Robert Myatt, Daniel Beatty, Michael Bonney, Shahabedin Mirtavousi, Megan Goolsby
4/29/14
James Makokha
ECON 2301.P05 TR 10-11:15am
Effects of Raising the Minimum Wage on the American Economy
The minimum wage was introduced as part of the Fair Labor Standards Act (FLSA) in
1938 by President Franklin Delano Roosevelt. The idea was to protect American workers from
being exploited. Over the years, the minimum wage has increased from 25 cents an hour to the
current rate of $7.25 an hour.
Thousands of workers welcomed this as a godsend, but it was violently opposed by many
employers and fiscal conservatives. Even though 25 cents an hour seems small by today’s
standards, many people worked for much less before it was established. Every few years
congress will increase the minimum wage to account for inflation and the cost of living.
President Bill Clinton introduced legislation in 1997 allowing individual states to set their
own minimum wage rates, and as a result several states have minimum wages that are higher
than the federal minimum wage (Minimum Wage Overview). Today, there is continuing debate
over whether the Federal Minimum Wage is truly a fair "living wage". Labor activists call on
Congress to raise the minimum wage, while others point out the negative effects this could have
on the economy (Minimum Wage Overview).
History
The Fair Labor Standards Act was signed by President Franklin D. Roosevelt on June 25,
1938, and became the law on October 24, 1938. It helped establish the first minimum wage for
workers in the United States. At the time Roosevelt signed this law, the minimum wage was
$0.25. Throughout the years the minimum wage has slightly increased with new laws, and the
last increase was made on July 24, 2009, establishing the current minimum wage of $7.25.
Minimum Wage and Cost of Living
Although the minimum wage has increased overtime, the value of the currency has
changed due to inflation. One graph provided by CNN from the Bureau of Labor Statistics shows
the amount per hour each worker is getting, and on the same graph is a line that shows the actual
value in terms of 2013 standards. In 1968, the minimum wage was $1.60, but in today’s terms it
would be equivalent to $10.71, which is the highest value on the graph. Ever since 1938 the
value had gone up to its highest in 1968. There has been a downward trend on the graph from
1968 to today. The current rate is still $7.25 an hour and the value is $7.25 an hour. (Minimum
wage since 1938)
A study conducted from 2002 to 2012, indicates that 16-24 year olds make up 51% of the
minimum wage work force. Many can conclude that these are young people going to either high
school or college and need extra funds while they are in school. The Bureau of Labor Statistics
conducted this study, which was provided by Pew Research Center. Minimum wage jobs are not
necessarily meant to be jobs that a person would take to support a family because they don’t pay
enough to cover all of the expenses. (Desilver)
The next largest bracket is 20% among 25 to 34 years of age. These are mainly made up
of couples where one spouse is working a minimum wage job while the other has a better paying
job that adequately provides enough money to support an entire family. Recent studies by the
Labor of Bureau Statistics also show that there are currently nineteen states, including
Washington D.C., that have a higher minimum wage than the required national minimum.
(Desilver)
It is important to note the fact that while an increase in the federal minimum wage would
affect the entire country, the cost of living is different depending where you live. A federal
minimum wage increase would be uneven as the cost of living in Mississippi is very different
than that of New York City. A federal minimum wage increase would disproportionately hurt
business in states where everything costs less, but now the cost of labor costs much more.
(Hawkins)
Positive Effects of Increasing the Minimum Wage
Increasing the Federal minimum wage can produce both positive and negative effects
economically. Although an increase to $10.10 an hour sounds enticing for those struggling to
provide for their families, many factors come into play when deciding whether or not this
increase will be beneficial to the economy. An immediate positive result of increasing minimum
wage is the extra earning potential of low-wage workers. By increasing their hourly pay, the
government is providing them with the ability to purchase household necessities and maintain
the financial stability needed to provide for their families.
Many have argued that raising the minimum wage will result in an increase in
unemployment rates. Increasing the federal minimum wage will mean taking money from the
employer and giving it to the low-wage worker in order to fulfill the pay raise from $7.25 an
hour to $10.10 an hour. This subsequently makes the employer produce more goods in order to
regain his lost profits, but more workers are needed to produce the amount necessary.
