Written by Miguel Calle Jaramillo
$7.25. $15. $25. The debate over the federal minimum wage is not new. However, before reassessing federal minimum wage laws, one must wonder why they exist in the first place. The reason commonly proposed by politicians – particularly those on the left – is that they help low-skilled workers and low-income earners (Guardian, 2021). The historical reason comes from a desire to end sweated labor – sweatshops with substandard work conditions and nonliving wages (NELP, 2018).
In 1938, after five years of push-pull between the Roosevelt administration and the Supreme Court, the Fair Labor Standards Act was passed. It established a uniform rate of $0.25 per hour (equivalent to $5.23 in December 2022). This rate only applied to workers engaging in interstate commerce or producing goods for interstate commerce (DOL, 1938). It was then extended to other kinds of workers in 1961, 1966, and 1990 (DOL, 2023). By then, most workers were “protected” by minimum wage laws. The last time the minimum wage was raised (to $7.25) was in 2009 at the beginning of the Obama administration (EPI, 2009).
In August 2020, an Ipsos survey found that 72% of Americans, including 62% of Republicans and 87% of Democrats, supported a federal minimum wage hike (Ipsos, 2020). This is understandable. Most Americans believe that raising wages through federal mandate will necessarily lead to earnings improvements. Unfortunately, that is not necessarily the case. There are several reasons not only to scrutinize a hike – especially of this magnitude – but also to consider opposing the federal minimum wage as an effective economic policy.
According to the Bureau of Labor Statistics, as of 2021, only 1.4% of hourly-paid workers make federal minimum wage or less. 44% of those workers are under age 25 (BLS, 2021). While these numbers are not insignificant, they do suggest one conclusion: federal minimum wage has an exceedingly limited effect on the wages businesses set.
Nevertheless, there is one subset of the population primarily affected by minimum wage laws, and that’s young people. Youth unemployment was 9.57% in 2021 (World Bank, 2021). These are young adults seeking a job who cannot find one. Should the federal minimum wage be abolished, businesses would be able to hire younger workers for a lesser wage, who will go on to have increased wages due to enhanced experience (Kreiner et al., 2019). This would partially defeat the “need experience to get experience” paradox (BBC, 2021). Though it may seem reproachful for 16 or 17-year-olds to make $4 or $5 an hour, there are numerous criteria justifying the idea’s inspection. First, these are surplus wages that very young workers typically do not need to survive and would not have been paid otherwise, for they wouldn’t have the job. Second, these are wages they will only make for a limited time, as their experience will oblige businesses to pay them a higher wage – or the workers will seek another job (IZA, 2018). And third, in an economy that increasingly sees a college degree as an absolute necessity, this is an alternative for young workers. If this work experience is combined with an apprenticeship or training program, this is a plan worth considering for thousands – even millions – of unemployed (someone willing and able to work not having a paid job) young people (Morgan & Steinbaum, 2018).
Additionally, unemployment as a whole would most likely decrease. General economic theory indicates this to be true but one need not rely on literature. Sweden, Italy, Denmark, Finland, Cyprus, Austria, and (prior to January 2015) Germany did not have minimum wage laws (Eurostat, 2023). What they did have was lower levels of unemployment than the rest of the EU. Are any of the aforementioned countries comparable to America? No. No country is. China’s the second largest economic power and its GDP per capita is less than $13,000. The United States’ is more than $70,000. Germany’s is less than $52,000 (World Bank, 2023). So why trust that it would work here? One can’t. It’s a bold experiment. Yet the pattern is clear – countries without minimum wage seem to have lower unemployment.
There are other benefits. Abolishing the federal minimum wage would help small businesses. Some economic theory suggests it would lower labor costs, expand the worker pool, raise profits, and reduce costs for consumers, as businesses tend to pass off the burden onto them. Also, ending it would delay the automation revolution. At a time in which ChatGPT – the AI chatbot that answers questions – is all the rage, more jobs get lost to machines every day (Burton & Wolla, 2021). The first ones to go are minimum-wage jobs. “Increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers,” according to Professors Lordan of the London School of Economics and Neumark of UC Irvine (Lordan & Neumark, 2015). Cost-effective measures such as AI and self-service counters become less appealing when one isn’t forced to pay workers more. This might sound callous, but one has to remember that these jobs will be lost unless businesses have a reason to preserve them.
Here a clarification must be made. Regardless of where one stands in regard to the federal minimum wage, two concepts are undeniable. The first is that only raising the value of workers’ labor can get them higher pay. And raising the value is accomplished through education, training, and/or experience (BLS, 2015). More jobs, which abolishing federal minimum wage would accomplish, leads directly to the latter two. The second is that there are two types of minimum wage: federal and state. As of this writing, 29 states plus the District of Columbia, Guam, and the Virgin Islands have higher minimum wages than the federal amount (NCSL, 2022). Whether that’s fruitful is a topic for a different article. This is about the federal minimum wage.
By now, many readers will be wondering what the risks are. There are several, but they depend on one’s political inclinations. In countries like Norway and Denmark, utopias for the left, there is no minimum wage, but the wages are set through collective bargaining done by unions (ILO, 2016). It is not a free-market Eden. Abolishing the federal minimum wage could lead to the rise of unions. On the other side, it could also spell the end of outsourcing. If labor’s cheap enough, why turn to Bangladesh or India? In a manufacturing small town, this could be revolutionary (Forbes, 2021).
In addition, inequality could rise. Some people would, possibly for a limited time, make low wages. That being said, the current rate of $7.25 is still below the federal poverty level, so it wouldn’t change much (ASPE, 2021). Instead, the unemployment effect would transform thousands of lives for the better. Besides, as was mentioned earlier, only 1.4% make this amount. Solely a tiny fraction of the population would be affected and millions who didn’t have a job will get one – along with practical experience.
There is one more possibility: nothing happens to wages. Economists have found that wages are “sticky” (they don’t go down). There are myriad possible explanations for this yet no definitive one (NBER, 2010). It could be that no worker wants to work for a company that decreases wages. It could also be that employers get used to believing that a job’s “worth” is $7.25 and not a penny less. Either way, the opportunity cost for workers is too high to stay at a company they feel doesn’t value them properly. No one knows. This would annul the possible benefits described previously.
Thus, there is an option that can balance all possibilities: abolish the federal minimum wage and expand income tax credits. According to Professors Burkhauser from Cornell and Corinth from the University of Chicago, “the earned income tax credit is an effective way to reduce poverty. It raises only the after-tax wage rates of workers in low- and moderate-income families, the tax credit increases with the number of dependent children, and evidence shows that it increases labor force participation and employment in these families” (IZA, 2021). While the federal minimum wage (and maybe state minimum wage) does not raise workers’ real wages nor help the economy, abolishing it and giving low and middle-income workers tax credits would.
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