The Case For A Higher Minimum Wage

Last week during the annual State of the Union address, President Obama laid out his case for raising the national minimum wage. He said:

“…Today, a full-time worker making the minimum wage earns $14,500 a year. Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong. That’s why, since the last time this Congress raised the minimum wage, nineteen states have chosen to bump theirs even higher.

Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour. This single step would raise the incomes of millions of working families…”

Raising the minimum wage always sparks an intense debate. In the days since the State of the Union address I’ve seen numerous blog posts and articles on why raising the minimum wage is a bad idea. They all tend to use the same arguments against raising the minimum wage, so let’s look at the most common arguments against, and show why the federal minimum wage in the United States should be raised.

1. Raising minimum wage will make low-income workers more expensive, therefore causing them to lose jobs. 

On the surface this sounds like solid logic. Companies will want to maintain profit margins and having to pay more for labor will cause them to slash the amount of employees they pay. However, we’ve seen dozens of minimum wage hikes and 19 states have minimum wages above and beyond the federal minimum. So where are all the job losses? They simply don’t exist.

This is not to say that no one loses their job, but as a whole, raising minimum wage has no discernible effect on employment rates. The University of Massachusetts-Amherst also conducted a 16 year study on the subject and also concluded that there are no employment effects of higher minimum wages. In fact, there are multiple studies that show raising the minimum wage increases employee morale, reduces job turnover and even increases productivity. So anyone that readily citing that mass job losses will occur from a minimum wage increase is speaking from a place of prejudice on the topic, not from the evidence.  

2. The costs of a higher minimum wage will get passed on to consumers in the form of higher prices. 

The “higher wages = higher inflation” argument is another popular one. Is it possible that companies that employ thousands of minimum wage workers, such as McDonald’s or Wal-Mart, will raise prices to offset increased labor costs? Yes, it’s possible. But this argument ignores that this is only one of the many ways that companies can deal with the increased cost.

higher minimum wage, executive pay vs employee pay

source: morningstar.com

Over the past 30 years executive pay has increased 127% faster than employee pay. The chart on the left shows that McDonald’s increased executive pay by 114% during the last recession. Did the price of my Big Mac rise due to those salary increases?

If they could increase executive pay at that rate during a recession surely they can afford to pay their minimum wage workers $1.75/hr more during a bull market. Maybe I’m a dreamer, but these employees could even get pay increases in lieu of increasing executive pay for a year or two!

Either way, inflation and the price of a Big Mac is influenced by so many economic factors that singling out one in particular as the cause is extremely short-sighted.

3. The increase doesn’t actually reach the people who need it.

This argument is the thought that an increase in minimum wage will only go to help high school kids who are flipping burgers on weekends for money to party with. Not to low-income workers actually supporting families. However a new study published by the Economic Policy Institute shows that:

- 84% of the total affected workers are over 20 years of age.
- More than half work full-time.
- Over 1/3 are married.
- More than 25% have children.
- The average worker affected brought home over 48% of their household’s earnings.
4. If raising it to $9/hr is so great, why not make minimum wage $90/hr!

I can neither confirm nor deny that I’ve seen something along these lines posted by multiple people as a Facebook status. You know the type, the ones whose political beliefs can all be summed up in those nice MS-Paint images that they love to spread around the internet.

Data Source: cepr.net

Data Source: cepr.net

This argument shows a complete lack of understanding of the topic in general. By increasing minimum wage to $9/hr (and historical increases) much less than 10% of the workforce is effected.

Raising the minimum wage to $90 (or whatever outrageous figure you prefer) would affect very close to 100% of the working population.  I hope the difference is clear in terms of the economic effects that would occur.

5. We shouldn’t increase minimum wage, we should expand the EITC.

The EITC is the Earned Income Tax Credit, which is designed to help low-income families pay less to no income tax. The amount you can get from the EITC depends on your income, marriage status and the number of children you claim as dependents. Many of the same people now saying we should expand the EITC were the ones vilifying its recipients during the “47%” debate from the past election, but I digress.

The best solution would be to increase both the earned income tax credit and the federal minimum wage.  With the EITC a person doesn’t reap the benefits until they go to file income taxes in the year after the income was earned. With a minimum wage increase, the benefit is received in real-time, with each paycheck.

Expansion of the EITC and an increase/inflation indexing of the minimum wage are two tools that compliment each other to help low-wage workers live better lives.

minimum-wage-inflation-indexed

If minimum wage had simply increased along with the inflation rate it would be $10.56/hr today. The minimum that should be done is to index minimum wage to inflation so that those working on that wage don’t see what little buying power they have, decrease over time.

These debates always seem to bring up the same tired talking points, remember that there is no magic bullet to restore the middle class to its former glory. Raising the minimum wage, or expanding the earned income tax credit won’t fix all the problems politicians claim it will. But each should be part of the way that even the lowest income earners in our society can share in the broader prosperity of our country’s economic success. 

