Minimum Wage Policy and Its Impact: Controversy

Table of Contents

Introduction

The minimum wage is the lowest amount of money for which employees can legally sell their labor. Minimum wage legislation was introduced in the USA in 1938, and in 2009, it was set at its current rate of $7.25 per hour (Congressional Budget Office, 2019). The proposal to increase the minimum wage to $15 has been discussed in the Senate since 2019 and still remains a subject of intense debate (Congressional Budget Office, 2019). The proponents of the reform claim that it will help to fight poverty, increase the efficiency of the market, and reduce wage inequality. However, research suggests that rapidly increasing minimum wage is a negative policy because it causes long-term negative consequences for businesses, employment, job growth, consumer prices, and worker welfare.

Main body

Businesses are the first to be affected by the hike, which forces many of them to close, cut back on hiring, or raise prices. The study by Luca and Luca (2019) on the impact of the minimum wage increase on the restaurant industry provides evidence that poor quality restaurants become 10% more likely to close within several months after the hike. Restaurants with higher ratings that are not close to the margin of exit are practically not affected (Luca & Luca, 2019). It means that the increase of the minimum wage forces companies to close, with lower-income businesses being affected the most.

Consumer prices also depend on the fluctuations of the minimum wage. According to the study of the restaurant industry, the rise of the minimum wage is accompanied by an increase in customer spending (Aaronson et al., 2015). Around 100% of the higher labor costs are passed onto consumers in the form of higher meal and service prices. The study by Purdue University’s School of Hospitality and Tourism calculated that raising wages to $15 an hour for restaurant employees leads to an estimated 4.3% increase in prices (as cited in Ma & Ghiselli, 2016). Passing an increase of the minimum wage onto consumers slows spending and economic growth.

The increase of the minimum wage makes many low-wage workers lose their jobs and increases unemployment. International experience suggests that a higher minimum wage reduces vacancies and turnover and, eventually, lowers employment by causing businesses to cut back on hiring (Dube, 2019a). Although the minimum wage is raised, and a slight increase in job growth is observed, it is followed by a reduction in employment over a significant period of time (Meer & West, 2013). The research of the restaurant industry shows that there is a decline in employment within two years after the minimum wage is raised, which is bigger than the positive short-term effect reported in the literature (Aaronson et al., 2015). According to the Congressional Budget Office estimate (2019), under the $15 minimum wage, 1.3 million workers who would otherwise be employed would be jobless by 2025. The hike makes employers cut down the hours and reduce the number of low-paid jobs, hire more experienced workers to perform the same tasks, automate some types of work, or delegate them to consumers.

Low-skilled workers and teenagers are particularly affected by the increase in the minimum wage. According to the research by Clemens et al. (2018a), the minimum wage hike results in the substitution of low-skilled labor with higher-skilled labor. The American Community Survey on the skill and education of workers in low-wage jobs reports that the changes in the minimum wage cause an increase in the average age and education of people employed in low-paid jobs (Clemens et al., 2018a). Having to pay more, employers tend to hire more trained and experienced individuals, and the vacancies are becoming less hospitable towards workers with no skill and education. This has a particularly disadvantageous impact on teenagers who are typically at the bottom of the wage and earnings distribution and make up a large share of the low-wage workforce.

The effect of the minimum wage on family income is controversial. On the one hand, workers who keep their jobs and start to be paid more experience an increase in earnings, which results in many families being lifted out of poverty. On the other hand, real income falls for many households because other workers lose their jobs, business owners lose earnings, and prices increase for consumers (Congressional Budget Office, 2019). For those reasons, the net effect of a minimum wage increase is thought to reduce average family income, with its impact on each particular family depending on a number of factors.

The increase of the minimum wage is also believed to decrease the total payroll of low-wage workers. The research by Jardim et al. (2018) of a large increase in the minimum wage in Seattle in 2015–2016 indicated that hours worked by low-skilled employees fell by 6.9% when the wage was raised. It resulted in a significant wage loss that exceeded the gains of the net wage increase.

