Written by Jimmy Hefter
Created by President Franklin D. Roosevelt in 1938, minimum wage was intended to help low-skilled workers with menial jobs to help them sustain a life outside of poverty. There is a federal minimum wage that every state must meet, but over the course of the 20th and 21st centuries, individual states have incorporated higher minimum wages. Minimum wage at the federal level has also increased over time. Over the years, the minimum wage has been a widely discussed topic in every election. The conversation about minimum wage is particularly pertinent this year because a government mandated $15 minimum wage is on the ballot. This would be a federal minimum wage, so every state would have to match this price. This new minimum wage seems like a virtuous concept that helps low skilled workers, but in reality, it unintentionally hurts workers and businesses in unforeseen ways. The detrimental nature of a $15 minimum wage demonstrates how a free market approach towards minimum wage will be significantly more beneficial to the economy.
To preface the discussion of a $15 minimum wage, it is important to note the economics behind a minimum wage. A binding price floor is a government mandated price where the market cannot reach higher than a certain price. Imposing a minimum wage, or a binding price floor for labor, the new price in the labor market will be higher than the equilibrium price. Due to this, the quantity supplied (labor) will exceed quantity demanded (employers), so there will be a surplus of labor in the market. Employers will be less inclined to hire as many workers because the price of labor is now significantly higher. If the business keeps the same amount of workers, something else needs to change. It puts employers in a tough position because of an arbitrary law that has unintended consequences.
There are a myriad of myths surrounding a $15 minimum wage, starting with how it allows impoverished laborers to have more disposable income, and then they would spend that money back into the economy. According to Yahoo, there will be an additional $105.7 billion in extra wages, but only 6% of those wages will go to low skilled and impoverished workers. More specifically, 42% of workers that are dependent on a minimum wage live with their parents, so it is not paramount that they earn a living wage of $15 per hour. Also, as stated in the previous paragraph, many workers will lose their jobs, so it will ultimately hurt the poor to an even greater magnitude.
The second myth of a $15 minimum wage is that it has no effect on employment. In fact, an increase in the minimum wage has a clear effect on the employment rate and the labor market as a whole. As you can see in this graph, businesses in North Carolina will suffer due to the possible $15 minimum wage policy. There will be an enormous detrimental effect on labor. In addition to the labor market, this new wage hike would hurt the economy as well, as demonstrated by the figure. GDP would significantly decrease, which ultimately lowers the standard of living for hundreds of thousand of Americans. Furthermore, a wage hike seems to help those in need of a living wage, but the policy in fact hurts those same people.
The third myth surrounding a $15 minimum wage is how it reduces income inequality. This myth is especially pertinent in this day and age, but a $15 minimum wage in fact does not solve this issue facing millions of Americans. An increase in minimum wage ultimately discriminates against low skilled workers because employers are now inclined to lay off people. It gives even more power in the hands of the employer and they may have racial, ethnic, or gender biases (Sowell). According to James Dorn, Fellow at the Cato Institute, a 10% increase in the minimum wage “leads to a 1 to 3 percent decrease in employment of low-skilled workers” in the short term, and “to a larger decrease in the long run” (“Should the Federal”). A minimum wage hike will increase income inequality and discrimination in the market. According to economist Thomas Sowell, before the federal minimum wage laws were imposed, black unemployment rate was lower than the white unemployment rate. Then, in the Southern textile industry, wages rose over 70% in five months and ultimately cost black people over 500,000 jobs (Sowell). This demonstrates how racial discrimination will be significantly more apparent in the economy and in small businesses. The myth of equality and how the wage hike will lower income inequality is disproved by lower employment rates in North Carolina and in the black community.
An example of how a $15 minimum wage policy has unintended consequences is through Chipotle in San Francisco. There was a 14% minimum wage increase for Chipotle workers, and although this seems like a virtuous and beneficial policy for its workers, Economist Mark Perry notes that Chipotle “saw across-the-board price increases averaging over 10%, including 10% increases on chicken, carnitas (pork), sofritas (tofu), and vegetarian entrees along with a 14% increase on steak and barbacoa” (Worstall). Due to the forced increase in wages, Chipotle had no other option but to raise prices of their products, which ultimately hurt consumers because they now have to pay a higher price for the food. Most of the businesses in the United States are small businesses with limited cash flow, so with a $15 minimum wage, businesses will have to either lay off workers, make them work less hours, or raise the prices of their product. Nevertheless, businesses will bear the brunt of this minimum wage hike.
Even though the politicians enacting this policy think they are righteous, a minimum wage increase to $15 an hour will unintentionally hurt a tremendous number of workers throughout the country and will have detrimental effects on the economy. A possible alternative is the Earned Income Tax Credit (EIC). It effectively helps low wage workers because they are more inclined to keep their money. The EITC is a constant percentage of earnings from the first dollar of earnings until the credit reaches its maximum. If the maximum is passed the tax amount, the taxpayer will get a tax refund and it declines with each additional dollar of income until no credit is available” (“What is the Earned”). The EITC is quite helpful because it actually lifts over six million people out of poverty each year, and 3 million of those people are children (“The Top Ten Reasons”). The Earned Income Tax Credit fights poverty, when an increased minimum wage creates a labor surplus that results in greater suffering for low income workers.
Sources
Goodkind, Nicole. “A $15 Minimum Wage Could Hurt Those It’s Meant to Help.” Yahoo! Finance, Yahoo!, 27 July 2015, finance.yahoo.com/news/raising-the-minimum-wage-to–15-hour-will-kill-6-6-million-jobs–aaf-152547994.html#.
Ligon, John L. “Unprecedented Minimum-Wage Hike Would Hurt Jobs and the Economy.” The Heritage Foundation, www.heritage.org/jobs-and-labor/report/unprecedented-minimum-wage-hike-would-hurt-jobs-and-the-economy.
“Policy Basics: The Minimum Wage.” Center on Budget and Policy Priorities , www.cbpp.org/research/economy/policy-basics-the-minimum-wage.
Sanders, Jon. “Minimum Wage Hikes Hurt The Very People They’re Supposed to Help.” John Locke Foundation, John Locke Foundation, 14 June 2017, www.johnlocke.org/research/minimum-wage-hikes-hurt-the-very-people-theyre-supposed-to-help/.
“Should the Federal Minimum Wage Be Increased?” ProCon.org, minimum-wage.procon.org.
Sowell, Thomas. Basic Economics . 4th ed., e-book, 2010.
“The Top 10 Reasons Why We Love The EITC.” Tax Credits for Workers and Families , www.taxcreditsforworkersandfamilies.org/news/the-top-10-reasons-why-we-love-the-eitc/.
“What is the earned income tax credit? .” Tax Policy Center , www.taxpolicycenter.org/briefing-book/what-earned-income-tax-credit.
Worstall, Tim. “We Are Seeing The Effects Of The Minimum Wage Rise In San Francisco.” Forbes , www.forbes.com/sites/timworstall/2015/07/07/we-are-seeing-the-effects-of-the-minimum-wage-rise-in-san-francisco/?utm_campaign=yahootix&partner=yahootix#45b967dc3013.