The Uneven Costs of Raising the Federal Minimum Wage

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In major cities like Los Angeles and Chicago, local hourly minimum wage levels have reached $12.00 and $11.00, respectively. They depart drastically from the minimum wage levels set by the federal government, which have stagnated since the $0.70 increase to $7.25 in 2009. The minimum wage discussion has become a hot-button political issue, with Republicans arguing that national wage increases would be destructive to the American economy and should be decided at the state level. Democrats have taken a strikingly different opinion, pushing for $15.00 federal minimum wage, which would increase the current federal minimum by over 50 percent. Those two stances don’t seem reconcilable, but in trying to find a solution, should we choose to focus on politics or economics?

In economic terms, the minimum wage is defined as the lowest legal hourly wage an employer must pay his employee. Classic microeconomic theory states that equilibrium wage will be determined where the workers’ demand and supply intersect. A minimum wage is most influential as a price floor above the equilibrium wage, but it is most efficient when it coincides with this market-determined wage, allowing worker supply to best meet worker demand and subsequently minimizing unemployment levels. However when rapid, non-market induced changes in minimum wage are forced by the government, there can and will be significant economic consequences.

Professor Alan B. Krueger of Princeton University argues that dramatic federal wage increases such as to $15 would be “counterproductive,” putting our economy into “unchartered waters.” Due to sparse and incremental federal minimum wage raises the throughout the 2000s, economists cannot gauge the consequences of an increase to $15 with certainty. A higher unemployment rate is one possible effect, and we should not downplay the possibility of other long-term economic costs.

In response to the federal government’s reluctance to increase the minimum wage, state governments have taken on the responsibility, resulting in wage levels more likely to help low-wage workers than hurt them. When high wages are implemented in economies that cannot support them, low-wage workers face the consequences of reduced hours and substantial layoffs to make up for lost profits. Specifically, we are seeing effects of such increases in cities like Seattle, where newly implemented wage legislation has already demonstrated negative economic consequences for workers. University of Washington Economics Professor Mark Long states that due to drastic wage increases in Seattle “the net amount paid to low-wage workers declined instead of increased.” More dramatically, an increased minimum wage can catalyze automation in some sectors, with the potential to replace low-wage workers jobs. Gradual increases that allow for economic price adjustments to occur at the state level will buffer the negative effects of wage hikes and better protect low-wage workers’ jobs. Additionally, federal wage levels may not be able to properly compensate for purchasing power differences amongst states. In cities like Los Angeles where cost of living is considerably higher than in cities such as Des Moines, nationwide wage increases would not be the most effective way to take account for these variations in purchasing power.

The federal government can intervene in ways other than wage increases to help low-wage workers. Programs like the Earned Income Tax Credit (EITC) provide low-wage workers with a refundable tax credit, benefitting working class families with children who receive a larger credit than other workers. Economist Michael R. Strain writes, “earnings subsidies like the Earned Income Tax Credit makes sure the dollars we redistribute find their way to the working poor by explicitly targeting low-income households.” In 2013, EITC tax credits alone were able to lift 9.4 million Americans out of poverty. By incentivizing employment and complementing earnings, expanding programs like the EITC would help low-wage workers keep their jobs and remove wage pressure on businesses.

When we look at the minimum wage debate through an economic perspective the answer is clear: a minimum wage increase at the federal level could do much more harm than good to low-wage workers. State governments should oversee the minimum wage because they are better equipped to assess how the economic tradeoffs involved would affect their specific constituencies. Lawmakers must carefully evaluate how wage increases would impact the population of low-wage workers in their states and adjust them accordingly. By moderately increasing wages at the state level and supporting federal pushes for programs like the EITC, profits of low-wage workers can be maximized and economic costs can be minimized.

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