Minimum Wage: Why Minimum Wage Should be Increased

Introduction

President Roosevelt established the federal minimum wage in 1938 as part of the Fair Standards Labor Act. The minimum wage was designed to protect workers from exploitation by their employers. Originally set at $0.25, minimum wage has been periodically increased as it is devalued by inflation. From 1997 to July 2007 the federal minimum wage was $5.15, and then increased to $5.85, where it stands today. Workers and economists argue minimum wage does not pay a sufficient amount to stay out of poverty. To supplement the low national minimum wage, 31 states have enacted higher minimum wages, but the remaining 19 states still abide by the nation minimum wage. The federal minimum wage can and should be increased as a tool to reduce poverty and stimulate the economy.

New Jersey and Pennsylvania Case Study

Minimum Wage: The Traditional Textbook Teaching

Minimum wage is examined under labor market situations consisting of supply and demand analysis. This analysis contains three assumptions: 1. Productivity is unaffected by wage rates 2. Minimum wage covers all workers and 3. The labor market is perfectly competitive. In a perfectly competitive market, the market price settles to the marginal value of the product, therefore, workers are paid the marginal value. If minimum wage was introduced (equilibrium wage rate is below minimum wage) under the three assumptions unemployment in the labor market will increase.

Minimum Wage: A New Look to the Traditional Teaching

David Card and Alan B. Kruger, however, believe that small to moderate increases in the minimum wage will not increase unemployment. These two economists observed the impact of minimum wage on employment by researching 410 fast-food restaurants in New Jersey and Pennsylvania before and after a minimum wage rise. In April of 1992, New Jersey’s minimum wage rose from $4.25 to $5.05, Pennsylvania’s minimum wage remaining constant.

Under the traditional theory, the increase in New Jersey’s minimum wage would predict higher unemployment. The study, on the other hand, suggested that raising the wage floor would in fact open new jobs. Card and Kruger also introduced the idea of wage levels influencing employer’s productivity. Higher productivity may offset the increased production costs. The minimum wage increase occurred during a recession in the New Jersey economy. Secondly, New Jersey’s economy is greatly influenced by nearby states due to its small size. However, when minimum wage increased, full-time employment increased in New Jersey relative to Pennsylvania full-time employment.

One reason why employment will increase despite an increase in minimum wages is an increase in full-time workers. As a response to an increase in the minimum wage, stores may increase the proportion of full-time workers. In fact, the fraction of full-time workers increased in New Jersey by 7.3 percent relative to Pennsylvania. Another reason why the rise in minimum wage did not lower employment was a reduction in non-wage compensation. New Jersey employers did not change either their wage profiles or their supplemental benefits to counterbalance the increased minimum wage.

In conclusion, Card and Kruger determined that minimum wage would increase employment regardless of whether one compares a New Jersey store with an initial wage of $5.00, a Pennsylvania store of a constant wage of $4.25, or a New Jersey store with an initial higher wage.

Small Business

Affect of Minimum Wage on Small Business

Economically conservative lawmakers traditionally argue that raising the minimum wage hurts small businesses because they cannot afford to pay higher wages, and therefore are forced to layoff workers, further augmenting poverty. In a study done by the Levy Institute, the vast majority of small business owners interviewed said a raise in minimum wage would not cause them to layoff workers, or decrease the number of new workers they could hire. The Levy Institute interviewed 560 businesses with under 500 workers each, asking them questions about their hiring practices, particularly with regard to a possible increase in the minimum wage. Of those businesses, only 6.2% said a raise in the minimum wage would negatively affect their hiring practices. When the minimum wage was increased in 1997, economists and lawmakers feared there would be significant job losses, but instead it was the best job market in 30 years. This shows the demand for labor is wage inelastic; meaning changes in wages does not affect the amount of labor demanded.

Benefits for Small Business of a Higher Minimum Wage

Higher wages decreases job turn over, especially in less specialized occupations. Workers receiving wages above the federal minimum wage, either because their employer chooses to pay more or they live in a state with higher minimum wage laws, become more committed to the company and therefore are less likely to look for a different job. The decreased job turn over increases productivity and saves the employer the cost of training new workers. Some economists feared this would decrease the growth rate of industries typically paying at or near minimum wage, particularly the retail and food industries. The opposite proved to be true. In Oregon the minimum wage is $7.25, about $1.50 above the national wage. The job growth rate in Oregon is twice that of the national average, demonstrating higher wages are beneficial to worker and the employer.

Benefits of Increase

The Problem with the current Minimum wage is that it has failed to keep up with inflation and rising cost of living. This means that over time the purchasing power of the minimum wage has decrease. The current minimum wage is not longer enough to keep working families from meeting their most basic needs such as cost of housing and food, health care, education and child care. According to Economist Jared Bernstein from the Economic Policy Institute the cost of basic necessities has increase by almost 50% between 1991 and 2007. As a result low income families are stock in poverty and the income gap between the low and high class is continuously increasing.

Summery Facts about the Minimum Wage:

1) The current minimum wage is insufficient for low income workers and families to meet basic needs.

2) High costs of living leave families that earn the minimum wage, below the federal poverty level. As a result taxpayers have to pay more for public assistance.