The minimum wage also has an impact on employee compensation and worker welfare. According to the American Community Survey (as cited in Clemens et al., 2018b), the changes in the minimum wage cause a decrease in the number of employees provided with employer-sponsored insurance. Having to pay more in cash, companies reduce non-cash benefits for low-paid workers, which also has “spillover effects on the compensation packages of higher-skilled workers” (Clements et al., 2018, p. 2). It has a negative impact on worker welfare, with many employees being forced to handle health insurance issues by themselves.

The proponents of the minimum wage increase argue that its effects on poverty and employment are generally positive. They claim that the existing wage gap between low- and middle-income workers are the result of the economy’s failure to respond to the decline in the real value of the minimum wage of recent decades (Autor et al., 2016). Therefore, the raise will compensate for the loss of the real wage value and help to reduce inequality. The minimum wage is also believed to be an effective anti-poverty tool that provides benefits to low-income families. The potential effect of the increase of the minimum wage to $12 is estimated to cause a 1.9% reduction in the poverty rate (Dube, 2019b). It is also believed to help reduce child maltreatment rates, as families could start spending more money and effort on their children, and teenagers would not have to start working early to support their parents. However, the studies focusing on the advantages of the minimum wage policy tend to overlook the long-term negative consequences.

The research exploring the negative effects primarily analyzes employment changes in the period following the rise of the federal minimum wage in 2009. The data is confirmed by the studies of international minimum wage practices and the experience of some states that have introduced minimum wage reforms in recent decades. The similarity of research results allows economists to make predictions on the effects of the proposed raise. They include the reduction of job growth, decrease in employment, increase of consumer prices and reduction of non-cash benefits for workers. However, the studies suggest that the negative effects are most visible after a rapid increase, and a gradual rise will cause less severe consequences (Congressional Budget Office, 2019). The main sources of uncertainty about the proposed changes are the responsiveness of employment and the uncertainty of wage growth under the current law (Congressional Budget Office, 2019). If thoroughly analyzed and accounted for before introducing the changes, their potential negative impact can be reduced or avoided.

Conclusion

The policy of the minimum wage has many proponents that argue that it increases the standard of living of workers and their family income, reduces poverty and inequality, and boosts morale. However, multiple studies show that the long-term consequences of the minimum wage raise are primarily negative. It is damaging to business and causes many companies to close, lay off workers, or cut back on hiring. It disadvantages teenagers and low-paid workers with no skills or experience. It generally increases unemployment over the period of several years and decreases the total payroll for low-wage employees. Additionally, it causes an increase in consumer prices, with many businesses passing the higher labor costs onto consumers. The negative consequences are primarily connected with the rapid increase of the minimum wage. In order to avoid them, a thorough strategy needs to be developed that focuses on the gradual increase and addresses all its potential negative impacts.

References

Aaronson, D., French, E., & Sorkin, I. (2015). International Economic Review, 59(1), 51–84. Web.

Autor, D. H., Manning, A., & Smith, C. L. (2016). American Economic Journal: Applied Economics, 8(1), 58–99. Web.

Clemens, J., Kahn, L., & Meer, J. (2018a). (NBER Working Paper No. 27090). National Bureau of Economic Research.

Clemens, J., Kahn, L., & Meer, J. (2018b). (NBER Working Paper No. 24635). National Bureau of Economic Research. Web.

Congressional Budget Office. (2019). [PDF document]. Web.

Dube, A. (2019a). [PDF document]. Web.

Dube, A. (2019b). American Economic Journal: Applied Economics, 11(4), 268–304. Web.

Jardim, E., Long, M., Plotnick, R., Inwegen, E., Vigdor, J., & Wething, H. (2018). (NBER Working Paper No. 23532). National Bureau of Economic Research. Web.

Luca, D. L., & Luca, M. (2019). (NBER Working Paper No. 25806). National Bureau of Economic Research. Web.

Ma, J., & Ghiselli, R. (2016). Journal of Foodservice Business Research, 19(2), 131–146. Web.

Meer, J., & West, J. (2013). (NBER Working Paper No. 19262). National Bureau of Economic Research. Web.

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