Minimum wage laws set legal minimums for the hourly wage paid to certain groups of workers (Gorman). Minimum wage laws were invented in Australia and New Zealand with the purpose of guaranteeing a minimum standard of living for unskilled workers. In the United States, workers are generally entitled to be paid no less than the statutory minimum wage. In the United States, amendments to the Fair Labor Standards Act have increased the federal minimum wage from $.25 in 1938 to $7.25 in 2013. Some states and municipalities have set minimum wage levels higher than the federal level, with the highest state minimum wage being $9.19 per hour in Washington State as of 2013 (Wikipedia).
President Barack Obama’s call for increasing the minimum wage during his State of the Union address has renewed debate among policy experts, politicians and economists, who argue that if enacted the proposal could either drive up unemployment or create more stability for America’s poor. President Obama wants to increase the minimum wage from its current $7.25 to $9.00 an hour, which he said would reduce the number of people in America who work full time but who live in poverty. President Obama states “this single step would raise the incomes of millions of working families; it could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets” (White, 2013).
This paper will examine President Obama’s proposal to increase the minimum wage by evaluating the history of the minimum wage, the people affected by the minimum wage, the economic way of thinking, and the writer’s perspective of the debate. In conclusion, this paper will provide an alternative to President Obama’s call for an increase in the minimum wage.
The Minimum Wage
The minimum wage has a strong social appeal, rooted in concern about the ability of markets to provide income equity for the least able members of the work force. The obvious solution to this concern is to redefine the wage structure politically to achieve a socially preferable distribution of income. Thus, minimum wage laws have usually been judged against the criterion reducing poverty (Wikipedia).
Minimum wage laws were also proposed as way to control the increase the spread of sweat shops in manufacturing industries. Sweat shops employed large number of women and young workers, paying them substandard wages. The sweatshop owners were thought to have unfair bargaining power over their workers, and a minimum wage was proposed as a means to make them pay their workers fairly. Eventually, the focus changed to helping people, become more self-sufficient. Today, minimum wage laws affect workers in most low-paid fields of employment (Wikipedia, 2013).
There is great disagreement as to whether the minimum wage is effective in attaining its goals. From the time of their introduction, minimum wage laws have been controversial politically, and have received much less support from economists than from the general public. Despite decades of experience and economic research, debates about the costs and benefits of minimum wages continue today.
Researching the minimum wage resulted in an abundance of scholarly reviews as well as opinionated news articles which provided the pros and cons of the minimum wage increase proposed by President Obama in his State of Union Address. David Neumark and William Wascher evaluates the effects of the “Minimum Wage and Employment” states there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the traditional review that the minimum wage reduces the employment of low-wage employment of low-wage employment is clearly incorrect. They characterize economist in the debate as those economists who claimed the low-wage labor market at the time as “marginalists” and those who claimed that it was not as “institutionalists” (Wascher, 2006).
Their findings resulted in studies that provide evidence of positive employment effects of minimum wage, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. They also found that studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.
Also, John Schmitt reviews evidence on eleven possible adjustments to minimum-wage increases that may help to explain why the measured employment effects are so consistently small. He states that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners; and small price increases. His report found that little or no employment response to modest increase in the minimum wage and evidence on a range of possible adjustments to minimum-wage increases that may help to explain why the measured employment effects are so consistently small (Schmitt, 2013).
As mentioned, online articles from Newsweek, Wikipedia, and Deseret News provided background information as well as opinions that determined the direction in which the writers would approach in this paper.
The people affected by the Minimum Wage
Minimum wage workers tend to be young. Although workers under age 25 represented only about one-fifth of hourly paid workers, they made up half of those paid the federal minimum wage or less. Among employed teenagers paid by the hour, about 21 percent earned the minimum wage or less, compared with about 3 percent of workers age 25 and over (See Table I). About 6 percent of women paid hourly rates had wages at or below the prevailing federal minimum, compared with about 3 percent of men. (Of minimum wage earners overall, 67 percent are women, and 33 percent are men).
The percentage of workers earning the minimum wage did not vary much across the major race and ethnicity groups. About 5 percent of white, black, and Hispanic hourly-paid workers earned the federal minimum wage or less. Among Asian hourly paid workers, about3 percent earned the minimum wage or less. Among hourly paid workers age 16 and over, about 10 percent of those who had less than a high school diploma earned the federal minimum wage or less, compared with about 4 percent of those who had a high school diploma (with no college) and about 2 percent of college graduates. Part-time workers (persons who usually work less than 35 hours per week) were more likely than their full-time counterparts to be paid the federal minimum wage or less (about 11 percent versus about 2 percent). About 7 in 10 workers earning the minimum wage or less in 2012 were employed in service occupations, mostly in food preparation and serving related jobs. Among the states, Mississippi, South Carolina, Tennessee and Oklahoma had the highest proportions of hourly-paid workers earning at or below the federal minimum wage (about 6 percent). The percentage of workers earning at or below the Federal minimum wage was lowest (1 percent or less) in Alaska, California and Oregon (Rampell, 2009).