3) A person who earns the minimum wage and works full time (40 hrs/week, 52 weeks/yr) only earns about $10,500 a year. This is $2,000 below the poverty line.

4) The federal minimum wage has not increase in almost eight years.

5) Cost of basic necessities such as food, clothing, housing, health care, education and fuel have raise significantly. The “Break out of Poverty Minimum Wage” (meaning the hourly rate at which a full time worker’s earnings will just exceed the federal poverty level) for a family of two and three are: Family Size Federal Poverty Level “Break Out of Poverty” Wage Family of 2 $12,830 $6.17 minimum wage Family of 3 $16,090 $7.36

Benefits of Increasing the Minimum Wage:

1) Raising the minimum wage can increase the annual income of working families and aid families to get out of poverty.

2) Raising the minimum wage will create a “ripple effect” by benefiting those workers who earned more than the previous minimum wage but less than the new minimum wage. Employers will pay these workers a higher wage to keep compensation differences among workers.

3) Raising the minimum wage increases spending. With a higher minimum wage consumers would be more likely to spend more, which in turn puts money back into the economy.

Economists In Support

In October of 2006 the Economic Policy Institute (EPI) released a statement entitled, “Hundreds of Economists Say: Raise the Minimum Wage”. Fifteen leading economists, that is, Henry Aaron, Kenneth Arrow, William Baumol, Rebecca Blank, Alan Blinder, Peter Diamond, Ronald Ehrenberg, Clive Granger, Lawrence Katz, Lawrence Klein, Frank Levy, Lawrence Mishel, Alice Rivlin, Robert Solow, and Joseph Stiglitz, endorsed the statement. Not only do these 15 individuals endorse an increase in minimum wage, but 650 of their fellow economists agree. By signing the statement the economists believe that “a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed. As economists who are concerned about the problems facing low-wage workers, we believe the Fair Minimum Wage Act of 2005’s proposed phased-in increase in the federal minimum wage to $7.25 falls well within the range of options where the benefits to the labor market, workers, and the overall economy would be positive.”

'Katherine G. Abraham University of Maryland Frank Ackerman Tufts University F. Gerard Adams Northeastern University Randy Albelda University of Massachusetts - Boston James Albrecht Georgetown University Jennifer Alix-Garcia University of Montana Sylvia A. Allegretto Economic Policy Institute Abbas Alnasrawi University of Vermont GarAlperovitz University of Maryland - College Park Joseph Altonji Yale University Nurul Aman University of Massachusetts - Boston Teresa L. Amott Hobart and William Smith Colleges Alice Amsden Massachusetts Institute of Technology Bernard E. Anderson University of Pennsylvania Robert M. Anderson University of California - Berkeley Bahreinian Aniss California State University - Sacramento Kate Antonovics University of California - San Diego Eileen Appelbaum Rutgers University David D. Arsen Michigan State University Michael Ash University of Massachusetts- Amherst Glen Atkinson University of Nevada - Reno Rose-Marie Avin University of Wisconsin M.V. Lee Badgett University of Massachusetts-Amherst Aniss Bahreinian Sacramento City College Ron Baiman Loyola University Chicago Asatar Bair City College of San Francisco Katie Baird University of Washington - Tacoma Dean Baker Center for Economic and Policy Research Radhika Balakrishnan Marymount Manhattan College Erol Balkan Hamilton College Jennifer Ball Washburn University Brad Barham University of Wisconsin - Madison Drucilla K. Barker Hollins College David Barkin Universidad Autonoma Metropolitana James N. Baron Yale University Chuck Barone Dickinson College Christopher B. Barrett Cornell University Richard Barrett University of Montana Francis M. Bator Harvard University Rosemary Batt Cornell University Sandy Baum Skidmore College Amanda Bayer Swarthmore College Sohrab Behdad Denison University Peter F. Bell State University of New York Dale L. Belman Michigan State University Michael Belzer Wayne State University Lourdes Beneria Cornell University Barbara R. Bergmann American University and University of Maryland Eli Berman University of California - San Diego Alexandra Bernasek Colorado State University Jared Bernstein Economic Policy Institute Michael Bernstein University of California - San Diego Charles L. Betsey Howard University David M. Betson University of Notre Dame Carole Biewener Simmons College Sherrilyn Billger Illinois State University Richard E. Bilsborrow University of North Carolina - Chapel Hill Cyrus Bina University of Minnesota - Morris Melissa Binder University of New Mexico L. Josh Bivens Economic Policy Institute, Stanley Black University of North Carolina Margaret Blair Vanderbilt University Law School Gail Blattenberger University of Utah Robert A. Blecker American University Barry Bluestone Northeastern University Peter Bohmer Evergreen State College David Boldt State University of West Georgia Roger E. Bolton Williams College James F. Booker Siena College Jeff Bookwalter University of Montana Barry Bosworth The Brookings Institution Heather Boushey Center for Economic and Policy Research Roger Even Bove West Chester University Samuel Bowles Santa Fe Institute James K. Boyce University of Massachusetts - Amherst Ralph Bradburd Williams College Michael E. Bradley University of Maryland Elissa Braunstein Colorado State University David Breneman University of Virginia Mark Brenner Labor Notes Magazine Vernon M. Briggs Cornell University