Since July 2009, the federal minimum wage has been $7.25 per hour. The House of Representatives voted to raise it to $15 by 2025. The “Raise the Wage Act” will go to the Republican-controlled Senate, where the bill is expected to fail.
But why is the minimum wage such an issue between Republicans and Democrats in Washington? Let’s explore the pros and cons of this public policy.
Pros of Minimum Wage
Two-thirds of the US economy is dominated by consumer spending. It is argued that increased wages will lead to higher spending on a wide variety of goods and services. This then has a domino effect by raising demand, creating more jobs, and generating greater business revenues.
When workers are unhappy, it can affect productivity levels and even lead to a high turnover rate – the percentage of employees leaving a firm and being replaced. However, if workers are paid more, then it might boost morale, lead to greater effort, and prevent workers from quitting.
From a government’s perspective, when employees receive a bigger paycheck, it increases tax revenues, allowing public officials to spend on education, infrastructure, health care, and other public services.
Advocates would also assert that a mandated wage floor would be preferable to an economy than expanding the welfare state or instituting a universal basic income, mainly because it motivates people to find and keep jobs.
Cons of Minimum Wage
Young people are typically the victims of a state-mandated minimum wage, usually because they lack the skills, work experience, and education to satisfy the requirements of a position. Because of this, a young person will not create $7.25, $10.10, or $15 in value to a company for every hour he or she will work. Instead, he or she might only be worth $5 per hour, which a business would be more willing to pay but is prohibited from doing so due to labor laws. This leaves young people out of employment options, which leads to a higher youth jobless rate.
A new trend is beginning to develop as the minimum wage goes up: less take-home pay. These workers will typically experience a decline in their annual earnings. On one hand, they will have higher earning potential, but their earning power drops due to fewer hours, less compensation and, if they get them, a drop in tips.
Research has found that increased minimum pay causes a business to not hire new workers, limiting job growth for newcomers. If this is the case, then younger workers cannot improve their human capital – the abilities and experience determined as value for an organization.
In the age of automation, a major concern is that front-line workers will be phased out and replaced with automation. In the last couple of years, the automation efforts have revved up: fast-food franchises are adding kiosks, supermarkets are installing self-serve checkouts, and even restaurants are experimenting with robotic chefs.
While polls suggest that most Americans support a $15 an hour minimum wage, free-market supporters say that this is bad for workers. Some libertarian economists have referred to it as “compulsory unemployment” and some conservative economists have called it an anti-worker policy. But left-leaning academics say it is necessary to reduce income inequality and prevent the private sector from hosing employees.
The economic reality is that unskilled workers, primarily youth, are competing against other workers to attain better incomes and trying to combat the rise of labor-saving technologies. The verdict is still out if the $15 minimum wage has been a positive or a negative on the economy. Time will tell.