Negative Effects of Increasing the Minimum Wage
Negative effects of increasing the federal minimum wage include the loss of
opportunities for low-skilled workers. Some believe that more jobs will be created from the
increase of hourly pay, but if an employee cannot produce as much revenue as the employer is
paying him to cover the minimum wage increase, that worker will then lose his or her job. If the
minimum wage is raised then there will no longer be work for entry level workers who are just
starting out, or who have not acquired the skills to be proficient in a certain position. Employers
also fear that raising his or her product prices to cover higher minimum wage for their employees
will result in a loss of business. In such a demanding economy, the higher the prices, the less
likely customers will want to purchase the products. This means that a higher minimum wage
will cut into an employers’ profits, there will be less capital investment, and job growth will
slowly decrease.
Conclusion
It’s easy for advocates of raising the minimum wage to approach the issue in an
emotional way, arguing that workers deserve to be paid higher wages. Although it may sound
enticing, many fail to understand the economic ramifications of doing so. Minimum wage jobs
are intended to be entry level, and after starting at the bottom and gaining valuable knowledge
and experience, a worker advances and begin making more money. Minimum wage jobs are not
intended to be lifetime careers, and they are certainly not intended to support an entire family.
Many argue that raising the minimum wage is only “fair,” but raising the federal minimum wage
will have adverse economic effects.
Raising the minimum wage will result in fewer jobs because it will cost employers more
to pay workers, forcing them to cut their workforce. “Most minimum wage jobs are not essential
jobs and making them more costly also makes them more expendable” (Hawkins). People who
are seeking minimum wage jobs will suffer the most since these kinds of jobs will be extremely
limited, if not completely gone.
If employers are forced to pay minimum wage workers more, they will have to make up
for it in other ways. They will either reduce their number of employees or raise the cost of their
product or service. “While you boost the minimum wage of these workers, the price of every
product they plan to purchase from other retailers just skyrocketed to pay for the increases…at
the end of the day, the value of the dollar is merely weakened and the ability to purchase more
goods becomes more expensive anyway” (Hawkins). Many argue that raising the minimum wage
is necessary to make things more affordable, but it will eventually force prices up which defeats
the whole purpose. “In the end, a feel-good policy could cause even further havoc on the middle
class and small businesses, while doing almost nothing to help those who the law was intended
to help” (Hawkins).
While large companies can absorb an increase in the minimum wage, small businesses do
not have that luxury. Some will either turn to reducing their employee’s hours or find ways to
replace them altogether with some kind of technology that will perform the job just as well.
Either way, it ends up being counterproductive to the employment picture. (Needleman and
Loten)
It is important to approach the issue of raising the minimum wage from a macroeconomic
point of view. Raising the federal minimum wage will have adverse effects on the economy as a
whole. The main reason why raising the federal minimum wage is not a good policy is because it
will eliminate jobs or reduce the workers hours resulting in less pay. This will not only affect
many workers, but it will also hurt the economy.
Works Cited
"Minimum Wage: BACKGROUND." CQ Researcher 24.4 (2014): 80-87. Academic Search
Complete. Web. 10 Apr. 2014.
"Minimum Wage Overview: Provisions Of The Fair Labor Standards Act. (Cover Story)."
Congressional Digest 92.5 (2013): 3-10. Academic Search Complete. Web. 10 Apr. 2014.
"5 facts about the minimum wage." Pew Research Center RSS. N.p., 4 Dec. 2013. Desilver,
Drew. Web. 18 Apr. 2014.
"Minimum wage since 1938." CNNMoney. Cable News Network, 1 Jan. 2013. Web. 14 Apr.
2014.
“The Unintended Consequences of Forced Wage Increases.” News and Issues: U.S. Conservative
Politics. Dustin Hawkins. Web. 5 April 2014.
“Can the Tablet Please Take Your Order Now?” The Wall Street Journal. Sarah E. Needleman
and Angus Loten. Web 26 April 2014.