will subsequently decrease, younger, less-skilled workers will be hurt the most from the rise in unemployment. Employers will want to pay the highest qualified employees with their minimal openings rather than the 16 year-old who has never cooked a burger before. We want to empower our youth, not relegate them to the bottom of the socioeconomic ladder, yet by pressuring employers to favor older, more experienced workers, we’re taking away the ability of a certain demographic of youth to be able to earn money to fund their education in a country where the cost of education is increasingly unaffordable and rising fast.
As we can see, there are several arguments to be made against raising the minimum wage. Unemployment is a major concern for hiking the minimum federal rate because ultimately people would rather have a job that pays something as opposed to no job at all.
End of Debate
There are strong arguments to be made for both sides of the debate. An increase in minimum wage would positively impact many different marginalized demographics and spur robust economic growth, while the argument against a raise brings to light valid points regarding increased unemployment and disadvantaging young workers. However, if we have to choose a side, we believe in raising the minimum wage. Over 20% of jobs in America pay less than two-thirds of the median wage, making the US the leader amongst wealthy, developed nations in terms of low-paying jobs. Furthermore, no economy can sustain balanced, long-term growth with severe and accelerating inequality. Although some jobs will be lost following a wage hike, it will overwhelmingly benefit millions of America’s poorest and most disadvantaged workers. And for the younger workers who might be forced to leave their jobs, we continue to advocate for more investment in high-quality education, job training programs, and more affordable higher education.
The minimum wage debate is a controversial one, however, ultimately it’s beneficial for society to continue raising it as prices levels, worker productivity, inequality, and the cost of living continue to rise.
Inflation is real, and as money becomes less valuable, we need more of it to live. So it’s only fair that workers are compensated more for their work, because their work costs more now. By surrounding yourself with a greater understanding of the markets, you can continue to step closer to financial fluency.