The Benefits of Raising the Minimum Wage

Words: 2560
Topic: Business & Economics

The minimum wage law was intended as a humanitarian act which would stimulate the economy as well. Most agree that employees who work full-time hours should be paid a wage sufficient so as to allow them to provide for their most essential needs which current minimum wage does not accomplish.

For workers in Mississippi, for example, $7.50 may be enough to subsist but the cost of living is substantially lower in Vicksburg than in Chicago, for example. Opponents to further increasing the minimum wage argue that prices to consumers will increase, workers will lose their jobs and the inflation rate will rise.

This paper demonstrates that raising the minimum wage is practical for all concerned, workers, employers and the economy as a whole. It also reduces criminal activity and slows the adverse effects of outsourcing which ships American jobs overseas.

The minimum wage law was established by the federal then some state government to assure that this ideal was a realization. The rationale behind a minimum wage, intended for the least skilled and educated persons in the workforce, is to raise their earnings in order to offset the forces that drive the market down which would otherwise reduce their buying power.

The welfare system, workers’ compensation and unemployment insurance established by the 1930’s New Deal to provide assistance to the poor, in part, still exist today. The economic conditions of the time demanded that the solutions foster relations between the oppressive capitalist class and the working class.

Labor unions lobbied for minimum wages and other worker benefits including employers’ liability laws, social reformers worked for maximum hours for women workers, factory inspections, child-labor laws, and anti-sweatshop laws” (Baker, 2003). Backed by the ‘New Dealers,’ these issues were addressed on the federal level.

Raising the minimum wage allows those who make minimum salaries to keep up with inflation. It will also help those that need it the most such as single mothers and minorities. In addition, it will cause a ‘ripple effect’ in that wages will also increase for those that make just above the minimum.

In 1968, a full-time employee who earned the Federal minimum wage made what would be “the equivalent of $15,431 today, 44 percent more than today’s full-time minimum wage worker” (Lee, 1999, p. 1016). Prior to the Bush administration years, Congress used to regularly raise the minimum wage so as to allow workers’ income to keep pace with inflation.

Congressional inaction during these years has resulted in the minimum wage value being immensely eroded. The purchasing power for the minimum wage worker has decreased by 20 percent since September 1997. “The minimum wage still equals only 31 percent of the average wage for private sector, non-supervisory workers… the lowest share since at least the end of World War II” (Bernstein & Shapiro, 2006).

Some of those who oppose the increase have suggested that the dominant wage earner of families does not fall into the minimum wage category; that it normally applies to teenage summer workers. This assertion is not at all the case.

The Economic Report of the President evaluated the evidence in 1999 and found that that this argument was indeed untrue stating in its report, “most minimum wage workers are adults from lower income families, and their wages are a major source of their families’ earnings” (Council of Economic Advisors, 1999, p. 111).

Opponents also argue that raising the minimum wage will hurt the economy and reduce the amount of available jobs but, unlike the effects tax-cuts for the wealthiest Americans have on the economy, when the poorest in society have extra income; they spend it on the necessities of life thus directly stimulating the local economy and add jobs.

Employers generally oppose increasing the minimum wage. Their claim is that they would be forced to lay-off employees to cover the extra costs. A problematic situation, they argue, arises as a result of high wages is that unemployment rises accordingly.

When the price of labor increases in the form of wages, the amount of labor required decreases because the cost to run a business is unchanged. To stay in business, the business must reduce its workforce. Put another way, if wages are increased, a greater amount of people will be seeking employment but employers will not be in a position to hire additional labor.

The result is a surplus of labor, in other words, higher rates of unemployment. (Lane, 1995). This claim, however, has been proven to be unfounded. On the front-end, employers may indeed pay more to their employees after a wage increase but, as evidence indicates, the increased costs to employers are usually compensated for by benefits.

For example, employees who make a wage that allows their families to subsist, rather than not, are less likely to secure other employment which reduces the employer’s employee turnover rate thus reducing additional training and recruitment costs. It also results in a decrease in absenteeism as well as higher employee productivity and morale (Holmes & Zellner, 2004, pp. 76-77).

Another startling statistic that defies employers’ arguments against raising the minimum wage is that “over the last three years, corporate profits in the United States have expanded by 57.5 percent, while private wage and salary income has actually decreased by 1.7 percent over the same period” (Price, 2004).

As a result of the minimum wage law, some employers do, in fact pay out more to their employees on the front-end but evidence indicates the increased expenditures to businesses are usually offset by associated benefits. For example, employees who earn a salary which allows their families to make ends meet are less likely to secure other employment and increase productivity.

This increases the employer’s bottom line while reducing the turnover rate thus reducing additional recruitment and training costs (Holmes & Zellner, 2004, pp. 76-77). It also results in a reduction of absenteeism while raising morale thus employee productivity. Many prominent economists theorize that highly paid workers are usually more effective.

