Federal minimum wage has been an arguable topic ever since it was implemented into the American society. Minimum wage is the lowest possible wage that employers may legally pay to employees. The first minimum wage law was enacted in 1894 in New Zealand. Many other countries followed at the beginning of 20th century, including The United States in 1938. Franklin D Roosevelt enacted on a Fair Labor Standards Act. This established a baseline minimum wage that was 25 cents, which is equivalent to $4.45 today. From the day that this particular act has been established, society has been fighting over a more accurate amount of what we should be getting paid in exchange for labor. This topic remains one of the most controversial ones for the past eighty-one years. Even though an increase of federal minimum to fifteen dollars can lower poverty, it should not be raised because it would slow market economy, it would increase unemployment, and it would create a wage-price spiral in the American economy.
First, why minimum wage should be raised or not because it would slow down the market economy growth. In the United States we have a market economy which is where consumers and producers determine the cost of goods by using the supply and demand method and reaching the equilibrium. If a $15 minimum wage takes place it would force businesses to overpay for less productive work which would disadvantage them by placing a bigger amount of capital on wages and not necessarily receiving more productive work. The number of workers a business would hire at $15 is less than the number they would hire at $7.50. More work could be done in that time period, businesses would grow faster with more workers which would have a positive impact on the economy. Increasing the wage to such a significant point like $15 will have an opposite effect. According to Kreutzer , “Some firms will use a lot less labor, as in zero labor, because there is no combination of fewer sales and higher prices that allows them to stay in business with a $15 minimum wage”. This quote explains how a lot of small businesses will fail due to them not having enough workers or not being able to afford enough hours for the business in order to generate more revenue. Those that stay in business will try to implement a variety of strategies regarding money management to economize on the more expensive labor.
Another reason why the market economy may slow down is due to automation. Businesses would rather invest into robots than pay people $15 an hour. Over a longer period of time robots will produce a greater return on their money. Recent study by Economists Lordan and Neumark, found that that ‘increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers and increases the likelihood that low-skilled workers in automatable jobs become unemployed”. The main idea of the study emphasizes that federal increases in the minimum wage raise the price of low-skilled labor. This increases the cost savings from this substitution forcing the businesses to re-consider employing low-skilled workers. Raising minimum wage will encourage businesses to shift towards automation. Some workers may get replaced who hold repetitive or stationary jobs, like cashiering or telemarketing, by technology. If this were to occur, it will decrease overall satisfaction in life because dealing with computers instead of human interaction is not ideal for a society. Regardless of whether the congress decides to increase the minimum wage, the process of automation is becoming inevitable and raising the minimum wage is just a further incentive for businesses to lay-off workers.
Every business faces an issue to increase their profitability, especially restaurants where employers hire employees that work on very thin operating margins and get most of their disposable income from tips. According to Stepman, “Nearly 1 out of 10 in areas with a recently increased minimum wage have closed an operation since the cost hike, and 71 percent have attempted to pass along the rise to customers by raising menu prices”. This quote expresses how California’s minimum wage policies produce underwhelming results, one out of ten restaurants have shut down. Over seven out of ten restaurants have raised their menu prices in order to justify for the minimum wage increase. Increased minimum wage is already failing in California. Those are strong warning signs that we cannot ignore nation-wide. Based on this example, if minimum wage continues to increase, like it is currently, businesses will be forced to close at an exponential rate because of direct correlation between increasing the minimum wage and the rise of prices of goods in order to cover employers that are encountering heightened labor costs.
Finally, not only does increase in the minimum wage increases demand for automation in the workplace, and slow down overall market growth, it also decreases the opportunity for teenage employment as well as overall employment. The key findings of research done by Corder presented in his writing piece, Survey of US Economists on a $15 Federal Minimum Wage, ‘minimum wage of $15 will have negative effects on youth employment levels (84%), the number of jobs available (77%) and adult employment levels (56%)”. This research clearly suggests that it is common knowledge that if minimum wage is higher businesses will demand employees with more skills and credentials. Moving forward after a minimum wage increase will lead to many young Americans having difficulty finding employment. Secondly this research also shows that it is also common knowledge that companies will introduce employment cuts and decrease unnecessary paid hours and decrease full-time employments opportunities in order to compensate for their decreased net income by paying less in wages and giving less benefits from having to pay their employees more. Overall greater difficulty for employment leads to a higher unemployment rate which historically shows to negatively affect the U.S economy and the stock market.
