A minimum wage is the lowest wage than an employer can legally offer to an employee. The first minimum wage in the world was enacted in New Zealand in 1894. The United States would not enact a minimum wage law until 1938, when the Fair Labor Standards Act was passed. The very first minimum age for covered workers in the U.S. was set at $0.25 per hour.
Since 1938, the minimum wage has only been raised 22 times. The last time the minimum wage was raised was in 2009, when it was brought to $7.25 per hour.
When the minimum wage was first introduced, just 20% of the U.S. workforce was covered by the law. With expansions to the minimum wage definition and mandates, about 85% of the population is now covered by this law. There are also state laws which may provide a higher wage than the one mandated by the federal government.
Here are the key pros and cons of raising the minimum wage to think about.
List of the Pros of Raising the Minimum Wage
1. It creates wealth distribution to each socioeconomic group.
Since the last time the minimum wage was raised at the federal level, over 80% of the income gains in the U.S. have occurred within the top 1% of income earners. The actual value of the minimal wage has gone down due to inflation since it was last raised. In real value terms, households earning $50,000 or less each year are making less in total income value, unlike the higher income groups. Raising the minimum wage would correct this situation.
2. Raising the minimum wage may reduce poverty.
Studies by the U.S. government suggest that a raise in the minimum wage to $10.10 per hour could move almost 1 million families out of poverty. In Australia, the minimum wage is AU$17.70 per hour. In the United States, the minimum wage is the equivalent of AU$10.08 at the federal level. The national poverty rate in Australia hovers about 5 percentage points lower than it does in the United States, despite the higher salary.
3. It reduces wage gaps.
The current wage gaps are based on every $1 that a white male makes in the United States. Women earn about $0.80 when compared to men, which means women earn about $10,000 less per year when compared to me. Hispanic women earn about $0.54 when compared to white men. African-American and black women earn $0.63. Even Asian women earn $0.85 compared to white men. Raising the minimum wage would help to reduce the influence these gaps have on employment.
4. Raising the minimum wage might reduce public assistance spending.
The Economic Policy Institute reports that a raise in the federal minimum wage to $12 per hour in the United States by 2020 would reduce public assistance spending by $17 billion each year. These savings could then be used to strengthen the other social safety net programs which are operated by the government. At the current minimum wage level, almost 60% of workers receive some type of public assistance, for themselves or through a family member. For workers earning between $12.17-$14.72 per hour, those receiving public assistance is cut in half. Even in prices went up because there was more money within local economies, most households would be better off with the higher minimum wage than they were using public assistance programs.
5. It improves the tax base for local communities.
When workers are earning more, then they are paying more in taxes. Many low-income workers pay little, if any, taxes on what they earn each year at the federal level. With more income, households spend more on items that are taxed at the state and local level, which generates more revenues for each community. That means needed services, such as infrastructure, social programs, and food assistance can be shored up with the extra revenues.
6. Raising the minimum wage reduces employee movements.
When employees are only given opportunities at the minimum wage, they will leave an employer when they get a chance to earn more. By raising the minimum wage, it does force employers to offer a larger paycheck to their workers. It also reduces their internal costs because there are fewer instances of turnover. Employers must pay for training and hiring when bringing in a new employee and these costs begin to go away with a higher wage.
7. It may improve the number of job opportunities.
When there are higher levels of spending within a community, there is a greater demand for services. That means there are more opportunities for local companies to earn revenues by meeting the needs of these households. That can inspire innovation, stronger revenues, and more jobs to meet the higher levels of demand that may appear when the minimum wage is higher for everyone.
8. Raising the minimum wage creates better local economics.
Research firm Civic Economics reports that when money is spent locally, then it offers direct, indirect, and induced impacts that help everyone enjoy a better overall return. When that money is spent at a chain retailer, then just 13.6% of the revenues come back through recirculation to the community. If that money is spent at independent local businesses, then 48% of the money spent is recirculated. That means the value of local spending is between $1.13 and $1.48, which means spending local creates more local wealth and the potential for jobs.
