Pro Minimum Wage Increase

Minimum Wage Today

1. • Realities of the Current Minimum Wage
     • The current federal minimum wage rate is $5.15 and hour.
     • This minimum wage is 31% of the current average wage in the United States, which is its lowest relative value since World War II.
     • The real value of the minimum wage is at its lowest value since 1955.
   • Proposed Minimum Wage Increase
     • The proposal is to increase the minimum wage from its current level of $5.15 to $7.25 by the year 2008.
     • While this increase is significant, it seeks only to increase the real value of the minimum wage to its historic level.
   • People Affected by the Proposed Increase
     • The proposed minimum wage increase would raise the hourly wages of 14.9 million workers (6.6 would be directly affected, 8.3 would be affected by spillover effects).
       • Spillover effects: workers earning at or above the proposed new minimum wage will see their wages increase as well as firms seek to preserve internal wage hierarchies.
     • The 14.9 million workers affected by the increase represent 11% of the work force.
     • 80% of the people who stand to benefit from the proposed minimum wage increase are age 20 or older (they are not simply teenagers and part-time workers, as is the common misconception).
     • Minimum wage workers are important contributors to their family's total income (a minimum wage worker accounts for an average of 54% of their family's income).
     • The workers who will benefit most from the increase are single parents, women, minorities, working households at the bottom of the income scale, and families with children.
   • Arguments for Minimum Wage
     • Best recent research on minimum wage increases shows positive effects on wages with without negative effect on employment.
     • The higher costs associated with a minimum wage are offset by increases in productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.
     • Negative employment effects associated with minimum wage increases are overstated.
   • Minimum Wage in the Past
     • 1970's and 80's - The competitive model of labor shows that any binding increase in the minimum wage will inevitably lead to significant lay-offs (higher unemployment).
       • Problems with the competitive model of labor - It is oversimplified; assumes that all employers and job seekers have perfect information, and that hiring, job loss, and unemployment are without cost. Furthermore, the competitive model of labor is based largely on time series studies, which have difficulty controling for external factors in the economy when studying the minimum wage.
     • In the 1990's, several famous studies are conducted that challenge the competitive model of labor.
       • 1992 - Princeton's David Card studies the 1990 minimum wage increase; concludes that there have been positive effects on wages, but no significant effects on employment.
       • 1992 - Card and Krueger study effect of a minimum wage increase on fast food restaurants in New Jersey.
         • This controversial study showed that a minimum wage increase had no negative effects on employment, and ushered in the "new economics of the minimum wage".
       • 1996-97 - Minimum wage is raised; studies show no evidence of siginicant job loss.

The Counter Argument

We have offered thus far substantial evidence as to why increasing the minimum wage is an appropriate move. However, opponents of a minimum wage increase use several key arguments to portray a higher wage floor as an ill-advised move.

• An increase in the minimum wage would adversely affect employment: some employees would lose their jobs.

The Classical Model shows us that this should be true. When the wage floor is raised it causes employment to fall back to meet it along the demand curve. The classical model demonstrates the rise in unemployment that is theoretically created by raising the minimum wage. However, “A 1998 EPI (Employment Policies Institute) failed to find any systematic, significant job loss associated with the 1996-97 minimum wage increase.” The findings go on to say that there was not only no significant job loss, but the low-wage labor market saw a period of “lower unemployment rates, increased hourly wages, increased family income, [and] decreased poverty rates.” (EPI quick facts) Research done on the 1990 and 91 wage increases showed that there was similarly no adverse employment affect associated with the wage increase. New economic theory suggests that employers may be able to absorb much of the negative effects of a minimum wage increase through “higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.” These findings, coupled with a model that explains how this is possible, overshadows the claim that an increase in minimum wage hurts employment; a higher wage floor in fact seems to contribute to a stronger economic state.

• The Minimum wage does not really help anybody in need, just teenage workers living at home and third-income earners in a family.

Opponents of the minimum wage cite research that shows that the main beneficiaries of a minimum wage hike are teenagers working while living at home, third income earners in families, and individuals living alone. However, raising the minimum wage would directly affect millions of workers hourly wage. 5% of the workforce, or 6.6 million workers, presently make less than the proposed federal minimum of $7.25, and would receive a pay boost. A substantial amount of the workers above them, up to 6% or 8.3 million workers, would also be likely to receive a pay raise due to the Spillover Effect.

