The Pros and Cons of Raising the Minimum Wage
In 1938, The Fair Labor Standards Act (FLSA) set the first U.S. minimum wage at $0.25 per hour. FLSA set the federal standard for protections on payment of minimum wage, overtime pay, employment of children, and record-keeping.
Back then, this new standard only represented about 20% of the labor force. Fast forward to today, and this wage now covers more than 80% of the labor force.
You’re likely aware of the highly-debated topic of whether or not the minimum wage should be higher. In the following article, we’re outlining the pros and cons of raising the minimum wage.
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Table of contents
- First, why do we have a minimum wage?
- What is the federal minimum wage in 2023?
- Pros of raising the minimum wage
- Economic stimulus
- More opportunity for jobs
- Reduced expense for social programs
- Decreased turnover rate
- Cons of raising the minimum wage
- Price increases
- Fewer hirings
- Competition will intensify
- Differences in minimum wage by state
- Does raising the minimum wage reduce poverty?
- Minimum wage and poverty statistics
- Was minimum wage meant to be a living wage?
- How to deal with effects of a minimum wage increase
- Key takeaways
First, why do we have a minimum wage?
Back in the 1930s, the minimum wage was established to help protect the post-Depression economy. Now, we keep the minimum wage to protect workers from low pay, which affects their health and well-being.
What is the federal minimum wage in 2023?
The federal minimum wage is set at $7.25 an hour. Employers are able to pay tipped employees just $2.13 an hour, as long as that hourly wage plus tips would equal the minimum wage. Congress last raised the minimum wage in July of 2009, but many states have enacted their own minimum wage which is higher, to help keep up with inflation.
Pros of raising the minimum wage
Reasons for raising include:
1. Economic stimulus
Raising the minimum wage means minimum wage workers have more money to spend, so more money ripples throughout the economy as minimum wage employees are able to spend more.
2. More opportunity for jobs
If these minimum wage employees are spending more, then businesses are earning more and need to hire more employees to keep up with the increased sales.
3. Reduced expense for social programs
Employees surviving at minimum wage are often the same people who must rely on additional support of government-run social programs to support themselves and their families on such a small amount of income. Raising minimum wage means some of these people would be able to better support themselves without leaning as heavily on social programs and this would ultimately mean lower taxes or a reallocation of those funds to support other needs.
4. Decreased turnover rate
Employees who are making a higher minimum wage feel more comfortable and satisfied in their minimum wage jobs, so they are less likely to quit. This means there would be a lower turnover rate, which results in fewer expenses to hire and train new employees.
The federal minimum wage needs to be raised in order to account for inflation, which increases every year. The minimum wage has only been raised three times in the past three decades.
Cons of raising the minimum wage
Cons of raising the minimum wage include:
If an employer has a tight compensation budget and the minimum wage is raised, it means they can no longer compensate the same number of employees at a higher rate and must make layoffs to remain within budget. So, while some employees may be making slightly more money, others will be left unemployed.
2. Price increases
Employers might raise prices of their product in order to generate enough income to support their more highly-paid minimum wage employees, which could ultimately create a ripple effect for other shops and industries, resulting in a slightly higher cost of living, resulting in another push to raise minimum wage again.
3. Fewer hirings
If businesses must pay their minimum wage employees more, they cannot afford to hire as many employees. According to a Federal Reserve Bank of Chicago study, a “10 percent increase in the minimum wage lowers low skill employment by 2 to 4 percent and total restaurant employment by 1 to 3 percent.” Or instead of hiring fewer employees, the company may start outsourcing jobs to employees in countries that are willing to work for much less than $7.25 per hour, resulting in fewer jobs for Americans.
4. Competition will intensify
If minimum wage increases, overly-qualified individuals will be vying for minimum wage positions, pushing younger, inexperienced workers out of the running. This may rob them of their opportunity to gain experience and knowledge to build a resume for themselves and enter the workforce.
5. Differences in minimum wage by state
Many states have their own set minimum wages, which are already above the federal wage ($7.25 per hour). As of August 2022, 30 states (and D.C.) have minimum wages above $7.25 per hour (California being the highest at $16.10 per hour), so the amount the national minimum wage is set at varies in significance from state to state.
Related read: 10 Resources to Track Labor Laws in Your State
Does raising the minimum wage reduce poverty?
Studies from both sides of the debate make it relatively clear that increasing the minimum wage will not make a significant impact on the poverty level.
Minimum wage and poverty statistics
According to the Congressional Budget Office report on The Effects of a Minimum-Wage Increase on Employment and Family Income, increasing the minimum wage from $7.25 to $15 per hour will only reduce the number of people in poverty by 900,000, a relatively few portion of the 16.5 million people that would supposedly benefit from the raise. It would also cut employment by 1.4 million workers.
This is because of the number of minimum wage workers, relatively few are actually in poverty, and of families who live in poverty, only about 7% have a full-time worker in the family, meaning poverty is not because people are not being paid enough, it is related to how much they are working.
Some suggest that creating more jobs for people who need them rather than raising earnings for people who already have them is a better solution for reducing the national poverty rate. Of course, this does not mean that raising the minimum wage wouldn’t be greatly beneficial to those earning it, but ultimately it does not help those who do not already have jobs to begin with.
Was minimum wage meant to be a living wage?
When Franklin Delano Roosevelt signed the FLSA in 1938, his intention was to have the minimum wage support fully-employed adult men and women, and he vehemently believed that the minimum wage should be a living wage.
Today, the argument is much different. The standard of living in the United States is different today than it was in 1938. Also the term “living wage” is subject to interpretation, with scholars believing that FDR’s description of a living wage was in context to starvation and bare subsistence. After all, FDR’s minimum wage of $0.25 an hour is comparable to a $4.54 minimum wage in 2019 dollars.
This idea of the minimum wage being a livable wage is political on all levels, and most experts agree that the minimum wage should be used in conjunction with other policies and social programs to address economic issues and worker hardship. So while there’s no specific answer on whether the minimum wage should be a living wage, there are more resources available for minimum wage workers should they need them.
How to deal with effects of a minimum wage increase
If your state increases the minimum wage, you’ll be given some notice before the change goes into effect. You’ll want to start as early as possible in assessing how you’ll make the change. Here are some tips to get you started:
- Take a look at your staffing levels—make sure you’re not overstaffed, just to have enough people when you need them. Right size your staff so you can afford to pay everyone the new minimum wage.
- Assess the effects of a wage increase on every position—if you have employees who’ve been making the minimum wage of $7.25 for awhile, and are now going to be bumped up to $10.10, you can’t hire new people at the same wage and expect your tenured workers to be happy. Make sure you raise everyone’s wage commensurate with experience, so you have room to hire new workers at the minimum wage and keep your team morale up.
- Determine the actual cost—now that you have new pay rates, put together your ideal schedule and look at the costs. Take into account the additional labor costs and make a decision on if it’s time to raise prices.
As with anything in life, there are pros and cons of raising the minimum wage, and it’s not as simple as it seems. There are plenty of variables to consider, including the effects on both employers and employees.
What is your opinion about the national minimum wage? Should we raise it or not? How would that affect you? Join the conversation in the comments section below.