Table 1. Employed wage and salary workers paid hourly rates with earnings at or below the prevailing federal minimum wage by selected characteristics, 2012 annual averages| Characteristic| Number of workers
(in thousands)| Percent distribution| Percent of workers paid hourly rates| | Total paid hourly rates| At or below minimum wage| Total paid hourly rates| At or below minimum wage| At or below minimum wage| | | Total| At minimum wage| Below minimum wage| | Total| At minimum wage| Below minimum wage| Total| At minimum wage| Below minimum wage| AGE AND SEX| | | | | | | | | | | |
Total, 16 years and over| 75,276| 3,550| 1,566| 1,984| 100.0| 100.0| 100.0| 100.0| 4.7| 2.1| 2.6| 16 to 24 years| 14,909| 1,797| 862| 935| 19.8| 50.6| 55.0| 47.1| 12.1| 5.8| 6.3| 16 to 19 years| 4,044| 854| 484| 370| 5.4| 24.1| 30.9| 18.6| 21.1| 12.0| 9.1| 25 years and over| 60,367| 1,753| 704| 1,049| 80.2| 49.4| 45.0| 52.9| 2.9| 1.2| 1.7| Men, 16 years and over| 37,113| 1,263| 567| 696| 49.3| 35.6| 36.2| 35.1| 3.4| 1.5| 1.9| 16 to 24 years| 7,454| 673| 333| 340| 9.9| 19.0| 21.3| 17.1| 9.0| 4.5| 4.6| 16 to 19 years| 1,922| 366| 207| 159| 2.6| 10.3| 13.2| 8.0| 19.0| 10.8| 8.3| 25 years and over| 29,659| 591| 235| 356| 39.4| 16.6| 15.0| 17.9| 2.0| 0.8| 1.2| Women, 16 years and over| 38,163| 2,287| 999| 1,288| 50.7| 64.4| 63.8| 64.9| 6.0| 2.6| 3.4| 16 to 24 years| 7,455| 1,124| 529| 595| 9.9| 31.7| 33.8| 30.0| 15.1| 7.1| 8.0| 16 to 19 years| 2,122| 489| 278| 211| 2.8| 13.8| 17.8| 10.6| 23.0| 13.1| 9.9| 25 years and over| 30,708| 1,163| 470| 693| 40.8| 32.8| 30.0| 34.9| 3.8| 1.5| 2.3| RACE AND HISPANIC OR LATINO ETHNICITY| | | | | | | | | | | | White (1)| 59,180| 2,760| 1,185| 1,575| 78.6| 77.7| 75.7| 79.4| 4.7| 2.0| 2.7| Men| 29,691| 984| 444| 540| 39.4| 27.7| 28.4| 27.2| 3.3| 1.5| 1.8| Women| 29,490| 1,776| 741| 1,035| 39.2| 50.0| 47.3| 52.2| 6.0| 2.5| 3.5| Black or African American (1)| 10,049| 533| 277| 256| 13.3| 15.0| 17.7| 12.9| 5.3| 2.8| 2.5| Men| 4,522| 183| 85| 98| 6.0| 5.2| 5.4| 4.9| 4.0| 1.9| 2.2| Women| 5,527| 350| 193| 157| 7.3| 9.9| 12.3| 7.9| 6.3| 3.5| 2.8| Asian (1)| 3,403| 117| 48| 69| 4.5| 3.3| 3.1| 3.5| 3.4| 1.4| 2.0| Men| 1,568| 39| 16| 23| 2.1| 1.1| 1.0| 1.2| 2.5| 1.0| 1.5| Women| 1,835| 78| 32| 46| 2.4| 2.2| 2.0| 2.3| 4.3| 1.7| 2.5| Hispanic or Latino (1)| 14,404| 718| 337| 381| 19.1| 20.2| 21.5| 19.2| 5.0| 2.3| 2.6| Men| 8,114|
295| 127| 168| 10.8| 8.3| 8.1| 8.5| 3.6| 1.6| 2.1| Women| 6,290| 423| 210| 213| 8.4| 11.9| 13.4| 10.7| 6.7| 3.3| 3.4| FULL- AND PART-TIME STATUS| | | | | | | | | | | | Full-time workers (2)| 54,745| 1,261| 501| 760| 72.7| 35.5| 32.0| 38.3| 2.3| 0.9| 1.4| Men| 30,052| 491| 197| 294| 39.9| 13.8| 12.6| 14.8| 1.6| 0.7| 1.0| Women| 24,693| 770| 304| 466| 32.8| 21.7| 19.4| 23.5| 3.1| 1.2| 1.9| Part-time workers (2)| 20,411| 2,286| 1,063| 1,223| 27.1| 64.4| 67.9| 61.6| 11.2| 5.2| 6.0| Men| 6,998| 772| 370| 402| 9.3| 21.7| 23.6| 20.3| 11.0| 5.3| 5.7| Women| 13,413| 1,513| 693| 820| 17.8| 42.6| 44.3| 41.3| 11.3| 5.2| 6.1| Footnotes:
(1) Estimates for the above race groups (White, Black or African American, and Asian) do not sum to totals because data are not presented for all races. Persons whose ethnicity is identified as Hispanic or Latino may be of any race. (2) The distinction between full- and part-time workers is based on hours usually worked. These data will not sum to totals because full- or part-time status on the principal job is not identifiable for a small number of multiple jobholders. Full time is 35 hours or more per week; part time is less than 35 hours.| NOTE: Data exclude all self-employed persons whether or not their businesses are incorporated (U. S. D. o. Labor, 2013).
