The Importance of A Federal Minimum Wage

– By Jeff Brittain

A Federal minimum wage was first set in 1938 by The Fair Labor and Standards Act.  The minimum wage is meant to be a tool for combating poverty and preventing unfair wages, however, some scholars and economists doubt its effectiveness and some even argue it has more negative effects than positive. Despite this, most scholars have accepted the minimum wage as part of our market system, but they are passionately divided as to whether increasing the minimum wage is positive or negative.

Opponents of the minimum wage primarily argue that it reduces the demand for labor and encourages layoffs, thereby increasing unemployment and hurting the poor. For example, if the minimum wage were raised from $8 to $10 an hour, a business would face an increase of 25% in labor costs. Opponents of the minimum wage claim that the increase in costs would translate to a reduction in the labor force to offset the costs. Another argument is that a higher minimum wage encourages outsourcing. For example, higher costs might cause a business to move its entire operation to China or India where they can be much more profitable by paying miniscule wages. This would in turn produce more layoffs and unemployment. The logic makes sense, however, even if opponents are right about the negative effects on employment, the loss of jobs would not outweigh the benefits of a higher minimum wage. This is because a higher minimum wage benefits almost all low-wage workers. For example, more than 21 million workers enjoyed improved wages as a result of the Clinton minimum wage increase.  Furthermore, as Bluestone and Ghilarducci suggest, employers might absorb higher labor costs by lowering profits or increasing productivity, rather than laying off workers.

The conclusion that the minimum wage has negative effects on employment is hotly debated by proponents of the minimum wage. For example, in 1994 David Card and Alan Krueger did a study on fast food establishments in New Jersey and nearby eastern Pennsylvania. Their research revealed that after New Jersey raised its minimum wage, employment increased at fast food establishments, while in Pennsylvania, where there was no minimum wage increase, employment declined.  The increase in employment is likely a result of increased productivity and quality at the New Jersey establishments induced through the incentive of higher wages, and also due in part to the increased incomes of workers who then buy more fast food. Regardless of this study, there is no broadly accepted consensus on whether the effect of the minimum wage is positive or negative. As Heidi Shierholz suggested, whether the effect is slightly above 0 or slightly below 0, most scholars agree it is small.

Moreover, there are many benefits and little costs of a Federal minimum wage. As opposed to the EITC (Earned Income Tax Credit), the minimum wage adds nothing to the federal deficit and will likely decrease the deficit by reducing welfare payments. Furthermore, the minimum wage can be an effective stimulus on the economy. Economists at the Federal Reserve Bank of Chicago have found that an increase in the minimum wage by just $1 an hour boosts the spending of impacted families by $800 per quarter. Such a stimulus would clearly benefit the economy and increase the sales of businesses, which may in turn, allow business to pay the increased wages with less of a loss to profitability. Finally, higher productivity may be a result of increasing the minimum wage. The reason is that firms would likely look for ways to improve the efficiency of workers due to the incentive of higher costs. To conclude, as Shierholz said on the minimum wage, “…for policy makers it is hard to avoid the conclusion that the benefits far outweigh the costs.”

Jeffrey Brittain is the Admin of KeepTheMiddleClassAlive.com. He strives to educate people about the importance of reducing inequality, removing corruption from politics, and preventing unjust wars.

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