The Pros and Cons of Raising the Minimum Wage

In 1938, the The Fair Labor Standards Act (FLSA) set the first U.S. minimum wage at $0.25 per hour.

FSLA 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.

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 expend which means 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 from the minimum wage employees who are buying more.

3. Reduced Expense for Social Programs

Employees surviving at minimum wage are also 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 meaning 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.

5. Inflation

The federal minimum wage needs to be raised in order to account for inflation, which raises every year and the minimum wage has only been risen three times in the past three decades.

Cons of Raising the Minimum Wage

Reasons against raising include:

1. Layoffs

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 increase

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 business must pay their minimum wage employees more, they cannot afford to hire as many employees. According to a Federal Reserve Bank of Chicago study, “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 $10.10 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 and robbing them of their opportunity to gain experience and knowledge to build a resume for themselves and enter the workforce.

5. Applied Inconsistently

Many states have their own set minimum wages, which are currently above $7.25 per hour already. As of January 1, 2014, 21 states (and D.C.) have minimum wages above $7.15 per hour (Washington being the highest at $9.32 per hour), so the amount the national minimum wage is set at varies in significance from state to state.

Does This Solve the Problem of Poverty?

Studies from both sides of the debate make it relatively clear that increasing minimum wage will not make a significant impact on the poverty level.

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 $10.10 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.

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 percent 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.

What is your option about the national minimum wage? Should we raise it or not? How would that affect you? Join the conversation in the comments section below.