Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

It is not news that the issue of increasing the hourly minimum wage from the current $7.25 to $15.00 has become a political football with no end in sight. Today’s blog critically examines this issue.   

Birth of Minimum Wage

Adam Smith, in his classic The Wealth of Nations published in 1776, upended the mercantilist system by laying the foundation for the industrialized capitalist system. He claimed that the new system would create an invisible hand. Miraculously, this hand would help maximize economic growth by determining what goods and services would be produced, how much of each would be produced, and for whom these goods and services would be produced. Nowhere does Smith mention the issue of a minimum wage as part of the industrial capitalist system. In fact, during the rest of the 18^th century, through all of the 19^th century and a third of the 20^th century, the issue of a minimum wage never surfaced in any economic discussions. 

That changed, however, when the Great Depression of the 1930s devastated the U.S. economy. Unemployment soared to unprecedented levels, thereby creating the precondition for exploiting these desperate unemployed people. Toward the end of the Great Depression, President Roosevelt introduced the concept of a minimum wage to protect these people.  

In 1938, the Fair Labor Standards Act established a federal minimum wage of $0.25 an hour ($4.54 in 2019 dollars.) Since July 24, 2009, the federal minimum wage has remained at $7.25 an hour. State and local laws can also establish minimum wage requirements, and employers generally have to pay workers the highest minimum wage prescribed by applicable federal, state or local laws. From 2018 to 2019, seven states increased their minimum wage levels through automatic adjustments, while increases in 16 other states and the District of Columbia occurred through referendum or legislative action. As of January 2020, there were 29 states and the District of Columbia with minimum wage rates higher than the federal minimum wage.  

Pros and Cons of Establishing a Fair Minimum Wage

I will now present key arguments for and against the goals sought to be achieved by establishing a fair minimum wage.

1. Improvement in Standard of Living

A 2019 Congressional Budget Office (CBO) report projects that, if the minimum wage is increased to $15.00, by 2025 there will be a significant improvement in the standard of living of at least 17 million people, and an estimated 1.3 million people will be elevated above the poverty line.

In the event of such an increase, many businesses, especially small businesses, will be forced to close, lay off workers, or reduce hiring, thereby reducing employment and the overall standard of living of Americans. 

2. Income Inequality

A $15.00 minimum wage will help narrow the income inequality gap between low- and middle-income workers. 

Increases in the minimum wage have been shown to make it more difficult for less skilled workers with little or no work experience to find jobs or become upwardly mobile. The result is that an increase in the minimum wage is not in the best interest of these workers. 

3. Federal vs. State and Local Minimum Wages

Studies show that raising only the federal minimum wage and leaving the state and local minimum wage laws unchanged does not make much difference in the overall outcome, since state and local governments are always free to establish their own minimum wage structures.. 

Increasing the federal minimum wage does not take into account regional cost-of-living variations. For example, an employee in New York City earning an hourly minimum wage of $15.00 will have much less purchasing power than an employee in Des Moines, Iowa, earning the same wage, assuming they both work the same number of hours. 

4. Reduction of poverty

 According to a 2014 CBO report, increasing the minimum wage to $10.10 would lift 900,000 people out of poverty. This trend toward lower poverty would continue if the minimum wage is increased to $15.00. 

A number of reputable studies suggest that, although low-income workers experience wage increases when the minimum wage is increased, their work hours decline and their unemployment increases. The combined effect of these changes is a net decline in earned income and an actual increase in the number of people below the poverty line. 

5. Reduction in Government Assistance

The Center for American Progress reported in 2014 that raising the federal minimum wage to $10.10 would reduce spending on the Supplemental Nutrition Assistance Program by $4.5 billion. Also, the Economic Policy Institute determined that by increasing the minimum wage to $10.10, more than 1.7 million Americans would no longer be dependent upon government assistance programs, thereby saving the federal government $7.6 billion annually. 

According to a Gallup poll, 60% of small business owners warn that raising the minimum wage will hurt most small business owners by reducing their income and negating most of the benefits claimed by the proponents of an increased minimum wage. 

6. Minimum Wage is not indexed for Inflation

Workers suffer because the minimum wage is not indexed for inflation. The federal minimum wage in 1968 was $1.60, which is equivalent to $11.16 in January 2016 dollars, which is 53.9% higher than today’s $7.25 federal minimum wage. 

Two of the biggest impacts of inflation (especially for lower-income earners) are on gasoline and food, both of which are currently excluded from inflation statistics.  It might become a nightmare for employers to be constantly changing wage levels to reflect the constantly changing economic conditions. 

7. Labor Turnover

Many studies, including one published by Janet Yellen, former Chair of the Federal Reserve Board, claim the following: “As the minimum wage rises and work becomes more attractive, labor turnover rates and absenteeism tend to decline.” Likewise, another study found “striking evidence that . . . turnover rates for teens and restaurant workers fall substantially following a minimum wage increase,” declining by about 2% in the case of a 10% increase in the minimum wage. 

If companies cannot afford to pay a higher minimum wage for less skilled service employees, they will use automation to avoid hiring people for those positions, thereby reducing overall employment. 

