Few issues in American politics today are more divisive than that of the minimum wage. Traditional economic teachings assert that by setting a minimum wage, which is essentially a price floor on wages, companies will purchase less labor, or reduce their consumption of other types of labor to adjust, leading to a loss of social welfare overall (Baye & Prince, 2017). One idea often cited by proponents of the minimum wage is the need for controls on the unethical treatment of workers by large corporations. More recent ideology, carried forward by progressive presidential candidates like Bernie Sanders and Elizabeth Warren, propose that the minimum wage should represent the minimum “living wage” of the society (McNett, 2020). With opponents calling for the abolishment of the minimum wage, and proponents seeking to raise it even higher, the best path forward is as murky as ever. This essay will discuss the most recent evidence with the goal of illuminating a rational course of action on the Federal minimum wage.
Progressive presidential candidates like Bernie Sanders and Elizabeth Warren propose that the minimum wage should represent the minimum “living wage” of the society.
The minimum wage was first implemented in the United States in 1938, as part of President Roosevelt’s response to the Great Depression. As set by Congress in the Fair Labor Standards Act, the first rate was $0.25, which is equivalent to about $3.80 in 2011 dollars (Glass, 2011). Since then, the numerical and economic value of the minimum wage has varied significantly. In 2007 Congress authorized the States to set their own minimums which can be higher than the federal level, further complicating the picture. This wide array of environments and price floor levels over time has given economists a broader view of the true implications of the minimum wage (Glass, 2011).
As a price floor, basic economic principles state that the effect of a minimum wage above the equilibrium wage will result in an increased supply of labor and a decrease in demand, leading simply to more unemployment. In addition, the lost economic value may show up in changes in GDP and/or stock prices of corporations employing minimum wage workers. One study showed that in the time period before and after the implementation of a minimum wage increase, stock prices on 38 publicly traded companies showed abnormal returns (Soper & Sywak, 2019). In another study focusing on new startup companies, there was a negative correlation between the minimum wage and the likelihood of hiring employees or probability of achieving profitability (Kwapisz, 2019). Indeed, it seems that the most vulnerable companies to the minimum wage are startups and small businesses who have fewer resources to be able to absorb the increases.
It seems that the most vulnerable companies to the minimum wage are startups and small businesses who have fewer resources to be able to absorb the increases.
Evidence also exists supporting the idea that increases in the minimum wage will result in a larger supply of minimum wage labor. One study examined the differences in rates of community college enrollment in two areas with differing minimum wages. The evidence suggested that in part-time students, a higher minimum wage leads to a decrease in enrollment at community colleges. This effect was not seen for full-time students, however (Lee, 2020). This shows that a higher minimum wage may entice more workers to directly enter the workforce rather than obtaining some type of post-secondary training or education.
an increase in the minimum wage lead to a decrease in the utilization of Social Security and extended the employment of potential retirees, with no disemployment effects seen
These references, and many others, seem to support the lessons of basic economics. However, changes in the minimum wage have effects much more complex than simply shifting the supply and demand of labor. Take, for example, a study which examined the effect of the minimum wage on retiree aged individuals. It was found that an increase in the minimum wage lead to a decrease in the utilization of Social Security and extended the employment of potential retirees, with no disemployment effects seen (Borgschulte & Cho, 2020). Another surprising result came from a study commissioned by the Centers for Disease Control and Prevention (CDC), showing that for each $1 increase in price-adjusted minimum wage, a 19.7% reduction in syphilis and an 8.5% reduction in gonorrhea in women was found (Ibragimov, Beane, & Friedman, 2019). In a country that spends over 16% of GDP on healthcare, reductions in disease like this can have a huge positive economic impact.
In addition to these less obvious effects, a growing body of evidence contradicts the predictions offered by basic economic theory. In some studied markets, the disemployment effects of the minimum wage are negligible, with estimated employment elasticities not statistically different from zero, at least for low-skilled and young workers (Sturn, 2018). Labor itself is different from other commodities on the market, as labor reimbursement can then have an effect on nearly the entire economy as incomes grow (Baye & Prince, 2017). Several studies show that consumer spending increases as minimum wage increases, driven in part by increasing in automobile purchases (Aaronson, Argarwal, & French, 2012) (Smialek, 2014). In effect, the rise in consumer incomes triggered by a minimum wage increase trickles back into the economy, stimulating growth and production that can outpace the detriment to the initial wage payer.
Consider one’s personal image of a low-wage worker. They may have limited means of transportation, relying on busses or carpools to get to work. Taking one aspect of the aforementioned studies; if the effect of a increase on minimum wage is an increase in vehicle ownership, this may translate into more productivity of the low wage worker due to less time wasted by missing buses or through the inefficiencies of public transportation routes. A newly mobile consumer may be more able to search for better jobs and better prices for goods in a larger geographical area. In short, it is conceivable that an increase in the minimum wage could substantially improve economic mobility for the low wage worker.
