13 Far-Reaching Pros and Cons of Minimum Wage

A minimum wage is defined as the lowest compensation permitted by law allowed for employers paying their workers. In 2018, the federal minimum wage in the United States is $7.25 per hour for employees who do not receive tips. For employees who receive tips, a wage of $2.13 per hour is required, with a minimum of $30 in tips received. If, in any week, wages for a tipped employee do not reach $7.25 per hour, then the employer is required to raise cash wages to compensate.

The first minimum wage in the United States was established in 1938 through the Fair Labor Standards Act. It set a uniform employment rate of $0.25 per hour for workers at the time.

There are 14 states in the U.S. who have a minimum wage equal to the federal wage. An additional 5 states have no local laws, while 2 states have lower state-based rates. If the state minimum wage is lower than the federal minimum wage, then the current federal wage must be paid.

The remaining states have a higher minimum wage than the federal minimum wage. Several states have scheduled adjustments set through 2023 that will increase local minimum wages to $15 per hour.

Here are the pros and cons of a minimum wage to consider when looking at this compensation schedule.

List of the Pros of a Minimum Wage

1. It allows workers to cover their cost of living.
Workers are more productive when they are able to meet their basic needs of living. Although anyone has the capability of working, people work better when they have enough food to eat and a secure place to live. Although a higher minimum wage creates more labor costs for employers, it is more effective to pay employees a rate which allows them to be secure because productivity gains typically outpace the costs to receive them.

2. It creates an incentive to work.
When there is a higher wage available to a worker, there is a greater incentive to work. When an economy is strong, the higher minimum wage promotes even higher wages in the skill-based positions, which creates more income for everyone. If each person was given a universal basic income for their primary needs, or earned enough on a welfare system that there was no need to work, then the incentives would disappear.

3. It promotes socioeconomic equality.
A higher minimum wage drives up the household incomes of working families. It gives them more income to work with, which brings them closer to the higher income levels of executives, high skill-based employment, and other high wage earners. The minimum wage promotes upward movement to continue earning more income as a household, while still rewarding those who have developed talents and skills, or pursued an advanced education, with a better income over the minimum as well.

4. It promotes higher levels of local economic growth.
When households are earning more income, then they are able to spend more of that income locally. Even if the spending is reflective of basic living needs, it still benefits the local economy in numerous ways. According to information released by American Express, $43 out of every $100 is redistributed when money is spent at a local national chain store. If that money is spent through a locally-owned business, then $68 of every $100 is redistributed locally.

5. It allows employees to invest more into themselves.
A higher minimum wage means more than a bigger paycheck. Employers offer a series of benefits with many positions that benefit workers too. An employee may have access to a tuition reimbursement plan which helps them go back to school to finish a degree they were working on. It may provide a retirement match to help them save for their retirement through a 401k plan. There may be paid sick days, paid vacation days, and other benefits which allow for personal investments as well.

6. It promotes a stable workforce.
When workers are unable to meet their basic needs with their employment, they will either supplement their paycheck with government benefits, look for another job or a higher-paying job, or live with fewer necessities. By having a minimum wage in place, employment stabilizes within each community because there is a specific level of compensation available. When workers are guaranteed an income which meets their needs, they are less likely to find new work. That means less turnover for the employer, which means fewer hiring and training costs.

7. It provides a boost to a small portion of the workforce.
In 2016, just 2.7% of working Americans in formal employment were earning a minimum wage. In 1979, over 13% of the workforce in the United States was earning the minimum wage. Although about 1.5 million workers are exempt from minimum wage laws in the United States, having a minimum wage set creates a baseline for the rest of the workers. That allows them to negotiate a wage that is fair, based on their own circumstances, skills, and talents.

List of the Cons of a Minimum Wage

1. It increases the labor costs for the employer.
Having a minimum wage in place raises the labor costs of employers in every market. Labor costs are already the largest expense that the average employer faces. According to the San Francisco Chronicle, some industries have labor costs as high as 40% of a company’s overall budget. When the government forces employers to pay more for each worker, they are forced to keep their labor cost percentage of the budget at a consistent level. That means fewer workers find jobs.

2. It affects low-wage workers more than any other group.
When employers make a move to limit budget expenses, then low-wage workers tend to be the ones most hit by the presence of a minimum wage. Employers may even look at automation or self-service options for their customers to limit the number of employees that are required to maintain productivity levels. Over time, the unemployment rate tends to rise, which can make it difficult for workers to find a job in an economy that is weak. You have more workers competing for fewer jobs.

3. It may put small businesses into bankruptcy.
Many small businesses operate on razor-thin margins. Enforcing a minimum wage law on these employers may create costs that the company is unable to absorb. They cannot let their workers go because they are needed to get the work done. They cannot pay their workers the minimum wage, as it would make the company become unprofitable. The only other outcome available for the small business owner is to declare bankruptcy, which could put everyone out of work.

4. It shifts the economic base of a community.
The nature of a minimum wage is that it rewards companies that are involved in capital-intensive pursuits. That means it penalizes organizations which are based on labor-intensive pursuits. Although this process stabilizes compensation levels throughout the economy, creating more equality, it also creates inequality within the economic base. The companies which are based on capital tend to receive more stability over companies that are based on labor.

5. It promotes outsourcing and offshoring.
A higher minimum wage encourages employers to look at employment alternatives which can save them money. Two good options are currently available: outsourcing and offshoring. Independent contractors and freelancers may work at wages which meet their personal needs without regard to a formal minimum wage. Some contractors and freelancers may prefer to work on a project-based wage instead. With offshoring, a cheaper minimum wage in a different labor market may create cost savings at home, keeping the labor costs at a percentage where a business needs it.

6. It does not always reduce poverty at a local level.
The goal of a minimum wage is to reduce the levels of poverty which are experienced at the local level. For workers who are able to get into a job, this may be true. There are other workers who may be prevented from receiving an employment offer because of a minimum wage, which means a higher unemployment rate. Over time, if there is little economic growth being experienced, then poverty rates may actually increase rather than decrease.

The pros and cons of a minimum wage indicate that it can increase the number of jobs which are available within an economy. Many businesses are able to find ways to offset the higher costs of labor, which may include reducing the availability of hours or raising prices. The higher wages create better worker morale and productivity.

The benefits of a minimum wage can be offset if the minimum compensation rates are too high for the economy to support. High wages are difficult to support during a weaker economy. That means a balance between protecting workers and businesses must be found when setting a minimum wage to ensure everyone gets a fair chance at success.

Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.