In the United States, the Federal minimum wage is $7.25 per hour. That wage was established in 2009 by the Fair Labor Standards Act. Tipped employees must receive $2.13 per hour in cash wages and ensure that the $7.25 per hour minimum is met.
The minimum wage laws in the United States at the state level, however, are very different. There are currently 29 states which mandate a higher minimum wage than the national minimum. Eight states have legislation which requires the minimum wage to rise through automatic adjustments.
There are even two states that have a lower minimum wage compared to the national rate, though the $7.25 would still be required there. Washington State current has the highest state minimum wage, at $11.50 per hour, as of 2018. Here are the pros and cons which are associated with raising the minimum wage.
List of the Pros of Raising the Minimum Wage
1. It allows workers to have a wage that keeps pace with the rate of inflation.
When the federal minimum wage was raised to $7.25 per hour in 2009, it had risen 41% in total value since 2005. Even with the increase in the minimum wage, the actual value of wages earned at that level were 7.8% lower than what the minimum wage in 1967 happened to be. In 2011, the minimum wage reflected just 37% of what the average worker earned in the United States. Raising the minimum wage gives families the chance to keep their wages at the pace of inflation, which maintains their spending power.
2. It gives workers more localized spending power.
Raising the minimum wage helps to increase revenues within each community. Local dollars have almost twice the direct and indirect value when compared to money spend outside of the community. That means the people who need the money gain the opportunity to meet their basic needs more effectively. As money is spent, more people down the chain of purchasing gain these benefits as well.
3. It can increase job opportunities within a community.
When increased spending is available within a community, there is the possibility of increasing the number of job opportunities which are available. Families have access to more discretionary income, which gives them a chance to support more businesses. With more demand comes more opportunities for local businesses to expand.
4. It can reduce employee turnover.
As workers gain experience, there is a need to pay them more. If an employer does not do that, the experienced employees look for new employment where a higher wage can be earned. That forces employers into a cycle of turnover and training that can be very costly. With a higher minimum wage that extends to all worker opportunities, there is a better chance to keep experienced workers, reduce hiring costs, and minimize the negative effects that high employee turnover rates can cause.
5. It can improve tax revenues.
When workers are earning more, they are often paying more in taxes. A full-time single worker earning minimum wage will have an income tax bill of up to $2,500 before deductions. That’s on a salary which may only total $15,600. After deductions, however, many workers in this category typically pay little, if any, income tax on their wages. By increasing the minimum wage, an increased tax pool is created, which generates more revenues for needed services in each community.
6. It can reduce the need for welfare programs.
Many workers who only earn a minimum wage tend to rely on safety net programs to supplement their basic needs. They may also use local food banks and other social services that take up a portion of available taxpayer dollars. By raising the minimum wage, the reliance on programs such as these can be reduced. Although prices may go up in conjunction with the rise in wages somewhat, the benefits to a household’s bottom line tend to be better with the raise increase than without it.
7. It could reduce poverty.
Research conducted by the Congressional Budget Office (CBO) suggests that raising the federal minimum wage could raise more than 900,000 households out of poverty in the United States. Although there would likely be people who lose their jobs in the immediate aftermath of raising the minimum wage, the working poor would see an immediate economic benefit. Most workers, in fact, see real wages increases after the minimum wage is increased. Decreases in real income begin for households that earn an income six times higher than the poverty rate or more.
8. It could reduce the wage gap for women and minorities.
From 2016-2017, the wage gap between men and women grew by 0.1%, even though an emphasis on equality in worker wages has been present since the 1980s. Between 2008-2017, the wage gap between men and women decreased by just 2%. For Hispanic women, the disparity between what she and a Caucasian male make in the same position is even greater at just 54.4 cents to the dollar. Instead of creating legislation that mandates a closure of the wage gap, raising the minimum wage can encourage wage growth more naturally.
9. It could create more fair wealth distribution throughout the economy.
Since 2009, the primary gains in wages and income have been within the top 1% of the U.S. economy. In 2017, wage growth for the entire economy rose faster than it has since 2009. At the same time, however, the actual value of those wages has decreased since 1980 for households within the middle class. By increasing the minimum wage, a greater distribution of the economy’s wealth would be directed toward the working poor first, then the middle class, to create more potential for value.