Another reason that in practice the minimum wage does not increase disemployment is that employers often pass along the added cost in the price of their product. One study showed that about 75% of the minimum wage increase is paid for by the consumer (Harasztozi & Lindner, 2019) (Cooper, Luengo-Prado, & Parker, 2017) (Allegretto, 2018) (Committee On Education & Workforce Democrats, N.D.). While this does support the argument against the minimum wage (that the minimum wage acts as a positive inflation pressure), this argument neglects the fact that the net result is an increase in consumer spending overall. Low-wage workers spend nearly all their income and save almost none. Increases in wages for low-income workers then have the natural effect of stimulating spending overall, compared to mid- or high- income individuals, who save a much larger proportion of their wealth (Langlois, 2019).
Other factors, such as the degree of wealth inequality and the monopsonic nature of some job markets may also contribute to the unpredictable effects of the minimum wage. A monopsony is a market in which there is only one buyer of a good or service. For instance, in a small town, there may be only one cattle market and many cattle farmers. In this scenario, the cattle farmers have no option but to use the cattle market (the monopsony).
In monopsonic markets , minimum wage laws have been shown to increase employment rates and net worker incomes (Manning, 2004). It should be no surprise that monopsonies can be just as harmful to the free market as monopolies.
…minimum wage laws have been shown to increase employment rates and net worker incomes
In conclusion, the basic laws of supply and demand indicate that price floors like the minimum wage ultimately have an adverse effect on the overall economy. Indeed, some effects of the minimum wage do follow with these predictions. However, in practice it does not appear that minimum wage laws always have the effect as taught in Economics 101. Due to complex societal factors, deeply interwoven economies, the presence of non-pure free markets, labor monopsonies, and extreme wealth inequality, increasing the minimum wage typically has a net positive effect on wages, consumer spending, and economic growth, with little to no increase in unemployment or job growth, particularly with low-wage workers. Far from a simple topic, the minimum wage is certain to continue to be a hotly contested subject until many more, clearer studies are published.
References
Aaronson, D., Argarwal, S., & French, E. (2012). The Spending and Debt Response to Minimum Wage Hikes. American Economic Review, 3111-3139.
Allegretto, S. (2018). Are Local Minimum Wages Absorbed by Price Increases? Estimates from Internet-Based Restaurant Menus. ILR Review, 35-63.
Baye, M. R., & Prince, J. T. (2017). Managerial Economics and Business Strategy, 9th ed. . New York: McGraw-Hill.
Borgschulte, M., & Cho, H. (2020). Minimum Wages and Retirement. ILR Review, 153-177.
Committee On Education & Workforce Democrats. (N.D.). Raising the Minimum Wage: Good for Workers, Businesses, and the Economy. Washington, D.C.: US Congress. Retrieved from https://edlabor.house.gov/imo/media/doc/FactSheet-RaisingTheMinimumWageIsGoodForWorkers,Businesses,andTheEconomy-FINAL.pdf
Cooper, D., Luengo-Prado, M. J., & Parker, J. A. (2017). The Local Aggregate Effects of Minimum Wage Increases. Boston, MA: The Federal Reserve Bank of Boston.
Glass, A. (2011, June 24). National Minimum Wage law enacted June 24, 1938. Politico, p. Online. Retrieved from https://www.politico.com/story/2011/06/national-minimum-wage-law-enacted-june-24-1938-057629
Harasztozi, P., & Lindner, A. (2019, August). Who Pays for the Minimum Wage? American Economic Review, 109(8), 2693-2727.
Ibragimov, U., Beane, S., & Friedman, S. R. (2019). States with higher minimum wages have lower STI rates among women: Results of an ecological study of 66 US metropolitan areas, 2003-2015. PLoS ONE, 1-18.
Kwapisz, A. (2019, December). Minimum Wages and Nascent Entrepreneurship in the US. The B.E. Journal of Economic Analysis & Policy, 20(1), Online. doi:10.1515/bejeap-2018-0140
Langlois, S. (2019, March 21). How the rich, the poor, and the rest of us make and spend our money. Retrieved from Marketwatch.com: https://www.marketwatch.com/story/how-the-rich-the-poor-and-the-rest-of-us-make-and-spend-our-money-2019-03-20
Lee, C. H. (2020, January). Minimum Wage Policy and Community College Enrollment Patterns. ILR Review, 73(1), 178-210.
Manning, A. (2004). Monopsony and the Efficiency of Labour Market Interventions. Labour Economics, 145-63.
McNett, J. (2020, January 4). Iowa caucuses: Bernie Sanders asks “tough questions” in Mason City visit. Globe Gazette, p. A2. Retrieved from https://globegazette.com/news/iowa-caucuses-bernie-sanders-asks-tough-questions-in-mason-city/article_afcf5507-7d35-5247-b1c5-2e2b43e2cdc4.html
Smialek, J. (2014, February 28). Minimum wage increase in U.S. will probably promote spending. Benefits News, p. 1.
Soper, C. C., & Sywak, M. (2019, November). An Increase in the Federal Minimum Wage: Good for Employees, Bad for Stockholders? International Advances in Economic Research., 25(4), 489-491.
Sturn, S. (2018). Do Minimum Wages Lead to Job Losses? Evidence from OECD Countries on Low-Skilled and Youth Employment. ILR Review, 647-675.
Tedeschi, E. (2019, April 24). Minimum Wage at Record High (Without Federal Help). The New York Times, p. 12.