Returning to President Obama’s speech, he said: …”a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong.”  And you know what? He’s right.

 

What do you think? Should the minimum wage be increased? Share your thoughts in the comment section below. 

 

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26 Responses to The Case For A Higher Minimum Wage

  1. Like the US we also have tax credits in the UK. Raising the minimum wage should have the result of reducing the total tax credit paid. In other words, low wages in a (semi-)civilised society end up as costing the taxpayer a lot of money. Raising the minimum wage has the effect of making employers value their employees more and it can reduce turnover, increase morale and productivity. So it is really a no-brainer and only those with little or no brain complain about it. Like the present UK government I am ashamed to say….

    • It is a no brainer, especially considering the min wage here in the US lags far behind the rest of the civilized world. It’s really amazing how heated the debates over helping the poor get in this country.

  2. Oh boy. I remember minimum wage quite clearly when I first entered the work force many moons ago. (I am 32 now.) Ten bucks an hour sounds like a small fortune now! Except, unfortunately, it really is not, due to rapid corrosion of purchasing power.

    • My first job paid me $5.25/hr. I would have killed to make $10/hr back then! Inflation happens, and thats why I think the part most everyone can agree on is that the minimum wage should be indexed to rise with inflation.

      • Kretek says:

        I recall the days of minimum wage. $5.15/hr was what I used to be paid. I remember making $140 a paycheck after 2 weeks and thinking that was awesome. Even at $10/hr I seriously doubt you could live well, if at all. $14/hr is about the BARE minimum that someone can actually live their life and not go dumpster diving for copper to sell.

  3. Point #2 isn’t valid based on the information given. I need to see a comparison of how much total extra money was paid to executives vs how much total extra money would be spent increasing the hourly wage of every minimum wage worker.

    I don’t really have any any issues with the other points you brought up. They seem okay to me.

    • Fair point, I tried to go that route but it was pretty much impossible to find the number of min wage employees and estimating based on the total number of employees just didn’t seem right.

  4. Pauline says:

    Obama makes a good point, working full time and still be below poverty line is nonsense. I am all for cheap stuff but $15K per year is unfair if someone not much more qualified is making 25-30K, let’s not even speak about graduates and high flyers making 4 to 20 times more. I wouldn’t mind paying an extra $0.5 for my meal if that meant the employees get it. Sure for manufactured goods you lose your competitiveness and it takes more of a collective effort to keep buying national goods.

  5. Martin says:

    I have mixed opinions on this issue, but generally lean towards disagreeing with minimum wage, because in my opinion this has negative impact in employment because it artificially enhances the supply & demand forces on labor market and employers will tend to get back to the equilibrium (between wage overhead and number of employed).
    I think you know who David Neumark is. Today he is considered an expert in minimum wage issue. Let me copy here some results of his latest study:

    A research study by David Neumark of the Employment Policies Institute, found that even “a 10 percent increase in the minimum wage will decrease minority employment by 3.9 percent, with the majority of the burden falling on minority teenagers by 6.6 percent,” the story says. The study also found that for “every 10 percent increase in the minimum wage, African-American or Hispanic males aged 16 to 24 and 20 to 24 experienced a decrease in employment by 6.3 percent and 5.5 percent respectively.”

    So I am not much convinced that the minimum wage is the best idea and still think it actually will hurt those, who are supposed to be protected by this measure.

  6. Keeping minimum wage indexed to inflation seems fair. The wage is so low, based on the cost of living in most places, that it shouldn’t go down relative to purchasing power!

    I recall making way less than the current minimum, but I was a high school kid then. Jobs are probably tougher to get now, which makes it interesting to think that such jobs can be a goal for some folks.

  7. For people who think that minimum wage workers are primarily high schoolers working part time jobs, I would invite them to look at the company my brother works for. He make injection molded plastics and nearly everybody who works on the production floor is a minimum wage worker employed through a temp agency. One woman has been there for 13 years and is still a “temporary” worker making minimum wage.

    • Martin says:

      I tend to say, why is she still there? I bet there are a lot better opportunities elsewhere. Even Walmart pays 15 / hour at night shifts. I would agree having such job temporarily, but searching for a better one.

  8. CF says:

    I agree with raising the minimum wage to a point. Clearly a minimum wage has to increase somewhat regularly to keep up with inflation. But I disagree with the notion that people are completely reliant on a government-set minimum wage in order to earn a living.

    I’ve worked minimum wage jobs when I was younger, and without fail, I’ve always gotten a wage increase after working hard for 6 months – year. Even lackluster colleagues have earned at least a cost of living increase of 2-3%. So I find it hard to understand why there seems to be so many people apparently “stuck” at minimum wage jobs. Even if you enter the workforce at a minimum wage, what’s stopping you from earning increases and gaining skills that allow you to get a better job? I would hope that people would be motivated to improve themselves rather than waiting for the government to do it for them.