The increase in the minimum wage would go to many families in need. An analysis of the 1996-97 increases that, on average, more than half of minimum wage workers provide the primary income source for their family. “An estimated 1,395,000 single parents with children under 18 would benefit from a minimum wage increase.” (EPI facts) The higher minimum wage would also benefit disadvantaged workers. 59% of workers receiving the higher wage would be woman, representing 14% of working women. The higher minimum wage would also help boost up the disproportionate share of minorities that would be affected by this wage hike, relative to the total workforce. The higher wage would also help raise entire areas income levels, such as in “some Southern and Mid-Western states” where nearly 20% of the workforce could receive a wage boost. All of this serves to illustrate that the minimum wage does not simply help teenagers with their first job or a third income earner; the higher minimum wage serves to help families and single parents as well as women and minorities to gain a boost in pay.

• Most hourly employees, nearly 90%, already make hourly wages higher than the new proposed minimum wage of $7.25.

While it is true that the majority of workers do not make the hourly minimum, and only slightly more make less than the proposed minimum, the concern is with the 10% (of the nearly 150 million workers in the US workforce) that make less than the higher proposed minimum. The real concern involves the buying power the minimum wage compared to how high it was in the past coupled with the increasing inflation rate. The real wage associated with the federal minimum has been declining steadily since the wage hike in 1997. It is 20% lower now than in 1997. Moreover, the wage inequality is worse than it has since nearly the inception of a minimum wage; “the minimum wage is 31% of the average hourly wage of American workers”. Inflation also adversely affects the real value of the minimum wage. Not only has the last minimum wage hike been completely negated by inflation, the actual equivalent wage is lower than it was in 1995 before the raise. An increase in minimum is not meant to boost up all of the workers in the economy, or even a strong majority: it is aimed to help those at the bottom end who would receive direct benefits from higher wages.

• The minimum wage is, in the end, simply not an effective tool to combat poverty.

Many critics of the minimum wage employ the argument that the minimum wage is not an effective way to help the working poor and combat poverty. In the first place, recent welfare reforms have shrunk the available amount of aid and forced families to rely more heavily on the income. Because of this, it is to be expected that a higher minimum wage would be directly beneficial to these families. Furthermore, a study in Oregon on their 1999 state minimum wage increase revealed that up to “one-half of the welfare recipients entering the workforce in 1998 were likely to have received a raise due to the increase.” This shows the possibility of the minimum wage to be effective against poverty. The minimum wage is also not typically used as a stand-alone solution to poverty and worker buying power. Generally raising the minimum wage is used as part of a broad program to alleviate the working poor. Usually the government would use a minimum wage boost coupled with the EITC to reduce poverty.

“For example, in 1997, a single mother of two children working 40 hours per week year-round at the minimum wage would have earned $9,893 (after Social Security and Medicare taxes) and would have been eligible for the maximum EITC of $3,656, which would have put her family income at $13,549, a mere 5% above the 1997 poverty threshold of $12,931 for a family of three. But because the minimum wage has not kept up with increases in the cost of living since 1997, the same family is now below the poverty line. In 2005, a single mother with two children would have combined earnings and EITC of $14,177, or 11% below the 2005 poverty threshold of $15,735 for a family of three.”

It is important to remember that the minimum was is not meant as a cure-all for poverty or the working poor; it is a tool to help low-income families, the working poor, and aid in boosting up the bottom income bracket in our economy. The minimum wage is an important tool to aid in maintaining families and individuals above the poverty line.

The Hidden Heart of America

• US policy changes in the second decade of the twentieth century

Minimum wage, as one of the factors that influence wage inequality in any society, is directly responsible for either increasing or decreasing the income-distribution gap between the rich and poor households in the American society (Goldin and Margo, p.4, 24.) America significantly reduced its unemployment rate during the second decade of the twentieth century through government programs: in 1933 and 1934, the government passed regulatory policies for maximum working hours and minimum wage, which increased the income gains of the low-income households, leading to wage inequality decrease (Goldin and Margo, p.16, 21.) The US government, aiming at mitigating the welfare of low-income Americans, increased the minimum wage to produce egalitarian wage distribution throughout the society. The minimum wage policies had a positive impact on the bottom part of the society’s wage earners (Goldin and Margo, p.28.)

