“Fast Food Workers Fight for $15 Minimum Wage.” This eerily familiar title sounds very recent, but this is the title of an article published by the Harvard Political Review in 2015. Although the fight for fair pay has been raging for nearly a century, it is and will continue to be one of the most important battles in the U.S.
At first glance, someone can calculate that $7.25 per hour is not enough to survive, implying the minimum wage should be raised. But this economic problem is much more complex than a simple calculation reveals. Raising the minimum wage is important to keep the economy and country moving forward, but awareness of the risks that come along with the raise is imperative to make well-informed policy decisions.
An Old Struggle
This fight is not new. The first federal minimum wage was established by the Fair Labor Standards Act in 1938. This law designated a change in U.S. labor policy, which had previously contributed to inequality and the collapse of the economy during the Great Depression. Along with a minimum wage, it also established child labor laws, a 40-hour workweek, overtime pay, and requirements to record this and more information for proof of compliance.
Since then, the minimum wage has been adjusted 23 times. During the most recent change in 2009, Congress moved the minimum wage up to $7.25, a 70 cent raise from the previous $6.55. The sentiments that led to the FLSA have carried on into our more recent times. In July 2019, 81 years after the passage of the FLSA, the House voted to raise the federal minimum wage to $15 per hour by 2025. Although this bill failed in the Senate, Republicans agreed afterwards that it was time for a raise, though there is still disagreement over how much. The continuing debate is representative of the policy’s slow acceptance among various political camps.
Much more recently, in April 2021, President Biden signed an executive order raising the minimum wage paid to federal contractors to $15 an hour, arguing that “no one should work full-time and still live in poverty.” Although this change only helps keep employees of the federal government from poverty, the movement to raise the minimum wage nationally is growing. According to a study by the Pew Research Center, 62% of U.S. adults currently favor raising the minimum wage. This federal raise is simply part of the growing momentum to make this next step in the FLSA’s concrete.
Taking Off the Blinders
While it has historical precedent, raising the minimum wage may be accompanied by undesirable long-term economic effects. These concerns range broadly from the effect on inflation to the damage it could do to people who lose their jobs. Politicians must make sure they aren’t blind to these possible consequences, and they must have these issues at the front of their mind when working on minimum wage policy.
One concern is that a raise in the minimum age will increase inflation. Let’s imagine that I’m a business owner and I decide to make my own company selling Donuts, Donuts4All. I have five employees and I pay each of them $10 an hour working 40 hours a week; this adds up to a grand sum of about $8,000 each month to support my employees in their donut crafting. If the minimum wage was raised to $15 per hour, this would suddenly make the cost of labor 1.5 times what it was before, costing me around $12,000 a month for labor. I, as the employer, would need to adjust for this — but how?
If I have enough profit, I can sacrifice some of it and give it to my employees. But if I’m having a bad year, I might need to raise the price of my donuts. This means that when my employees, now making $15 per hour, go to shop at Walmart, they may find the milk costs $4.40 instead of $3.82. Imagine a price hike like this on all the things you have to buy. This effectively means the extra money I pay my employees from the wage increase will be canceled out by higher prices, leaving workers in the same position they were in prior to the raise.
What if my business had already raised prices and was in a precarious position after cutting costs, minimizing employees, and raising prices as high as is still marketable? If the business is already on a bare bones budget, raising the minimum wage could add extra cost to running the business. This puts the owner in a conundrum: lean into my own pockets to try and keep this business alive, declare bankruptcy, or close up shop?
The first option could still leave the business closed in the end with the owner in debt. The second option puts the business in an incredibly difficult position. Then the third option leaves the business closed. In two of those three options, everybody involved loses their job and source of income. A higher minimum wage doesn’t help if you don’t have a job. Now imagine this, but on a large scale — around 48% of people are employed by small businesses. That could do a lot of damage to a lot of jobs. It would be even more damaging during a period of economic instability like the one the country is in right now.
Another way it could increase unemployment is by encouraging the outsourcing of jobs. In a survey done by Billshrink, it was found that lower wages were one of 10 reasons American businesses hired labor in other countries. This means if we raise the minimum wage, it could scare American businesses into moving their factories to China or other countries where cheaper labor forces are available. As of 2019, there were around 14.6 million workers employed overseas by U.S. affiliates. If we continue to push jobs into other countries, there won’t be enough jobs left for Americans.