8. Wage Increases

Studies arguing against a minimum wage laws do not adequately cover all key aspects of the national wage problem. For the sake of uniformity passage of a universal minimum wage law is essential.

Ellora Derenoncourt of the University of California, Berkeley, and Clemens NoelkeStudi and David Weil of Brandeis University published a study analyzing the operating performance of Amazon, Walmart and Target in low wage areas. The study found that wage increases by large corporate employers drive up wages with no material impact on the level of employment. Other studies with similar results prove that a minimum wage law is not required to level the playing field.  

9. Impact of Absence of a Minimum Wage Law

Numerous studies claim that the labor market does not operate as well when the task of negotiating fair wage bargains is left to the workers. The reason is that employees do not always know their potential worth, or are afraid to change jobs because of the attendant risks and uncertainties surrounding such a move. Hence a national minimum wage law is sorely needed.  

 A minimum wage law is too difficult to successfully impose on all 50 states, partly because of the diversity of economic conditions that separates them. So it is best to leave the minimum wage issue to the free labor market.

10. Federal Deficit

Increasing the federal minimum wage would reduce government expenditures for a variety of assistance programs and simultaneously increase tax revenues from increased wages, thereby reducing the federal budget deficit. According to Sienna College Economics Professor Aaron Pacitti, the federal deficit would decline “by lowering spending on public assistance programs and increasing tax revenue. Since firms are allowed to pay poverty-level wages to 3.6 million people, which is 5% of the workforce, these workers must rely on Federal income support programs.”

According to James Sherk, former Research Fellow at The Heritage Foundation, a single mother working full time and earning the current federal minimum wage of $7.25 an hour would be over $260 a month worse off if the minimum wage is raised to $10.10. Sherk maintains that: “While the market income rises by $494, she loses $71 in earned income tax credit refunds, pays $37 more in payroll taxes and $45 more in state income taxes. She also loses $88 in food stamp benefits and $528 in child care subsidies.” A 2014 survey of the Chief Financial Officers of 400 U.S. companies by Duke University Professor of Finance Campbell Harvey found that 40% of these companies would reduce employee benefits if the minimum wage was increased to $10.00. 

Do We Need a Minimum Wage Law?

Thus far, we have concentrated on the benefits and drawbacks of increasing the minimum wage from $7.25 to $15.00. We will now turn to a related but different issue: Do we even need a minimum wage law?

The federal minimum wage law was implemented in 1938 to fight the evils of the Great Depression. But today we are not facing anything like the Great Depression. In fact, by all accounts, our economy is doing fairly well. If that is the case, then should we even need to have minimum wage laws? Put another way, since at this time we do not have a real need for this law, why not benefit from letting the free market determine workers’ wages instead of letting the federal, state and local governments interfere with our free enterprise system? 

My initial reaction to this question is to refer to a couple of authoritative studies that suggest that the benefits of letting free market forces determine all wages far outweigh the benefits of minimum wage laws. A survey by the Small Business Network found that 82% of small businesses agreed that “the government should not be setting wage rates.” Another study by Oklahoma State University Professor Per Bylund concluded that the federal minimum wage “disrupts the balance of the market and prohibits the creation of new jobs.” Bylund also feels that the free market should determine wages based on the value of work performed, so employers can hire the needed number of workers at wage levels that make sense for their businesses. Similarly, The American Enterprise Institute argues that government-mandated minimum wages “are always arbitrary and almost never based on any sound economic cost/benefit analysis . . . . In contrast market-determined wages reflect supply and demand conditions that are specific to local market conditions and vary widely by geographic region and by industry.”  I have not found any equivalent scholarly studies or reports that rebut this argument.

That being said, it cannot be denied that minimum wage laws do protect the interests of scores of poverty level workers who are unable to bargain for fair wages. However, one should be careful in taking this state of affairs at face value because relevant statistics are grossly distorted. 

A study published in The Washington Post on March 3, 2021, concluded that in recent years the number of people making less than $15.00 an hour has been dropping dramatically and represents about 39 million workers. But even this statistic is grossly distorted.  In 2020, only a quarter of a million people earned the federal minimum wage of $7.25. Of those that did, a vast majority earned a lot more when tips, overtime and commissions were included as part of hourly earnings. Perhaps a more preferred alternative to controversial minimum wage laws is the organization of labor unions to protect the interests of poor workers. This idea is not as foreign as it sounds. In fact, only recently, President Biden expressed solidarity with Amazon workers in Alabama who are attempting to unionize one of the retail giant’s facilities. He also warned Amazon (without naming the company) that “there should be no intimidation, no coercion, no threats, no anti-union propaganda.” However, since that leads us to another highly complex issue, it is best we discuss this issue more thoroughly in a separate blog.  

Bottom Line

In this blog I have uncritically provided arguments for and against raising the minimum wage to $15.00 an hour without revealing my personal preference. I have also raised the issue of replacing the minimum wage laws with a better alternative that should be addressed in a separate blog.    

And with that, I rest my case. As always, I would like to know where you stand on this controversial issue.­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­

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Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. Roger Wingelaar, formerly associated with Oakland Press, is in charge of selecting blog titles.  However, the author takes full responsibility for the contents of this blog.

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