When considering the debate about President Obama’s proposal to increase the minimum wage, it can be framed around select guideposts of economic thinking. The first guidepost that can be applied to the minimum wage debate is “beware of the secondary effects: economic actions often generate indirect as well as direct effects” (Gwartney, 2013). The direct, immediate effect of increasing the minimum wage is an intended one, but secondary effects, or unintended consequences also present themselves. The law of demand states that the quantity demanded will decrease as the price of the good increases, with all other variables holding steady at constant. In this case, according to the law of demand, an increase in the price of
labor, the minimum wage, will cause a decrease in the amount of available positions in the job market. The higher minimum wage will draw more workers into the market, but simultaneously, the higher price of labor will cause employers to offer less employment opportunities for lower skilled workers. Opponents of this viewpoint argue that an increase in the minimum wage will have a more positive secondary effect: $18 billion injected into the economy, along with 100,000 new jobs by 2015, supporting economic growth (White, 2013).
President Obama’s proposal to increase the minimum wage appeals to a moral sense; people prefer to see fairness in the job market when it comes to wages. The conservative side of the argument echoes the law of demand. The true test of an economic theory is its ability to accurately predict, another guidepost of economic thinking. The law of demand is a strong one, but considering the changes in other economic variables, it cannot be considered absolute. In New Jersey, the number of fast food jobs actually increased after an 18 percent increase in the minimum wage was instituted (White, 2013). ————————————————-
2 Sides of the Debate (the writers’ perspective)
Increases in the minimum wage have consistently fallen behind inflation, so that in real terms the minimum wage is substantially lower than it was in the 1960s. Meanwhile, worker productivity has doubled. If the current minimum wage seems low, raising it would cost jobs. But there’s evidence on that question. And while there are dissenters, the great preponderance of the evidence points to little if any negative effect of minimum wage increases on employment (Krugman, 2013). It is also important to understand how the minimum wage interacts with other policies aimed at helping lower-paid workers, in particular the earned-income tax credit. The tax credit is also good policy. But it has a well-known defect, some of its benefits end up flowing not to workers but to employers, in the form of lower wages. And guess what? An increase in the minimum wage helps correct this defect. It turns out that the tax credit and the minimum wage aren’t competing policies; they are complementary policies that work best in tandem
(Krugman, 2013). President Obama’s wage proposal is good economics. It is also good politics; a wage increase is supported by an overwhelming majority of voters…. Yet G.O.P. leaders in Congress are opposed to any rise. Why? They say that they’re concerned about the people who might lose their jobs, never mind the evidence that this won’t actually happen. We will learn that an increase in wages will restore strength to the economy. We will see room that even more increases in wages will improve the economy. Social costs of labor will be better covered and the economy will work better. The US economy is a mature economy, and that means that labor needs to be paid more of the % of national income as real GDP increases.
