The Minimum Wage Controversy In America Economics Essay

Minimum wage was originally put in place to help impoverished people earn a living during post World War II. Ever since it was instituted there has been an ongoing debate over its effectiveness. Many proponents will argue that without it many families will struggle to make ends meet while many opponents will say that it is detrimental to small businesses. President Truman once quipped that he wanted a one-handed economist, since the economic advice he typically received took the unhelpful form of “On the one hand…but on the other hand.” (Berman) Whenever money is involved there are sure to be heated discussions. I contend that raising the minimum wage is an outdated crusade. Raising the minimum wage actually hurts low income families which are the people it is intended to assist.

Minimum wage is a starting wage that by law is the lowest allowable wage paid to employees by employers. Minimum wage was first enacted as part of the Fair Labor Standards Act which was outlined in the New Deal. It was passed in 1938 by President Roosevelt and it established the minimum wage at 25 cents an hour. Since being established in 1938 the minimum wage has been raised 12 times from its origin of 25 cents to today’s standard of $7.25. (Katel 1063)

By law, states are allowed to establish their own minimum wages and regulations. However, anytime the state minimum wage differs from the federal minimum wage, the higher rate applies. By 1945 only a handful of states had passed minimum wage laws that applied to both men and women. The vast majority only endorsed minimum wage laws that protected women and minors. Currently 14 states plus the District of Columbia have higher minimum wages than the federal minimum.

Our capitalistic society is based off of the most fundamental principle of economics which is supply and demand. When considering workers, this would mean that when the supply of workers goes up the wage will follow, and if the demand for workers goes down then the wage will go up. Let’s consider this example, a secretarial position becomes available and is advertised for hire. If the starting wage was $100 per hour, countless people would want the job, but if the wage were only $1 per hour, very few if anyone would be interested in the position. Now what if the government required the employer to pay a minimum of $7 per hour, the employer may not even hire a secretary at all but opt to have other employees take on the additional duties. Therefore, a job would be go unfilled because of the minimum wage. A second example is a restaurant that has $10,000 in their budget to hire bus persons. If the starting wage begins at $7 per hour, the restaurant may only be able to hire 10 people instead of 20. Creating and setting a mandated wage limit interferes with the market forces of supply and demand. Remember that if no minimum wage existed that companies would still be forced to pay a competitive wage or no one would for them or their competitors would steal the most qualified employees by paying them a better wage. Let’s face it, if you were offered 50 cents an hour to be a dishwasher would you consider doing it, would anyone? But in that same circumstance if the wage were raised to $6 per hour, they may be able to find someone to fill the position, a high school student might be excited for the opportunity. Highly skilled jobs like accountants, lawyers, and engineers make more than 7.35 per hour. This is because the market uses factors of supply and demand to help determine the amount of jobs that are available and what each job will pay. As the minimum wage increases, the number of people working decreases. When the minimum wage decreases, the number of people working increases. An important thing to remember is that minimum wage only applies if someone is working.

Many economists feel that the minimum wage is a failing system and that we already have something to replace it, Earned Income Tax Credit. “The Earned Income Tax Credit or the EITC is a refundable federal income tax credit for low to moderate income working individuals and families.” (IRS) “Instead, we should expand Earned Income Tax Credits (EITC), which more effectively target the working poor,” says Richard Burkhauser, Cornell Professor. “Workers who have children but low family incomes, for example, receive a 34 percent to 40 percent tax credit, which essentially boosts their minimum wage rate from $5.15 to $7.21 per hour. And because it’s government supported, the labor force doesn’t lose jobs as it does when the minimum wage goes up.” (Lang) Burkhauser points out that “only one out of three of the working poor gained from the federal minimum wage hike in 1996. The others were poor despite having higher rates because they either earned more than the minimum wage, worked part-time, or had large families. Of the $3.39 billion in additional wages generated by the last minimum wage hike”, Burkhauser found that only 17 percent went to the families of the working poor. The other 83 percent primarily went to second or third earners whose families had income that was often well above the poverty line, indicated by the federal government to be $16,450 a year for a family of four.

