Presently, the minimum wage in the United States is $7.25/hr, which works out to about $15,000/year. While this wage is above the poverty line established by the Department of Health and Human Services for an individual ($12,880), it is clearly below what many would consider a "livable" wage. Indeed, in many US cities, rent for a 1-bedroom apartment is over $1,000/mo, which leaves less than $3,000/year for other essentials, like food and transportation. As such, there has been serious discussion of late among politicians about raising the minimum wage to $15/hr. While (I think) we can all agree that working individuals should earn a livable wage, the question remains if a federal minimum wage would be a net benefit to those who are currently struggling to make ends meet. Below, I outline a few of my thoughts on the likely consequences (good and bad) or raising the minimum wage.
Consequence #1: increased wages for those with a job. No explanation is needed here. With a $15/hr minimum wage, all individuals that work full-time will earn about $31,000/year. Based on the current cost of living in the USA, this wage is definitely livible (at least for individuals ... perhaps not for single parents).
Consequence #2: fewer jobs. When does a business hire somebody? The simple answer is when the cost of hiring that person is less than the additional revenue that person generates. If the minimum wage is raised to $15/hr, it is reasonable to expect jobs for which an employee generates less than $15/hr of revenue to disappear. With an increased cost of labor, it is also reasonable to expect that large corporations will intensify their efforts to reduce labor costs by automating many jobs that are currently carried out by humans.
Consequence #3: fewer small businesses. Many large corporations, such as Amazon, Costco, etc., already pay their employees more than $15/hr. Increasing the minimum wage to $15/hr will have no effect on these companies. But, there are small businesses across the nation that are barely surviving as it is. Increasing the cost of labor will almost certainly make many small businesses unprofitable, thereby leading them to close their doors.
Consequence #4: increased cost of living. The rental market is very efficient. Increased salaries will lead to an increased ability to pay rent. Landlords will quickly discover this and will raise the rent they charge for apartments. Indeed, grocery stores and restaurants will also raise the cost of food as they discover their clients have deeper pockets. Will the increased income that results from a higher minimum wage offset the increased cost of living? This is a difficult question to answer.
I do not think there is any way to predict exactly what the effects of raising the minimum wage will be. So, I hesitate to say whether or not I think raising the minimum wage is a good or bad idea. I will say, however, that doubling the minimum wage is a drastic step, which is likely to have many unintended consequences. As such, if the government is going to raise the minimum rageI would prefer that they do so gradually. I would also suggest that, rather than set a fixed dollar amount for a minimum wage, they should set a minimum wage that is pegged to some cost of living index, which might include things like the cost of food, rent and transportation. Furthermore, this cost of living index should be location-dependent.
I would be very happy to read others' thoughts on this matter.
Did you mean to call the poverty line a “pervert line”, or was it an autocorrect issue? :-o
ReplyDeleteHa ha. Good catch! I meant to write "poverty." But, I guess I probably wrote something like "povert" and changed it to "pervert" when I ran a spell-check.
ReplyDeleteWould be interesting to know what the federally established "pervert line" is though. Somewhere north of Pee-wee Herman I guess.
Is minimum wage not already tied to cost-of-living?
ReplyDeleteIn Seattle when we increased the minimum wage it seemed the prices increased by a similarly margin that was relative to the minimum wage increase - meaning employers were trying to keep their profits equal to the level prior to the wage increase. My salary was also increased by a more significant amount due to the rising cost-of-living in the Seattle area. Seems like it just caused a renormalization where $15/hr in Seattle is no longer a "livable" wage. Seems like we would perpetually be chasing a "livable" wage after each renormalization of the cost-of-living. Im not formally trained in economics or financial systems so may not understand the full consequences. However, I agree with what you mentioned above but these seem more like short term issues.
Thanks.
I agree that any policy that increases people's overall spending power will lead to a renormalization of prices at a higher level; this was basically my consequence #4. That doesn't mean, however, that those working minimum-wage jobs won't see any benefit from an increased minimum wage. It is possible, for example, that an increased minimum wage results in poorer people having a larger portion of the overall spending pie, thereby giving them a greater ability to compete with rich people for goods and services. To be clear, I am not saying this would definitely be the case. I am saying that it is a possible outcome. As with everything in macro, the consequences of any change in public policy are difficult to predict.
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