Secondly, the unemployment rate is going to be greatly affected by a sudden increase in the federal minimum wage. Contrary to popular belief one may think that increasing the minimum wage might be an incentive for people to work more due to a bigger financial reward. Unfortunately, every coin has two sides to it, we know that businesses are less likely to hire workers at higher wages. In order to debunk the radical claim of correlation between minimum wage increase and job employment increase, we need to look at a statistic from the Bureau of Labor Statistics for every year that congress has increased the minimum wage. The first federal minimum wage has been established in 1938, but it was not consistent across all industries until 1978. According to Carrol, “When workers become more expensive, businesses will be less likely to hire them, and unemployment follows” (p. 3). The main findings of the research clearly point out that even slight increases in minimum wage have led to decrease in unemployment. In the article that I reference where she takes the statistic from bls.gov, one can clearly conclude that increasing the federal minimum wage was not always followed with positive job growth. The key findings of research done by Bureau of Labor Statistics indicate that for the past three increases in minimum wage that happened in the following years: 2007, 2008 and 2009 ($7.25) have followed with significant job losses. Since even small increases in wage cause job loss, one can only imagine the negative effects on the American economy a $15 minimum federal wage would pose.
Moreover, there has been a fight over potential benefits that a $15 minimum wage would create. On July 19th of 2019, The House of Representatives has passed a “Raise the Wage Act” the bill ended up with a 231-199 vote in the U.S Congress. Movement called “The Fight for 15” has started in November of 2012. Couple hundred of devastated McDonald’s workers decided that they are not getting paid enough for their labor and began to stand with banners of $15 and a union on the streets of New York City. The bill was found with huge democratic support in Congress, but for it to be approved it needs to be passed in senate and then later approved by the President. There have been a multitude of reasons of why the bill has not passed the senate. According to Kreutzer, “When forced to raise their labor costs, they are forced to raise their prices. And their customers, faced with higher prices, wind up buying less. Naturally, when businesses start moving less product, they start using less labor” . With over thirty-five years of experience senior research fellow at the Heritage Foundation’s Institute for Economic Freedom and Opportunity—David W. Kreutzer completely debunks the fight for fifteen by proving that it is unnecessary. It will result in fewer available jobs. Raising the minimum wage when these small businesses already operate on thin profit margins will cause them to compensate somewhere else. Plenty of firms will use less labor, some will lay off workers, and some will not bother with hiring people. It is going to be hard to find balance of fewer sales and higher prices that have been induced. Some individuals may be performing more tasks than normal in order to save on money. Customer service quality may decrease, and more thought will be given towards automating jobs. No matter where one stands politically it is common sense that the number of workers that a firm will hire at $15 is way less than the number it will hire at $7.50.
Higher unemployment combined with automation is an equation for disaster that will have a large impact on the working class. It will lead to a slow-down in the market growth. In this world if one wants to make more money, they need to find a marketable skill that will make their time more valuable. The current progress with technology is growing at an exponential rate, one must adjust for that variable which is necessary for success down the road. Almost anyone can be a fast food worker, including a robot. Similarly, not everyone can be a real estate broker, not everyone possesses the communication and persuasion skills that are needed for selling someone a house. Basic economic principles of supply and demand apply to how employees are demanded in the workforce. A higher wage leads to decrease in the quantity of labor demanded by employers, in other words if one’s job requires skills that are harder to possess, they are more valuable and harder to replace, a lower wage means quite the opposite. The truth, in most cases, is that employees are easily replaceable.