Minimizing Minimum Wage Risks
These are very real and dangerous risks of raising the minimum wage, but with proper awareness and knowledge, the risks can be minimized or circumvented. For instance, gradually raising the minimum wage can actually reduce the effects of inflation drastically. One working study done by the Upjohn institute, tracking the effect of prices on minimum wage increases in different U.S. states from 1978 to 2015, found that for every 10% increase in the wage floor, prices grew by only 0.36%. Along with that, the price increases generally only happened in the month the minimum wage raise was implemented, not before or after that point. An example of this idea in action occurred in July 2009, when the minimum wage was increased from $5.85 to $7.25. Instead of jumping immediately, it was first raised to $6.55 before arriving at $7.25. This allowed the economy, still reeling from the 2008 crisis, to stabilize where inflation was fairly steady by mid-2010.
The claim that minimum wage hikes will hurt small businesses ignores some of the upsides of raising the minimum wage. Yes, it will cost more for labor. But traditionally, when the minimum wage increases local income, it also increases local spending. Local spending, matched with more federal relief for small businesses, will help small and medium-sized businesses in the future. Along with this, it is not unusual for minimum wage rises to occur during a recession like the one that the U.S. is currently facing. This could be the boost our economy needs.
Regarding outsourcing, it is a valid worry — lower wages abroad are one of the reasons businesses outsource jobs from the U.S. Raising the minimum wage does create that possibility, but it also stimulates the economy and increases the spending power of consumers. So, although it may make labor more costly, it could also lead to a country that spends and consumes more, allowing companies to make more money off the profits.
Maximizing the Return
Although these concerns are serious, there are also benefits and solutions that balance the downsides of this project to make raising the minimum wage an altogether positive policy reform. The cons of this endeavor have a lot to do with broad economic factors, but often the more personal results of getting paid a fair wage can outweigh the potential risks.
First of all, it can boost productivity and promote education and self-improvement. According to a study by George Akerlof, a Nobel laureate in economics and professor at Georgetown University, and other economists, employee morale and work ethic increases when employees believe they are paid a fair wage. This means that employers will get more out of their employees with a raise in wages.
You could imagine how your productivity, customer service, and mood would rise along with this raise. Moreover, when people are able to comfortably live off of one job, it gives them more time to spend on their education and health. When people sleep well, spend time with family and friends, and exercise, it allows them to be more energized when at work. These things shouldn’t be the exception for having a good job — they should be the standard.
Secondly, the rise in minimum wage will reduce income inequality. Currently, the federal minimum age is $7.25 per hour. With some quick math, one can find that somebody working 40 hours a week makes around $15,000 a year (assuming they only work one job). For a person living on their own, that puts them barely above the $12,880 poverty line. Just one injury, car wreck, or unexpected cost could pull a person under.
There is, of course, the possibility that employees work two or more full or part-time jobs like nearly 13 million U.S. workers do. But working 60 or 80 hours a week is an incredible feat to sustain, and it takes a serious toll. Raising the minimum wage will allow individuals to make a livable wage while working one job. When people don’t have to juggle multiple jobs, it allows them to dedicate more time and means to their personal lives.Workers should not have to work two or three different jobs just to keep themselves or their families away from the poverty line.
Finally, raising the minimum wage will cause fewer job-to-job transitions. According to a study by economist Arindrajit Dube and others, people who are receiving a fair wage tend to stay in the same job instead of seeking employment with higher pay. This type of job security helps stabilize life not only for the workers, but also for the employers running the business. Even before the pandemic, people were moving jobs more often when they made $60,000 or less. The amount that they shifted in fact tripled between 2017 and 2019. I would argue it’s much easier to run a business if you know your employees are going to show up each week.
Although there are serious risks to increasing the minimum wage, with proper awareness and policy changes, the raise is possible and even beneficial for U.S. workers. Politicians commonly get caught up in the matter of whether action should be taken or not; some believe action puts Americans at risk and others believe inaction does the same. This dualistic gridlock of action versus inaction takes focus away from the more essential questions of what changes can help Americans the most and how they ought to be implemented. Politicians must break this gridlock and innovate to improve the American economy, and in turn American’s livelihood — this process can begin by raising the minimum wage.
Image by Kenny Eliason licensed under the Unsplash License.
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