Economic Effects Of Raising The Minimum Wage

The Economic Effects of Raising the Minimum Wage According to the United States Department of Labor, on June 25, 1938, the Fair Labor Standards Act was signed by President Franklin D. Roosevelt, setting the federal minimum wage to twenty-five cents per hour. Since then, the federal minimum wage has increased twenty-eight times, and currently sits at seven dollars and twenty-five cents per hour. Despite these raises, the general public shows dissatisfaction with the current wage, and the discussion about whether or not to raise it has surfaced again. Some even argue for doubling the current rate. Although raising the federal minimum wage may create temporary economic stimulation, the long-term results show another side to the story, such
as limiting of upward mobility, shutting teens out of the workforce, having little or even negative impact on the overall economy, and causing major employee labor cuts. Raising the minimum wage can actually decrease future earnings for those who need the boost in their income levels the most. In his article, Labor Market Institutions and Economic Mobility, Seth Zimmerman states that “each 10 percent increase in the minimum wage a 25- to 29-year-old experienced between the ages of 20 and 24 decreases his or her expected current earnings by 3.8 percent.” He goes on to discuss the benefits of raising the minimum wage for “a number of people who remain stuck at low levels, however decreases in overall employment[...] may offset these gains for some groups”(Zimmerman, 2). This is an indicator of how raising the minimum wage may disproportionately impact upward mobility for low wage groups by reducing the motivation to pursue higher education among high-school students, cutting off their ability to obtain higher wages later in life. Delayed gratification is often far more rewarding than immediate gratification in regards to hard work, and raising the minimum wage would limit a person’s earnings down the road. In addition to the detriments toward upward mobility, increasing the minimum wage would limit the ability to find work as a teen. From an employer standpoint, if such an increase on the price of labor were to occur, the first logical step in counteracting this jump in cost would be to reduce the amount of labor required. This could be achieved by replacing workers with automated machines that could do the same job, or it could be done by reducing the amount of inexperienced workers on the payroll, and avoiding hiring those with little experience on their resume. The first of these workers to be affected would be those at the entry level: teenagers. When teenagers lose the chance to obtain a paying job, they lose out on many of the educational opportunities an entry level job provides, such as “valuable life skills like the importance of meeting deadlines, how to report to a manager, and how to get along with coworkers” (Employment Policies Institute). A lack of experience for future workers could be detrimental to the efficiency of United States businesses, as well as the national gross domestic product.
Many believe that raising the minimum wage will result in Americans consuming more, causing gross domestic product growth as well as an increase in commerce for growing businesses.
Although this seems pleasant in theory, this claim does not take into account the principle that “Consumption is not a determinant of economic growth; it is the result of a prior increase in production. Workers cannot be paid what they haven’t first produced” (Dorn, 1). In other words, production and demand have to increase before consumers can purchase a product. This economic theory is similar to the law of conservation of mass, in that consumption can’t happen without a product to consume. Several researchers, including Daniel Aaronson and Eric French of the Chicago Federal Reserve, have calculated that “a $1.75 hike in the hourly federal minimum wage could increase the level of real gross domestic product (GDP) by up to 0.3 percentage points in the near term, but with virtually no effect in the long term”(French, Aaronson 2). Less than a third of a percentage point in gross domestic product increase is not enough to justify raising a federal minimum wage that does not take into account the difference in the cost of living between
states. The student body of Blue Earth Area High School had their own opinion about whether or not the minimum wage should be raised.
In fact, 50% of students stated that the current rate was too low. 30% stated that it was fine, and twenty percent believed they had no opinion. Four options for response were provided for a question asking where students thought the finances for a minimum wage increase would come from. 23.3% of surveyed individuals stated that they believed the resource would come from investors in the form of decreased returns on their investments, 6.7% believed from customers in the form of increased prices, 16.3% believed from workers in the form of labor cuts by employers, and 53.3% stated that they did not know. These statistics raise the question of whether the public, though having an opinion, is informed about the subject. The finances have to come from somewhere, and there are three main sources that make up the majority of a business's revenue. These sources include “a) reduced profits, b) increased prices and/or c) reduced hours or jobs for unskilled workers” (Perry, 2). From an employer’s perspective, it makes little financial sense to reduce investor profits, as that may result in losing investors, and increasing prices may cause a company to lose customers. This only leaves one option, and that is absorbing the cost of the increased wages by cutting the cost of labor. This could mean laying off fairly large sums of employees or reducing the hours of
low skilled workers and replacing some of the work with automated systems, or giving their hours to more experienced laborers in order to increase the efficiency of their dollar. In his article, Mr. President, Increasing the Minimum Wage is the Wrong Medicine for an Ailing Economy, James A. Dorn states that “The idea that raising the minimum wage will increase income confuses the price of labor (the wage rate) with labor income (wage rate x hours worked). If a worker loses her job or can’t find a job at the higher minimum wage, her income is zero.” If a laborer loses his or her job, then raising the minimum wage will not do any good for that individual. This result ends up hurting the individual that an increase in the federal minimum wage aims to help: the low skilled worker. In 1938, Franklin D. Roosevelt signed the Fair Labor Standards Act with the intent of looking out for the low skilled worker. Although the incremental raises in the minimum wage have not caused great loss to employment and gross domestic product of the United States, doubling the current wage will pose a threat to those at the lowest income level. With the limit of upward mobility, an inability for teenagers to obtain jobs, and massive labor cuts, the small amount of economic stimulation that raising the minimum wage would bring simply isn’t worth the cost this change would bring to the American workforce.