Teenagers are the group of workers most affected by the minimum wage, he says. When the minimum wage went from $4.25 to $5.15 in 1996, 44 percent of teenage workers benefited, but only 17 percent of those teenage workers lived in poor families. The majority, 51 percent, lived in families whose income was three or more times above the poverty line. (Lang) In addition, “Economist Kevin Lang of Boston University concluded that the raising the minimum wage would draw better skilled job applicants into the job market, displacing workers with lesser skills.” (Katel 1057)

The effects of minimum wage increases impact employees, employers, the economy and even the government. Many proponents of minimum wage increases will argue that minimum wage workers will make more money therefore they will have a higher disposable income and the ability to save money. Unfortunately, there is a flaw in this logic. Employers have profit margins that they must adhere to. This is what initially brings investors to buy their stocks or entices people to start their own businesses. When minimum wages are raised it sets off a chain of events. “The several steps through which the minimum wage affects prices (the transmission mechanism) can be described as follows. First, there is a direct effect on those workers between the old and the new minimum wage. Second, there are indirect spillover effects on those above (and below) the new minimum wage. Third, firms raise prices in response to these higher labor costs. Furthermore, firms adjust the associated level and mix of input and output (consistent with cost minimization subject to expected demand). Now, the resulting new employment and wage levels combine to produce a new equilibrium income level, aggregate demand and, after some lag, production. Finally, the inflation and unemployment rates consistent with the new equilibrium might in time again affect wages and prices.” (Lemos 189)

Minimum wage affects small companies more than larger ones. Larger companies can weather storms longer than smaller companies and once the smaller companies go out of business it affects the wages of people hired into the larger companies. When you lose competition the repercussions can be felt on many levels and it often is relayed in hiring wages for new employees. People often believe businesses have an endless supply of cash which can easily withstand the increases of minimum wage and other cost increases. Unfortunately, that’s not a correct assumption. Over 90 percent of businesses will fail within the first few years. Recessions cause thousands of businesses to go under. This is very prevalent in restaurants, because they pay wages at or close to the minimum wage level. Therefore they rate highest in failure of any other business type. Whenever the cost of business increases, they are pushed closer to the edge. For example, consider a small neighborhood grocery store. This grocery store doesn’t have the resources or advantages of a Super Wal-Mart. So it is forced to charge more for its groceries. Although they will have to charge more for their groceries they probably make up for this in their customer service. Now when the minimum wage is raised, it also increases the labor costs for that grocery store even more. When this happens it has no other alternative but to raise its prices to cover these costs. Eventually, prices will get so high that the consumers will realize that shopping, although convenient and having excellent customer service, isn’t worth the additional cost. The local grocery store is slowly driven out of business.

When American companies are forced to pay certain hourly wages, it will increase the likelihood that companies will look elsewhere and begin outsource jobs to foreign markets and workers, where labor is much cheaper. Lately, there has been attention brought on the topic of job “outsourcing”, where U.S. companies will outsource or hire foreign workers, which leads to loss of jobs for Americans. Businesses that outsource jobs are doing it to reduce costs not because they dislike the American worker. When the price of labor is increased in America, additional incentives for businesses to hire foreign workers are created. The best way to stop outsourcing of jobs is provide the best conditions and environment for doing business in America. Raising the minimum wage creates an environment that just makes things more difficult for companies to do business in America.

When considering the state of minimum wage, one must keep in mind that minimum wage is designed to be a starting wage. The majority of these workers are high school students and transient workers that are working the minimum wage job while looking for their next job. Rather than reward these workers with employer resources and take away from the core work force I feel that minimum wage should not be raised. Instead we have to introduce in our culture a shift of values, attitudes, expectations and social policies. Willing people have an opportunity to earn an honest living and gain real world experience if their employer will not pay them what they are worth another one will. Benjamin Franklin once said “When the people find they can vote themselves money, that will herald the end of the republic.”