The real job creators are the bottom 90 percent, including those right at the bottom who would benefit from a minimum wage–consumers, those who spend nearly all of their income on real goods and services and hoard very little of it. And truth be told, without spending there are no sales; without sales there are no profits; without profits there is no demand for workers; without demand for workers there is no job creation; and without job creation there is no recovery. Overall raising the minimum would help some family live a little better and not stress as much with paying for food and utilities. It will help build a sense of pride and self-esteem… after all is this not the land of opportunity (Krugman, 2013). The minimum wage makes it harder for unskilled workers to gain the labor market experience and on-the-job training that would raise their productivity and future pay. Unskilled workers are less attractive with a higher minimum wage because they produce less per hour and their hiring diverts more senior workers from revenue producing activities to training and supervision (Shemkus 2011). Firms will only invest in human capital if they expect to receive a return on their investment. Firms will not pay for general skills if workers are likely to leave before firms recoup their investment costs. The Bureau of Labor Statistics states that 69% of jobs started by workers age 18 to 24 last less than a year. Turnover is even higher for teen age workers. Young workers must therefore pay for the general (often informal) training they receive by accepting a lower wage (Shemkus, 2011). The good news is that once these workers have some experience and training they can command a higher wage. A higher minimum wage encourages firms to hire already trained and experienced workers, eliminates some opportunities for
experience and training, and puts an even bigger burden on our vocational schools to train unskilled workers. The effects on employment rates would be exactly the opposite of those supporters foresee. A higher minimum wage, they claim, would be too heavy a burden on employers, especially small business owners. And those employers, in turn, would be unable to hire as many people — an undesirable result when unemployment continues to hover at about 8 percent (Shemkus, 2011). When legislators raise the price of low and unskilled labor, it is usually low- and unskilled laborers who end up paying the price, increasing the minimum wage has not proven to be effective at lowering the poverty rate. Multiple studies have demonstrated little to no relationship between a higher minimum wage and reductions in poverty. So it looks like the minimum wage will probably be staying right where it is for some time to come (Shemkus, 2011). ————————————————-
In conclusion, the writers’ personally support the President’s call to increase the minimum wage to $9 per hour. However, the writers’ must realistically look at both sides of the debate and recommend an alternative that will ease the minds of US citizens, politicians, and economists (on both sides of the debate). We recommend continuing to allow individual cities and states to mandate the minimum wage deemed necessary for the citizens of their jurisdiction. The Department of Labor states that there are 4 states that have a minimum wage set lower than the federal minimum wage and 19 states (plus DC) with minimum wage rates set higher than the federal minimum wage. There are 22 of the states that have a minimum wage requirement that is the same as the federal minimum wage requirement. The remaining states do not have an established minimum wage requirement (D. O. Labor, 2013). With this said, the Federal minimum wage law will always supersede state minimum wages where the federal law minimum wage is greater than the state minimum wage. In those states where the state minimum wage is greater than the federal minimum wage, the state minimum wage prevails (D. O. Labor, 2013). This recommendation would protect the minimum wage employees in less than statutory minimum wage states, while granting the
federal government a reprieve until the economy get back on its feet. Along the same line, the writers’ also recommend allowing states to regulate their citizen’s minimum wage, the minimum wage would be linked to a consumer price index. This linkage would increase the minimum wage each year. Currently, there are 10 states (AZ, CO, FL, MO, MT, NV, OH, OR, VT, and WA) which already have this recommendation in place (D. O. Labor, 2013). The economy in these states has not been affected by the increase each year. Employees earn enough to live on in their prospective state and the employer’s bottom line is not affected because their charges for products or services are also increased due to inflation.
Gorman, Linda.). Minimum Wages. Retrieved April 4, 2013, 2013, from http://www.econlib.org/cgi-bin/printcee.pl Labor, Department Of. (2013). United States Department Of Labor, Wage and Hour Division. Retrieved April 30, 2013, from http://www.dol.gov/whd/minwage/america.htm Labor, United States Department of. (2013). Characteristics Of Minimum Wage Workers: 2012. Retrieved April 12, 2013, from http://www.bls.gov/cps/minwage2012.htm Rampell, Catherine. (2009). Who is affected by a higher minimum wage? Retrieved April 17, 2014, from http://economix.blogs.nytimes.com/2009/07/24/who-is-affected-by-todays-minimum-wage-hike/ Schmitt, John. (2013). Why Does the Mininmum Wage Have No Discernible Effect on Employment? (pp. 2-24): Center for Economic and Policy Research. Wascher, David Neumark and William. (2006). Minimum Wages And Employment: A Review Of Eveidence From the New Minimum Wage Research. National Bureau of Economic Research, NBER Working Paper No. 12663, 2-432. White, Mercedes. (2013). The great minimum wage debate: how Obama’s proposal to increase the minimum wage will impact the economy. Retrieved March 27, 2013, from http://www.deseretnews.com/article/865573603/The-great-minimum-wage-debate-how… Wikipedia.). Minimum wage in the United States. Retrieved April 15, 2013, from http://en.wikipedia.org/wiki/Minimum_wage_in_the_United_States Wikipedia. (2013). Minimum Wage. Retrieved April 14, 2013, 2013, from