    That being said, I understand that in some areas, there number of people vying for a job allows companies to be stingy with wage increases, so perhaps we’ve been lucky in Vancouver. *shrugs*

    • Fast food restaurants need to be staffed and retail stores need cashiers. I think especially for people working these jobs we should lend the assistance we can. It’s better we encourage being part of the workforce in that regard than not at all.

  9. Justin@TheFrugalPath says:

    I’m not a fan of EITC. I’ve worked for several years with people who receive the credit and when tax time comes around a good portion call in sick and ask for more time off. This goes on for about a month. Then the money is gone and they’re back to complaining.
    I’m not against a minimum wage increase, but I don’t know that it would solve anything. Instead we should offer education, vocational training and free childcare (reputable of course) to help these families pull themselves up.

    • I don’t think that it’s fair to lump together everyone that receives a certain tax credit and blame them all for the acts of a few. I know plenty of hardworking people that get the EITC and are responsible. That’s like saying that everyone on welfare is too lazy to get a job. Or saying that food stamps are a waste of taxpayer dollars because you know of a woman that bought luxury food items with it.

      • I agree with Ed. I see a tendancy from a lot of people to discredit an entire program based on the abuse of a small number. The “food stamps are a bad idea because I saw a woman buy steak with them” is easily the most common example I hear.

        • Justin@TheFrugalPath says:

          I didn’t mean to sound as if everyone on EITC, welfare, or food stamps is abusing the system or lazy.
          What I meant is that sometimes these credits keep the people who earn them down by making it a disincentive to move up the financial ladder.
          For certain programs you can’t have assets exceeding a certain amount. Therefore, many people spend their money instead of saving it for fear of losing the assistance.
          Although I am in favor of giving people the tools that they need rather than cash. I think that free education, vocational schooling, and childcare services would go a long way to helping lower income families move up to a higher wage and standard of living.

  10. Great article and thorough breakdown of each of the arguments…I love it!

    I’m all for the minimum wage being increased; realistically, I’d imagine much of the increase would simply get dumped back into the economy anyhow and help offset the loss in profit by the companies that would then have to pay a higher minimum wage.

  11. I think that it is a complex issue and there is a lot of good arguments on both sides. However, I am a small business owner and my business does not have a lot of revenue. I would be willing to pay someone $5/hour to do some easy tasks that don’t require much thought. However, since it is not legal to hire someone at that rate, I do the work myself. I think a minimum wage hurts people from that perspective.

  12. funancials says:

    I appreciate you highlighting both sides of the argument allowing the reader to come to his/her own conclusion. You also do a nice job of providing evidence, rather than shouting and bashing the other side.

    Having said that, I’m not sure how much weight your “evidence” carries. Citing the University of Massachusetts- Amherst and the forever-liberal Economic Policy Institute doesn’t strengthen your stance.

    The first argument “sounds like solid logic” because it is solid logic. It’s pretty simple to understand.

    And the argument of “Why $9, not $90?” isn’t limited to heartless Republicans on Facebook, the question has also been raise by the Chairman of Economics at Harvard, Greg Mankiw. I, personally, would listen to the Economists at every Ivy League school before anyone else.

    David Neumark has studied the topic more than anyone else whose opinions I have read. I recommend you check him out.

  13. Rich Guy says:

    Minimum wage is for those entering the workforce with little or no skills. It is not meant to raise a family. Any employer will gladly pay more than minimum wage if that the employee is neat, shows up when scheduled, pass a drug/ alchohol test, and actually preform some labor that makes the business more efficient. Employers do NOT hire people as employees so they can put up with their crap, support their families and listen to them bitch and drag everyone else down who is trying to do their damn job..

  14. Pingback: Principled Money Posts #35: Monday Begins on Saturday edition : The Money Principle

  15. Raising minimum is great for corporations. The fact of the matter is, most people who want to raise minimum wage are also the same people who want to support local businesses and start-ups.

    McDonalds and Taco Bell would love you to raise minimum wage…. why? Because it raises the cost to get into the market for a small business or a startup, and puts many new small businesses out of business.

    Big corporations can deal with higher costs because they already have a low cost of production from buying in bulk and the many other advantages of being a large corporation… small businesses struggle to survive as it is because of all the taxes and wage laws we have put on them.

    I’m all for paying workers more… but I’m more for helping more people start their own small businesses and giving less breaks and control to large corporations that do not have the best interest of the general public in mind. I’m not against large corporations at all, but we should be making it easier for small businesses to enter the market, not harder.

    • Martin says:

      Josh, great words and I am signing myself under your comment. People do not see it that way. Many of them do not see the forest thru the trees. Minimum wage generally is a bad instrument.

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