• Recent trends and facts

The high wage inequality of today is, to a great extent, caused by the declining value of the minimum wage: the fall in the real value of the minimum wage may be a premature consequence for the increase in wage inequality in recent years (Lemieux and Fortin, p.83.) This decline has long-run consequences that have become apparent today: lower purchasing power of less-skilled workers, which in turn may definitely lead to social problems – increase in crime rates and destroying the social capital of a community. As mentioned above, before the 1980s, the wage inequality gap between low-income and high-income households in America was compressed: one of the factors responsible for that was an increase in the minimum wage. Yet, since 1980 the income inequality gap between those households has increased substantially. Labor productivity growth is no longer directly related to minimum wage growth (Figure 7: Inflation Adjusted Minimum Wage and Productivity1947-2004 (indexed to 1968=100)). While the productivity rate has been continuously increasing since the 1980s, the income rate for low-income households has rapidly decreased during the same time, with very short and unstable periods of slight increases: the minimum wage is no longer systematically related to productivity growth as it used to be in the second decade of the twentieth century (Figure 3: Minimum Wage, Median Wage, and Labor Productivity 1979-2005.)

As many as eighteen states, for instance Pennsylvania, New York, and New Jersey to name just a few, has increased their minimum wage rates above the federal rate, which is $5.15.

• The counter argument

Some critics, besides our opponents, argue that the increase in the minimum wage will cause job losses because employers will be willing to decrease their work force, provided they have to face higher wages. Yet, workers have limits to effectively using their abilities and skills as long as they work under obstructive or stressful environment: a worker cannot normally handle many tasks at once because it will lead to bad work performance; besides there are laws and regulations in force to control work conditions such as environment safety, etc. The increase in the minimum wage is aimed to better the financial conditions of low-income workers in the service sector. In heavy industries, for example steel and car sectors, employees are already paid more than twice the federal wage rate per hour.

Moreover, proponents claim the raise will actually foster an increase in employment rates: people will start searching for jobs and will reduce their dependency on government support. If transfers are reduced then the government will have more money to spend, for example, on public goods and services to facilitate an increase in GDP. The increase in minimum wage is beneficial for firms as well. They will have to learn to use innovation and efficiency in their business transactions as their main competitive and core advantages and work to develop them rather than solely relying on profiting from paying lower wages.

• Do we have moral (are we an integrated part of our society)?

The increase of the minimum wage will inevitably lead to improving the overall economic health and social capital of America. A higher minimum wage will increase the purchasing power of low-income households, which in turn will spend more on consumption, generating money in the US economy. Over the years, parents will invest in the education of their children, a crucial factor for the prosperity and development of a well-founded community. Low-income workers have difficulties adjusting to today’s high standard of living, for example the increase in medical costs and school tuitions. Such difficulties can be remedied, without incurring unnecessary monetary burden on the US government, by increasing the minimum wage.

The minimum wage is more that a mere earning tool for low-income American workers: it is one of the founding blocks of the American free society – a society that thrives on its own prosperity. How is it possible? The minimum wage as a monetary unit is very important factor for the entire American population or any society: it can be either the supporter of a well-established community with high social capital and ethic values that facilitates beneficial communications between its citizens or it can be the instigator of crime that destroys social capital and ethic values. To be safe and sound a society depends on its social capital. As a free society, America cannot deprive its citizens from the right to earn adequate minimum wages to support themselves and their children. The high standards of living are real burden for low-income households, who gained very little monetary value over the years 1979-2004 (Figure 1: Hourly Wages of High- Median-, and Low- Wage Earners in Pennsylvania, 1979-2004 (in 2004 dollars)) some of those households consist of a single mother with two children for instance. One of the possibilities to raise the low-income households from destitute is to increase the minimum wage rate.

The necessity of increasing the minimum wage is not purely financial one: it is a highly moral one. We all live in one community and when the betterment of our community is at stake, we better do what is necessary rather than wait blindly and gather the long-lasting and economically rotten consequences of our unwise actions. The good health of our society is not a natural outcome: it is a human one – the outcome of our efforts. As the above arguments suggest, the entire US economy and society will benefit from the increase in the minimum wage.

We are not alone on the frontier for a minimum wage increase: WHO is with us?

Research Sources