As enshrined in the United States Fair Labor Standards Act, FLSA, the minimum wage policy aims at curbing poverty and minimizing income inequality. Over years, the minimum wage has been reviewed upwards amidst increasing cost of living, with the latest proposal seeking to increase the federal minimum wage to $10.10, up from the current $7.25 per hour. Nonetheless, increasing the minimum wage elicits intense debate from opponents and proponents of the strategy. This paper reviews secondary sources arguing for and against the increase in minimum wage as a way to curb poverty and inequality, and in its conclusion from the findings, arguing that the federal minimum wage should not be raised.
For over a century, the minimum wage remains a critical component of public policy. Neumark and Wascher (2008) trace its back to the 1890s in Australia and New Zealand. It aimed at ensuring fair pay for work done. In the United States, the provisions of the federal minimum wage are enshrined in the Fair Labor Standards Act, FLSA. With its history traced back to 1938 when applied to Virgin Islands and Puerto Rico, the FLSA has undergone numerous amendments to what it is today, covering the whole of the United States. It aims at helping families attain self-sufficiency, thus targeting low-paid occupations. Following amendments to its 2008 predecessor, the 2009 amendments set the federal minimum age at $7.25 per hour as documented by the United States Department of Labor, DOL (2014). Even though there are states with greater employee protection legislations, all states should adhere to both legislations. In cases where the minimum wage set by the federal authorities differ from that set by the state authorities, employees are entitled to the higher minimum wage.
Having not been amended for the past five years, there are calls to have the minimum federal wage increased. The United States President Obama set the momentum for this amendment, having called on the Congress to support the increment of the minimum wage to $10.10 an hour, soon thereafter signing the Executive Order on the same for employees under the new federal service contracts (Executive Office of the President, 2014). Should this Act be enacted, the DOL (2014) notes that federal minimum wage would be raised to $8.20, then to $9.15 and finally to $10.10 an hour on day one of the third month, after one year and after two years respectively. Tipped employees would also have their minimum wage increased to $3.00 per hour. Furthermore, depending on the increase in the Consumer price Index, these amounts would be reviewed by the Secretary of Labor after three years and yearly thereafter. Indeed, cities, counties and businesses have taken action to effect these amendments. However, despite such actions and efforts to have this bill passed, the proposal has been blocked by a majority of Congressional Republicans (Puzzanghera & Hennessey, 2014). These leaders raise critical issues that do not support the raising of the federal minimum wage. As such, the federal minimum wage should not be increased.
Arguments for Increasing the Federal Minimum Wage
The widespread argument is that raising the minimum federal wage would improve the living standards of the people. Adjusting for inflation, the Executive Office of the President (2014) found out that the value of the federal minimum wage has dipped by 33% from its peak, now considered less than it was at the beginning or the administration of Ronald Reagan in 1981. The wage is now approximately 36% of the average wage, this being a more than 50% dip from its peak. This increment would cushion families from the effects of inflation. At present, a family of four, having only one full-time worker who earns the minimum wage of $7.25, lives 17% below the poverty line. Increasing this wage to $10.10 would cause such a family to rise above the poverty line set at $24,100 in 2013 for a family unit of four, lifting about 2 million families in total from poverty (Puzzanghera & Hennessey, 2014). Moreover, the Executive Office of the President (2014) observes that such an increase would disproportionately advantage the working women who account for about 55% of all workers. They make up 72% of those undertaking predominantly tipped occasions and would thus be the beneficiaries of the first ever increase on tipped minimum wage since this was last witnessed over 20 years ago. Only 12% of beneficiaries of this increase are teenagers. With women being the greatest beneficiaries, it is argued that the welfare of many more families would be positively impacted.
Secondly, raising the minimum federal wage would improve the economy. As documented by DOL (2014), approximately 28 million workers stand to benefit from an increase in the minimum wage. Of these, 19 million who earn less than $10.10 would be direct beneficiaries whereas 9 million low-wage workers would benefit from the associated ripple effect. The increased earning by the low-wage workers would cause them to spend more. According to the Executive Office of the President (2014), increasing the minimum wage would result in an increase in aggregate demand, citing the study by Federal Reserve Bank of Chicago economists which revealed that increasing the minimum wage would cause a 0.3% point growth in the short run. Furthermore, the associated benefits of “improved productivity, lower rates of absenteeism and increased retention” as documented by Puzzanghera and Hennessey (2014), increasing the minimum wage would improve productivity of employees. Consequently, this would foster the performance of the economy.
Increasing the minimum federal wage would attract more productive workers. According to Adams, “higher wages attract more productive workers who tend to be more affluent” (2013). These include spouses not much interested in the work or retirees who also could manage without the work. To such people, quality of work is paramount, thus high productivity. This positively affects the performance of organizations, making production attractive.