Small businesses in America make up a big chunk of the national economy. It is one of the few countries that encourages people to open their own businesses. The United States of America is known for a lot of tax deduction, incentives offered by federal, state and local governments as well as independence, control, prestige, equity and a tremendous financial gain from. It is truly the land of opportunity and society cannot ruin it by imposing some dubious economics. According to Kreutzer, “The best wage policy is a pro-growth economic environment. A vibrant economy increases wages and jobs at the same time”. This particular quote explains that democrats need a reality check to understand that the best wage policy is a pro-growth economic environment, because when the economy is doing good it increases wages and jobs simultaneously. Economic growth is driven by consumer spending and business investment. Conventional wisdom often says that you have to spend money to make money. Inflation goes strong in hand with positive economic growth, when the aggregate demand expands faster than aggregate supply that’s where inflation occurs. Regular workers that do not generate alternative income from investing, over the years the money that they have saved up without earning any interest has less buying power. Raising the wage may help the poor people out in a short-term because they will earn more, however, the lower-class usually has so many expenses and no way to take advantage of inflation and create passive income or invest the money. They simply have no money left over, if the minimum wage is going to be raised, the buying power will decrease over the years which will lead for low income workers to ask for another wage raise.
Finally, the most important reason why the federal minimum wage should not be raised is that it would create a wage-price inflation spiral. This macroeconomic concept is used to explain the relation between increase in wages and increase in prices. Every country that is exposed to the free market has experienced this phenomenon. Increases to the disposable income cause a raise in the demand for goods and cause the price to rise. According to Berlatsky, “The minimum wage is set by legislators. As inflation causes prices to rise, a worker making the minimum wage will be able to buy less and less. The push of inflation is often behind calls for a higher minimum wage”. What Berlatsky is saying is that after raising the wage there will be a progression towards an economic vicious cycle. Workers receive a wage raise, they have more money, therefore they want more things. Consumer Price Index increases, which is the measure of average of prices of a basket of consumer goods and services increases, and the perpetual cycle starts when the minimum wage is increased. It affects everybody ranging from lower class to the top one percent. The prices of basic goods will increase, not only stocks and bonds. This includes the most generic things like toiletries, food, cars, and anything that involves American currency.
Furthermore, the American currency will enter a wage-price spiral in the job field, which ties back to increased unemployment. If the federal minimum wage increases to $15, there would be a direct effect on people who were earning $15 before the change. According to bls.gov on average, Emergency medical technicians and paramedics earn $16.50 per hour. It is common knowledge that EMTs are more skilled than fast food workers, then why would they make almost the same amount of money? One must be certified and complete over three hundred hours of coursework to become an EMT. Those people deal with actual human lives. An argument could be made that they are underpaid since they possess traits like intelligence, ability to work under pressure, compassion and kindness and most importantly decision making. Emergency medical technician abilities are not comparable to those who simply serve customers at a fast-food chain. Their work is crucial in our country, any country would not be able to function properly without them. Paramedics cannot be making only $1.50 more, on average, than fast-food workers. That is simply madness and does not make any sense at all.
Indeed, while raising the wage can lower poverty, federal minimum wage should not be raised because it would slow down the economic growth, it would increase unemployment and it would create an inflation spiral. The United States stopped issuing gold to foreign governments in exchange for the American dollar in 1971. It was strongly believed at that time that our currency did not need a physical asset as a backup. Rich countries like Switzerland back up their currency with gold. United States decided that their currency is backed up by strictly faith, credit and the belief that it works. Americans are arguing about raising or lowering our fiat currency that deep down has no intrinsic value to the human being. One should search for happiness inside of them, surely money helps but it’s not an essential element. In the ideal world, money would not be used at all but capitalism, socialism, and all the systems have their flaws and society has yet to find a perfect system. Solution to the minimum wage issue is not raising it, but creating a pro-growth environment, a solid pro-capitalism mindset that will lead us forward. Instead of raising the wage to $15, a better solution would to index the minimum wage to inflation year by year. In other words, the minimum wage should be automatically adjusted to keep up with cost of living. Raise the wage by 2-3% annually. This way the income inequality gap will start closing in, poverty levels will decrease, economy will be stronger. It’s the best and most educated way to approach this problem, it would benefit the most amount of people and let America continue to be great.