Of developed Western countries, the United States has the lowest minimum wage, standing at a paltry US$7.25 per hour in most states. In his recent State of the Union Address, President Obama urged Congress to gradually raise the minimum wage to $9.00 per hour by 2015, amounting to an almost 25% increase, sparking debate among Congressmen, economists, and the general public.
Critics argue that such an increase of the minimum wage would result in higher unemployment, higher inflation, and would negatively impact small businesses. They claim that many small enterprises would not be able to hire additional workers as a result of reallocated capital to increased wages of current employees. Due to increasing employee salaries, small businesses may be increasingly strained and may reduce the number of hours worked by their employees or may even lay them off due to budgetary constraints, thereby raising the unemployment rate.
In addition, many economists argue that raising the minimum wage is harmful to low-income workers – the population it is meant to benefit – by promoting price inflation. By raising the minimum wage, the cost of goods sold presumably rises due to increased labor costs. With a higher cost of living, they argue that this would negatively impact all social strata and not just a single income group.
Proponents in favor of an increase in the minimum wage argue that its buying power has not been adjusted for inflation and is declining in value. This means that the amount of goods that could be bought decreases over time due to the rising cost of living. For instance, the buying power of minimum wage in 1968 was the modern equivalent of $10.51, more than 40 percent higher than the current US minimum wage. Although nominal wages may seem to have risen, real wages have not, which means that more Americans earning the minimum wage are only able to afford a fraction of what they were able to in the past.
Contrary to neoclassical economic thought, some economists argue that a rise in minimum wage would only cause a minor tremor in the greater economy or may even boost it. The 3.8 million people that work for or below minimum wage in the U.S. is eclipsed by the greater 133.3 million of employed people. Thus, some economists argue that the actual overall effect of a minimum wage increase on the economy would be small in the long run and would not cause any major price increases. Furthermore, lower-income workers spend the vast majority of their income in the local economy, which may stimulate the economy by $21 billion if the minimum wage was raised to $9, according to the Economic Policy Institute.
Facing decreasing purchasing power of its currency and increasing economic disparity, the United States must raise its minimum wage. President Obama’s proposed staggered wage hike, similar to previous increases, will allow for businesses to adjust their budgets, enabling them to anticipate the change in minimum wage and mitigate many of the shocks that a hike may bring.
While some claim there may be minor repercussions that accompany the wage hikes, the correlation between growth in unemployment and a raise in minimum wage is inconclusive. Instead, adjustments in organizational efficiency, miniscule price increases, wage compression, and a decrease in labour turnover rates all cause the change in unemployment rate to be almost negligible. The gradual increase proposed by President Obama would give businesses enough time to adjust for these differences at a manageable cost.
However, the cost of living varies considerably between states. States like Tennessee, Oklahoma, and Arkansas have significantly lower costs of living than states like California, New York, or Connecticut. The effect of a wage hike on areas with a lower cost of living would impact local shops far more than their counterparts in a more expensive state. Cooperation with states historically opposed to minimum wage is also possible, as seen when almost all U.S. states raised their minimum wage pursuant to the Federal Minimum Wage Act of 2007 to $7.25. Different states ought to be able to raise their minimum wage at a different timeframe to satisfy the local economic climate there but remain adherent to the federal minimum wage.
Despite the fact that only a small fraction of Americans actually earn minimum wage, the low pay shadows the ever-growing income inequality in the country. The stagnant base wage fails to keep up with inflation, making it more difficult every year for individuals and low-income families to make ends meet. As economist and Nobel laureate Joseph Stiglitz once said, “Increasing inequality means a weaker economy.” If the United States wishes to improve the standard of living for its lower-income citizens and bridge the inequality gap, the government should take measures to cautiously raise minimum wage to an acceptable, livable amount.
The views expressed in this opinion piece are the author’s own and do not necessarily represent those of The Bull & Bear.