Arguments against Increasing the Federal Minimum Wage
On the other hand, increasing the federal minimum wage poses a risk of increasing unemployment rates, thus hurting the low-skilled workers, the people whom it should positively impact. Increasing the minimum wage would result in an increase in wage costs for employers across the country. To cushion themselves, employers would undertake job cuts so as to manage their expenses on wages. More specifically, Puzzanghera and Hennessey (2014) argue that this increment would cause a loss of 500,000 jobs, this being about 0.3% decrease in total employment and about 1.5% drop with regards to the total population of low-wage workers. Evidence from the American Action Forum indicates a slower employment growth in restaurants and retail occupations, these being fields where employers are most likely to be paid the minimum wage, in states that had implemented the raised minimum wages (Morath, 2014). This acknowledges minimum wage as a critical determinant of hiring decisions. Since the 2008 recession, employers have been struggling with production costs, a fact that has even forced them to pay their employees below the minimum wage. Adams (2013) gives examples of a Chinatown restaurant and Upper East Side pizza place in New York as among the many organizations which cannot pay even the current minimum wage. This is attributed to lack of enough wage competition as a result of the recession. Thus, increasing this minimum would cause most of them to close shop, leaving many unemployed. With unemployment being one of the top concerns for America, raising the minimum wage should not be approved as it would destroy instead of create the much needed jobs in the country.
In the same way, prices of commodities would rise, thus creating a null net effect of the increment on the lives of the low-wage workers. Should the increase in minimum wage not affect the employment rate as intended by the Executive Office of the President (2014), the wage bill for these employers would rise. Consequently, employers raise the money needed to pay for the higher wages by increasing prices of their products or services. Reviewing over 20 studies on minimum wage, Neumark and Wascher(2008) observed that in the US, increasing the minimum wage by 10% causes food prices to rise by about 4%. Should Wal-Mart or McDonald’s, for example, be the employers to increase the prices of their commodities as a result of the increased minimum wage, then, disadvantaged families could be further burdened as they are leading customers in these places (Adams, 2013). Therefore, in as much as DOL (2014) argues that the spending of the people would increase, there could be a high likelihood of this not being realized as the wage increment would be consumed by the additional costs of commodities. Therefore, there would be no meaningful net effect of the increased wage due to the increased prices of commodities.
Another critical fact to consider is that raising the federal minimum wage compromises on the development of an economy. Evidence from primary studies conducted by Neumark and Wascher (2008) from the mid-1990s shows that increasing the minimum wage makes such wages attractive to the youth and teenagers who in turn leave school for jobs. Increasing the minimum wage also makes firms shy away from offering training to young workers who are sources of wage growth in future. For these reasons, some states opt to offer the bare minimum wage as dictated by the federal authorities just for compliance. These findings attest to the fact that increasing the federal minimum wage could discourage education among the youth and teenagers and jeopardize the skills of the workforce in various firms thus negatively affecting the development of the economy.
There are better alternatives to dealing with poverty and inequality than increasing the minimum wage. One of the most fronted alternatives has been the alteration of the earned-income tax credit. Most of the low-wage earning employees struggle to meet their basic living expenses, especially those that have families to support. The government, through the earned-income tax credit initiative, gives payouts to such people with low incomes. This is meant for the poor families and not the relatively affluent spouses, retirees or college students (Morath, 2014). Increasing this credit provides a better alternative to curbing inequality and poverty, the basic reasons on which the argument on increased federal minimum wage is based. In fact, Adams (2013) observes that even conservative groups such as the Employment Policies Institute support this strategy. Moreover, studies show that increasing the minimum wage has no or little effect on poverty reduction. Neumark and Wascher(2008) cite an academic study which documented no change in poverty rates following the federal and state wage increases effected between 2003 and 2007. Therefore, instead of increasing the minimum wage, other more effective alternative strategies to reducing poverty and inequality should be adopted.
The minimum wage policy as documented the United States Fair Labor Standards Act, FLSA seeks to curb poverty and minimize income inequality. The main aim of this policy is to help families attain self-sufficiency and therefore targets workers in low-paid occupations. When the government increases the federal minimum wage, it anticipates improving the living standards of its people, lifting them above the set poverty line. The economy also improves due to increased aggregate demand and also attracts more productive workers for employment. Nonetheless, there being benefits and costs with increasing the minimum wage, its implementation should follow a consideration of the acceptability of the tradeoffs between the benefits and costs. Overwhelming body of evidence argues against increasing the minimum wage as a way to curb inequality or poverty. Increasing the federal minimum wage would almost certainly lead to a reduction in employment opportunities, especially among the entry-level, low-skilled wage earners for whom a job presents the first step on their opportunity ladder. It results in increased cost of commodities thus a null net effect on poverty levels in addition to compromising the development of the economy due to promoting school drop-outs among the youth and teenagers attracted by the higher wages. There exist better alternatives to reducing poverty and minimizing income inequality such as increasing the allocation for earned-income tax credit. As such, the federal minimum wage should not be raised.
Adams, S. (2013, November 11). The minimum wage debate: Who’s right? Forbes. Retrieved 12 November 2014 from http://www.forbes.com
Executive Office of the President. (2014, August). A year of action: Progress report on raising the minimum wage. Washington, D.C.: The White House. Retrieved 11 November 2014 from http://www.whitehouse.gov
Morath, E. (2014, August 31). Labor Day turns attention back to minimum-wage debate. The Wall Street Journal. Retrieved 12 November 2014 from http://blogs.wsj.com
Neumark, D. & Wascher, W. L. (2008). Minimum wages. Cambridge, MA: Massachusetts Institute of Technology.
Puzzanghera, J. & Hennessey, K. B. (2014, February 18). Report on federal minimum Wage of $10.10 heats up debate in Congress. Los Angeles Times. Retrieved 11 November 2014 from http://www.latimes.com
United States Department of Labor. (2014). Minimum wage. Retrieved 11 November 2014 from http://www.dol.gov