Paying a higher wage is indeed a sound investment for a business rather than a baseless expense. The merits of increased payment as an incentive to employees are matters of debate. Other factors such as job satisfaction and opportunities for growth are also part of the equation, but the overwhelming modern bodies of work have clearly demonstrated that higher wages equal increased production.

Employers counter that even if the average production output of workers has risen significantly supposedly as a result of wage increases, if the product prices or profit margin declines because of the wage increase, the revenue return per employee possibly would have either remained constant or declined. Businesses that pay higher wages are able to hire better quality employment applicants.

Consequently, this offers an enhanced approach to hiring and the prospect of increased profitability for businesses that cannot afford to directly scrutinize the quality of employees’ work. There is another factor in the wage/production equation however.

Those that theorize an association between wages and labor productivity within either an occupation or industry unconditionally presuppose that when employee production rises, their contribution to the businesses’ revenue increases which causes the demand for the employee’s services to increase as well. This scenario is not necessarily justification to increase wages accordingly.

The assumption is incorrect because wages are driven by the principle of supply and demand. Even if employee production increases, the revenue gained per employee most probably will decrease.

Moreover, when production output per-employee increases, the business must sell more of their product thereby causing the supply to increase. However, by utilizing the principle of supply and demand, if the supply of a product increases, its price decreases.

That is, the increase in worker productivity may cause a decrease in prices. In certain instances, this decrease in a product’s price is so extreme that an increase in worker productivity may actually cause a decrease in revenue per worker. In sum, many argue, there are not necessarily any connections between revenue per-employee and output per employee. (Bruce, 2002).

Many leading economists support the minimum wage as a viable part of a sound economic policy. A group of 526 economists including four Nobel Prize recipients signed a statement in 2004 that stated, in part, “a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effect that critics have claimed” (Aaron et al, 2004).

Less than 30 years ago, almost all economists thought that a rise in the minimum wage would cause proportionate unemployment of low-wage workers. This view changed dramatically in the 1990’s however. During that time, some states, including Illinois, New Jersey, Oregon, California and Pennsylvania increased the mandatory minimum wage in excess of the federal mandate.

Two Princeton economists published a study in 1995 regarding unemployment figures of various fast-food establishments in New Jersey and in Pennsylvania which did not raise its minimum wage. The study showed that employment figures climbed in New Jersey but not in Pennsylvania. This evidence was in contrast to the popularly held belief.

This and similar studies caused a mass reversal in the opinion of economists that higher wages equals higher unemployment. Explanations for the phenomenon include “cost savings from reduced job turnover, increased productivity as a result of better worker morale and the attraction of higher-quality employees through higher wages” (Chipman, 2006).

The experiences of those states that raised their minimum wage over the 1990’s have provided researchers an exceptional and wide-ranging case study with irrefutable empirical economic evidence. Researchers have had the ability to make numerous state-by-state comparisons which overwhelmingly show that a wage increase, in many cases, lowers the unemployment rate.

No evidence has shown a perceptible increase in unemployment figures following a wage increase. A study conducted by the Fiscal Policy Institute discovered that “between 1998 and 2004, the job growth for small businesses in states with a minimum wage higher than the federal level was 6.2 percent compared to a 4.1 percent growth rate in states where the federal level prevailed” (Parrott & Kramer, 2006).

The contention that a minimum wage requirement puts a financial burden on them causing the lay-off of workers is weak at best. According to Alan Blinder, former Federal Reserve vice chairman, “The evidence appears to be against the simple-minded theory that a modest increase in the minimum wage causes substantial job loss” (Chipman, 2006).

A 1998 study conducted by the Economic Policy Institute found no loss of employment in connection with the minimum wage increase in 1996-97. Furthermore, subsequent to that increase, the low-end labor market experienced lower poverty rates, an increase in family income and lower levels of unemployment (Bernstein & Schmitt, 1998).

Increasing the minimum wage aids the economy and, at least in the long-term, employers as well. This conclusion of pure economic benefit is for those that look at only the bottom line of the profits and losses ledger and do not see the human suffering caused by congressional inactions. Millions of hard working full-time employees in this country are unable to provide even the basics of necessities for their children. This, one would think, should be reason enough.

The low minimum wage is a factor contributing to the number of individuals choosing to remain within the criminal arena including gang activities. The switch from a production economy to a consumption economy has left a vast number of the populace on the have-nots side of the fence, contributing to the feelings of inadequacy among those who live in impoverished areas and exclusionist perceptions among the elite, including the politicians.

The result of this switch has been a rash of public policy that works to support and secure the wealthy while providing little help or incentive for the unskilled worker that is unqualified to meet the new service oriented employment positions (Bourdieu, 1998, p. 31).

Rather than choosing to starve on unskilled labor wages, typically at or below the minimum wage through such short-cuts as contract work and temporary employment, many criminals are choosing this option as a permanent lifestyle choice, effectively making the gang element itself a major ghetto employer and the process of climbing the company ladder one of increasingly violent, dangerous and/or illegal activities (Hagedorn, 2001, p. 157).