9. It places the value of an income at the same rate of inflation.
Using a standard inflation calculator available through any web search, the spending power of $7.25 in July 2009 offers the same buying power as $8.47 as of May 2018. That means the minimum wage at the federal level is currently $1.22 less than it should be because of the effects of inflation. Regional and local standard of living differences can further reduce the spending power available at the current federal minimum wage. By raising this wage, households can negate the effects of inflation and meet their basic needs without making the same sacrifices that they are forced to make today.
List of the Cons of Raising the Minimum Wage
1. Raising the minimum wage negates experience.
When the minimum wage is raised, it creates a host of problems for employers. What if the assistant manager is suddenly required by law to make as much as the manager? You must then either raise the wage of the manager too or somehow convince the manager to do more work for the same amount of money. Raising the minimum wage may come with a host of benefits, but it also negates worker experience at the same time.
2. It may encourage vocationally-related school dropouts.
If a student knows that they’ll earn a specific income with or without a degree, it might make sense for them to drop out of school to pursue a job opportunity. All students would face a higher risk of this type of incidence, though households with lower income levels or students who would not qualify for higher education programs would be the most at risk. Earning a degree of some type can create up to 40% more lifetime income, which is difficult to see sometimes when you’re staring a fair minimum wage right in the face.
3. Raising the minimum wage would hasten the adoption of artificial intelligence.
Let’s say that you’re paying an employee $12 per hour in Washington State in 2018. That means your annual employee labor cost for their salary is almost $25,000. You must also include your annual payroll taxes to that amount, which would be $1,934.40, along with your overhead, benefits, and other costs. That employee might cost you $24 per hour instead. If you can invest into an automation service for $30,000, then AI would pay for itself in the first year, then continue to provide cost-savings that human workers can’t offer.
4. It offers hidden costs beyond the basic wage increase.
The actual wage increase costs for raising the minimum wage are somewhat minimal. If an employee works 40 hours per week, then they’ll put in 2,080 hours. Raising the minimum wage by $1 means an extra expense of $2,080. It’s the other costs associated with this raise, like increases the wages of other employees, providing added benefits, and regulatory costs that are often not calculated into this expense. It is the hidden costs, not the actual cost of the wage, that forces employers to look for alternatives.
5. Raising the minimum wage encourages under-employment.
Under-employment is defined as an over-qualified worker being employed in a specific position. Many people do not choose to work at a minimum wage. Just 7% of U.S. households have one member working full-time, despite living in poverty. Because entry-level jobs are easier to obtain, raising the minimum wage encourages under-employment because it discourages the need to better oneself. For an economy to truly grow, people who want to work must be given the opportunity to work instead of paying people more to do what they’re already doing.
6. It would encourage offshoring.
Offshoring is the practice of outsourcing jobs to other countries where the labor market is cheaper. When the minimum wage goes up domestically, employers begin to look at overseas opportunities to maintain service and production levels without raising their costs. Contractors and freelancers can often set their own wages as well, which would further undercut the traditional employee. Even if a company only offshores 5 jobs, the savings they generate could be more than $100,000 with a higher minimum wage.
7. Raising the minimum wage changes the employment market.
There are two factors to consider here. The first is that employers may decide to not fill open positions because of the cost of the higher wage. The second is that employers may decide to implement stringent screening protocols for their open positions to ensure highly qualified individuals apply for the job. Instead of creating more employment opportunities, a higher minimum wage may encourage fewer of them instead. Although families would benefit from the higher wages, there would be 500,000 households suddenly unemployed if the minimum wage were raised to $10.10 per hour in the United States.
8. It raises the prices for goods and services.
Businesses are not going to absorb the costs of a higher minimum wage. They will pass those costs along to their customers. That means everyone pays more for what they want or need. The business earns its margins because of the higher prices. The losers in this scenario are the consumers, who pay more to often receive less, which reduces the spending power of the minimum wage.
9. Raising the minimum wage makes a major hit to a business budget.
If a small business with 5 employees is mandated to raise the minimum wage by $2 per hour, then that’s a cost of $80 per day, or $400 per week. That might seem doable. Then expand that concept to a larger business with 10,000 employees. Suddenly the costs make a direct impact on the profitability of the business. That is why raising the minimum wage causes employers to look for hiring alternatives rather than paying a higher wage for the same positions.
These pros and cons of raising the minimum wage show that it can be a successful experience if the potential risks and pitfalls of such an action are recognized.
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.