DAA Daily

Does the Minimum Wage Work?: The Tug-of-War over Minimum Wage

Image Source: flickr

By Soyeon Park

Feature Editor

The Pawprint


Though seemingly negligible at first glance, this simple number has brought some significant changes and controversies in the US society and the world in the past few months. Amazon, countering criticism on poor pay and working conditions, has raised the minimum employee wage to $15 starting from 1 November 2018. Similarly, all businesses in New York City as well have to pay at least $15 to their employees from 2019.

The dispute over minimum wage, whether it be on its increase or the existence itself, has been raging on since its advent. As many consequences as it can bring to the whole society, from workers to businesses, the tension between the pros and cons doesn’t seem to end. But what role does minimum wage actually have on the economy? Can it really benefit everyone?

Amidst this societal, economic and ethical conundrum, the supporters of the minimum wage have some solid arguments. Perhaps the most ethical approach, going back to the origin of the minimum wage, would be that the minimum wage protects the basic rights and needs of workers.

The first minimum wage in the US was proposed by President Franklin D. Roosevelt in 1938 as part of the Fair Labor Standards Act(FLSA), in order to protect the employees from being exploited during the Great Depression. It still serves the same purpose today; by definition, the minimum wage is mandated, smallest possible “living wage” that allows all workers to meet their basic needs. The proponents say that minimum wage is an obligation and an essential pathway towards human rights.

Looking from a more economical view, the minimum wage can spur economic growth. With more money in hand for workers, demand and business revenue will increase, more money will flow into the economy, and therefore result in an economic upswing. Economists of the Federal Reserve Bank of Chicago analyzed that a $1.75 increase in the federal minimum wage would increase household spending by $48 billion a year, which would be injected into the economy and boost GDP.

Opposers tackle this by reasoning that the minimum wage rather discourages the economy due to higher unemployment rates. Businesses earn nothing from minimum wage, the critics say. Labor costs already take up the majority of businesses’ budgets, and when they are forced to pay more, they will ultimately hire fewer workers. Paradoxically, this would harm mostly the minimum wage-level workers since businesses will cut down on the number of entry-level jobs first. Small businesses that are unable to operate with less workers will even have to face bankruptcy.

Furthermore, minimum wage may lead to job outsourcing, as it provides an incentive to the companies that move their facilities to countries where labor costs are low. Either way, national employment rate will dwindle, whereas all 7.5 million unemployed Americans will get a job if 14 million outsourced jobs return. A 2014 research by Duke University surveyed 400 Chief Financial Officers(CFO), where 70% of them replied they would “increase contracting, outsourcing, or moving actual production outside the United States” in the case of the minimum wage rise.

Another explanation for this spike in the unemployment rate would be the shift to automation from human resources. In an already technological society, a rise in minimum wage would encourage businesses to abandon the expensive human labor sources, and rather invest in automated processes with much higher productivity. We are already facing job losses due to artificial intelligence; McKinsey Global Institute predicts that automation will displace up to 800 million jobs by 2030. The minimum wage will simply accelerate the process and force workers onto the streets.

Minimum wage advocates challenge this and contend that it can actually benefit both the workers as well as the employers. When the minimum wage is raised, not only it will boost worker morale and productivity, but will also make the jobs attractive, resulting in the decline of “labor turnover rates and absenteeism”, as stated by Professor Alan Manning of the London School of Economics. With higher wages, workers are less likely to leave the workplace for a better paying job, allowing businesses to cut back on their expensive retraining costs.

Moreover, there are multiple ethical facets to the minimum wage since it can reduce the overall inequality in society. Most notably, the rise in minimum wage can narrow class stratification. According to economist Richard Freeman, the minimum wage has a stabilizing effect on the economy by reducing income disparity, giving more spending power to those on the lower end of the economic spectrum. His “redistribution theory” explains that when the government sets the limit on the employee wage, the cost of production increases and results in higher prices. Higher good prices mean that the middle and upper class are paying more for them while the lower class are increasing their income, reducing the economic gap between classes.

Talking of class stratification, it turns out that the minimum wage reduces sexual and racial inequalities. In the US in 2015, the national median hourly wage was $15 for African American men and $14 for Latin men but $21 for white men. Likewise, women earned 20% less than men, and this was more drastic for females of other race. Similar to the case of income disparities between economic classes, the rise in minimum wage ensures equal income for ethnic minorities with their white counterparts and for females with males.

Minimum wage is primarily designed to lift low-income families and individuals above the poverty line. In terms of its societal values, the positives might outweigh the negatives at first glance. One of the most obvious anticipated impacts of minimum wage is the decrease in the number of households under the poverty level. With more income, they will naturally be better off with increased standard of living. But does it really?

Minimum wage rather increases poverty, the opponents say. Relating to the spike in the unemployment rate, companies respond to the higher labor cost by shifting their focus to high-skilled employees with better productivity instead of entry-level counterparts. Almost all minimum-wage workers are front-line workers that do not require much experience and training. They can easily be replaced by automation, effectively shutting them out of the workforce. In the end, experienced workers are benefiting at the expense of less experienced workers.

Then who benefits ultimately from minimum wage? It happens to benefit groups other than the minimum wage workers, for whom the minimum wage was designed. Looking at the data from the U.S. Census Bureau of Labor Statistics, the average family income of US employees who benefit from the minimum wage is over $47,023. More, half of the benefittors live in families with annual incomes exceeding $75,000; they are not poor at all, considering that the 2018 federal poverty level in the US was $25,100 for a four-member household.

Despite all this tug-of-war, the minimum wage exists and is subtly yet constantly being increased in parts all over the world. In fact, it seems that the majority of Americans have made their minds; 71% of them replied to the New York Times Survey that the federal minimum wage should be raised to $10.10 from the current $7.25. One of their justifications is that minimum wage has not kept up with the inflation rates and therefore many families still remain under the poverty level. City Harvest, New York City’s largest food supplier to hunger charities, has analyzed in its research that almost half of the households in New York City do not meet the self-sufficiency standard or the income that is required to meet the basic necessities.

According to their calculations, a single parent with two children living in Brooklyn would need to make approximately $70,000 a year, which points to an hourly wage of $33. This means that the current minimum wage of $15 in New York can barely lift families out of poverty, let alone bring them just up to the poverty line. Looking at these numbers, it seems that the fight for the $15 wage in New York City and Amazon hardly had any effect.

Of course, minimum wage as high as $33 will undoubtedly bring consequences and unbalance in the economy. Among this endless gauging of costs and outcomes, the majority of the workers will continue to demand higher minimum wage and businesses will stand up to it, although its existence itself even is put into question.

Eventually, it is a question whether the government is able to find the ‘sweet spot’ between protecting the workers and simultaneously allowing businesses to remain competitive; if there is one.

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