The Minimum Wage Debate

Democrats, since taking control of both chambers of Congress and the Executive Branch, have been pushing for increasing the minimum wage to $15 per hour. The proposed legislation seeks to raise the federal minimum wage (currently being $7.25) to $15 per hour by 2025. 

Proponents of raising the minimum wage to $15 say it would lift millions of workers out of poverty, but opponents say that raising the minimum wage would result in a wave of job losses. There is truth to both sides of the argument, but also nuances often not taken into account by both sides.

One thing proponents of increasing the minimum wage to $15 per hour ought to keep in mind is that $15 per hour is far from an actual “living wage,” as they often call it, and what a living wage is can vary greatly from state to state, city to city, and person to person. According to the MIT Living Wage Calculator (a living wage is defined as enough to fully support one’s household independently), one adult in California could live on a minimum of $14.99 per hour should they be working 2080 hours a year (40 hours a week every week of the year). However, a living wage for one adult with one child in their household in California would be $31.25 per hour if they were working 2080 hours a year. In Mississippi, one adult would need to make $10.89 per hour working 2080 hours a year. One adult with one child in Mississippi would need to make $21.14 per hour working 2080 hours a year. Raising the minimum wage to $15 per hour is not in any way a complete solution to the issue of poverty wages in the United States, the root of the problem is much more so the cost of living.

One thing opponents of raising the minimum wage to $15 per hour ought to keep in mind is that in the past raising the minimum wage has had no discernible effect on unemployment. There are several reasons given by economists for why businesses can adjust to a higher minimum wage. The biggest reason is that raising the minimum wage significantly decreases turnover rates, which in turn saves businesses a large sum of money. Less need to seek out and train new workers massively benefits businesses. Another reason is that when millions are getting a raise (not just the workers at one business) the increased income of those workers acts as a stimulus for the economy. People will consume more and therefore benefit businesses and the economy as a whole when they have more income. Another reason is that many businesses can handle a reduction in their profit margins for the sake of paying their workers higher wages. Many businesses could pay their workers more but do not so they can keep profit margins high. Other reasons given by economists include possible negative changes such as reductions in non-wage benefits, cutting of total hours for workers, and increased prices. However, these negative changes are often negligible in their overall impact.

That is what has happened in the past, but according to the Congressional Budget Office, it may not be the case in the future if the federal minimum wage is raised to $15 per hour by 2025. In the past, the minimum wage has been raised in small amounts (last being raised by $0.70 in 2009), but $15 is more than double what the minimum wage is now. It would be implemented over four years, but it is still a significant increase. The CBO predicts that if the minimum wage were raised to $15 an hour by 2025 as Democrats want it to be, approximately 27 million workers would benefit, 900,000 would be lifted out of poverty, but 1.4 million jobs would be lost. According to the CBO, Democrats are right in saying $15 per hour would benefit millions of workers, but Republicans are also right when they say it would result in job losses. However, the CBO also predicted in 2019 that if the minimum wage were raised to $10 per hour in that same time frame, 3.5 million workers would benefit and there would be no jobs lost, but it would have a negligible impact on reducing poverty. Since the CBO says that raising the federal minimum wage to $10 an hour would have no negative effects, raising the minimum wage is not the issue, the issue is by how much we raise the federal minimum wage.

There is one aspect of the minimum wage debate that is often glossed over. The current federal minimum wage is $7.25, which was raised from $6.55 in 2009. The time in the U.S. where the minimum wage was highest was in 1968 at $1.60, which would be equivalent to $11.90 today. This means that the real minimum wage is significantly lower than it once was. The main reason for this is that the minimum wage works differently in the United States than in other countries. Most other countries with a minimum wage tag their minimum wage to inflation so it is automatically raised every year as needed. The United States does not tag it to inflation and has to legislate a new minimum wage every time it needs to be raised, putting the responsibility into the hands of politicians instead of non-partisan economists. This means that minimum wage workers in 2021 are being compensated less than they were in 2009, despite the minimum wage being the same. Again, the debate should be over how much we raise the minimum wage, not if we should raise it at all. One could of course argue the minimum wage should be lower, but an argument for keeping the minimum wage at $7.25 per hour would essentially be an argument for lowering it as well. The federal minimum wage not being tagged to inflation makes it a more partisan issue than it really ought to be.

What should perhaps be spoken of more is the importance of labor unions. In Denmark, the average minimum entry level wage is approximately $20 per hour, but Denmark does not have a national minimum wage law. In Denmark, labor unions collectively bargain for their pay and benefits from employers and have those negotiations mediated by the government. Unions are widespread and strong in Denmark, while in the United States unionism has been on the decline for decades. All in all, what can be said in regards to raising the minimum wage is that the free labor market has proven that it is not capable of properly compensating the working class for their labor on its own, but raising the federal minimum wage is not itself the solution to the issue of poverty wages.

Sources: Center for Economic and Policy Research, Congressional Budget Office, MIT Living Wage Calculator, Forbes