List of the Cons of Raising the Minimum Wage
1. It comes at a cost to the employer.
Labor costs are one of the largest expenses employers face. By raising the minimum wage, employers are forced to pay more, and their revenues may not support this higher payment. That means some employees will make more because of the mandated pay raise. Others will find themselves out of work because their employer can only support a certain amount of labor expenses. This results in more workers potentially accessing unemployment benefits, which places a secondary strain on the economy.
2. It can raise the cost of goods or services.
Although raising the minimum wage does generate more personal income, it also promotes higher costs for goods or services performed in the community. This creates a scalability issue which can negate the impact of the higher minimum wage. It may even increase the overall cost of living for everyone in the community, which then creates a cycle where an even higher minimum wage would be required to help people make ends meet.
3. It can tighten the employment market.
Employers may limit the number of new positions they create when a higher minimum wage is mandated. They might create application screens which require applicants to have a specific degree or a length of experience for a job that minimum wage workers may not possess. That process can limit the number of opportunities available for people who only have a high school diploma, recent college graduates, or workers who are re-entering the labor force after an extended stay away from it. The CBO estimates that 500,000 jobs would be lost if the minimum wage were raised to $10.10 per hour.
4. It may encourage labor outsourcing.
Even though a higher minimum wage may be in place, that standard does not apply to every country in the world. Businesses can decide to outsource their labor needs to a country where the labor costs are much lower. The cost of a full-time IT worker in India, on average, is about $40,000 less per year than an IT worker based in the United States. Even if a business can save $5 per hour, per employee, through outsourcing, shifting 100 positions is a savings of $500 per hour – a figure that may be difficult to ignore.
5. It does not change the issue of under-employment.
For families that are living in poverty, just 7% of them have one person in the household that is working full time. Raising the minimum wage will not change this issue. If people are choosing to be under-employed, then they will continue to live in poverty, no matter what the minimum wage happens to be. Creating more jobs, or converting more half-time positions into full-time positions, may have a larger economic impact than simply raising wages.
6. It requires raises for other workers as well.
When the minimum wage is raised, it creates conflicts within the work environment. Entry-level workers are suddenly making as much as experienced workers. Depending upon on how high the minimums are raised, some supervisors might find themselves earning the same amount as their direct reports. To counter this issue, businesses find that they must offer structured raises to everyone involved to maintain productivity levels. This hidden cost is often not calculated into the benefits of raising the minimum wage and is one of the reasons why workers are laid off instead of receiving a raise.
7. It may encourage a move toward automation or self-service.
We’re already seeing the effects of automation and self-service at stores. Instead of being having items checked and bagged by a cashier, self-service stations are being installed. If there are six self-service stations active, along with three traditional checkout lines, that store has cut their employment levels by 60% with a small investment into technology. Automation follows a similar process. If an employee’s position is repetitive, then it could be replaced by a machine that doesn’t require a paycheck.
8. It could encourage more student dropouts.
With a higher minimum wage available, some students may decide to stop going to school to enter their chosen vocation. The students most at-risk for this decision are those who would either not qualify for college or wish to work in a vocation that does not require a degree. That could depress the economy over the long-term, as individuals without a diploma can earn up to 40% less than individuals with a graduate degree over their lifetime.
9. It rewards inexperience.
When workers can earn a similar wage without experience compared to those with experience, it creates a disincentive for workers to pursue further training opportunities. Why become a lead writer when an assistant writer would receive a similar wage without the same responsibilities? Instead of rewarding those who pursue more knowledge and experience, it rewards those who waited long enough to get a raise without really doing anything for it.
Raising the minimum wage has various pros and cons which are important to consider. There are economic benefits which may occur with such an action. There are also economic concerns which may develop over time that could negate the positive impacts that a raise in the minimum wage creates. It should be noted, however, that Washington State, with the highest minimum wage, was also ranked as the top economy in the U.S. in 2017.
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.