Youngsters coming into this gang atmosphere see the success and prestige of their older members and are encouraged to follow in this same path as an alternative to the impoverished and isolated form of existence they experienced with their parents and their parents experienced all their lives.

Raising the minimum wage not only reduces the number of families and individuals living in poverty, it effectively reduces crime and helps end the cycle of career gang members which is not only a benefit for them but to society as well.

That many would have concern regarding the effects of outsourcing is understandable. One solution to outsourcing can be accomplished with higher minimum wages and mandatory or voluntary cost of living increases.

In addition, jobs can be structured in such as way as to encourage and reward higher skills and career paths. Thanks to measures such as these, the most humble workers in Las Vegas’s hotels, those who clean the rooms, are paid middle-class salaries with health benefits and have career opportunities.

They are becoming homeowners and starting to live the American dream while these higher labor costs have little to no impact on the success of the casinos. Learning from this example, it can be inferred that blue-collar jobs should pay livable wages creating a larger and more affluent consumer base while still providing quality service and production and allowing companies to prosper.

Outsourcing can be curbed by paying higher wages, not keeping wages low to compete with ‘slave labor’ wages paid to workers in Asia and India, the areas of the world where many American jobs have gone. The ‘competitive ‘edge’ argument employers often invoke to keep wages low is self-serving, flawed reasoning. (Klein, et al., 2003)

Convincing evidence backs-up the supposition that moderate increases in the minimum wage do not negatively affect unemployment or economic figures. Employers often gain as a result of a minimum wage increase, because of lower employee turnover rates, as do the low-wage workers and the economy as a whole.

Better paying jobs ‘keep kids off the street’ which keep neighborhoods safer. Selling drugs is too often an attractive alternative to working for a minimum wage which, if it is too low, gives youths the impression they are working for nothing.

Contrary to popular albeit simplistic reasoning, raising wages would actually slow the cascade of jobs being outsourced to other countries. National and State legislators should raise the minimum wage and index the rates to keep up with inflation. If it does not, more people will be living within the depths of poverty, a shameful comment on the most economically powerful country in the world.

The sentiment behind the well-known phrase, ‘a country is ultimately judged by how it treats its poor’ along with a need to re-energize the economy during the Great Depression of the 1930’s were the catalysts for the minimum wage law.

Though opposition to the noble and economically advantageous undertaking still exists, convincing evidence backs-up the supposition that moderate increases in the minimum wage does not negatively effect unemployment figures. A higher minimum wage would be advantageous for business, the economy, the working poor and society as a whole.

Works Cited

Aaron, Henry; Arrow, Kevin; Blank, Rebecca. “Hundreds of Economists Say: Raise the Minimum Wage.” Economists Statement. Economic Policy Institute, 2004.

Baker, Dorie. (2003). “Yale Professor Writes Book on American ‘Security’ System.” Yale News Release. Yale University.

Bernstein, Jared & Shapiro, Isaac. “Buying Power Of Minimum Wage At 51 Year Low: Congress Could Break Record For Longest Period Without an Increase.” (June 20, 2006). Center on Budget and Policy Priorities.

Bourdieu, P. (1998). Acts of Resistance: Against the Tyranny of the Market. New York: New Press.

Bruce, Christopher. (Summer/Autumn, 2002). “The Connection between Labour Productivity and Wages.” Economica Ltd. The Expert Witness Newsletter. Vol. 7, No. 2.

Chipman, Kim. “Higher Minimum Wage no Longer Regarded in US as Sure-Fire Job Killer.” Bloomberg, (2006).

Council of Economic Advisers. “Economic Report of the President.” (1999).

Hagedorn, J.M. (2001). “Gangs and the Informal Economy.” Gangs in America III. R. Huff (Ed.). Beverly Hills, CA: Sage.

Holmes, Stanley & Zellner, Wendy. “The Costco Way: Higher Wages Mean Higher Profits. But Try Telling Wall Street.” Business Week. (2004), pp. 76-77.

Michael W. Klein, Scott Schuh, and Robert K. Triest, Job Creation, Job Destruction,and International Competition, Upjohn Institute, 2003

Lane, Cloda. (1995). “An Analysis of the Causes of Unemployment.”

Lee, David. “Wage Inequality in the United States During the 1980s: Rising Dispersion or Falling Minimum Wage?” The Quarterly Journal of Economics. Vol. 114, N. 3, pp. 977-1023.

Parrott, James & Kramer, Brent. “States with Minimum Wages Above the Federal Level Have had Faster Small Business and Retail Job Growth.” Fiscal Policy Institute, (March, 2006).

Price, Lee. “Lopsided Trends in Profits and Wages Threaten to Topple Growth.” Economic Policy Institute, Economic Snapshot.