Whether or not the Federal Minimum Wage should be raised from the current level of $7.25 an hour has been hotly debated in recent years. Many low-income households struggle to make ends meet for themselves and those dependent on them. Because American’s working full-time jobs at or near the minimum wage earn yearly incomes less than the poverty level, law-makers, lobbyists, and low-wage workers themselves have fought for an increase in the federal minimum wage. It is generally accepted that the minimum wage exists in order to help poor families earn sustainable incomes over the poverty level. In theory, a higher mandated wage seems it will do just this. The reality however is that a raise in the minimum wage alone will have a statistically insignificant impact on poor families’ incomes. The reason this is the case is because the minimum wage targets low income individuals rather than poor households. There is much more than meets the eye when discussing the effects that a minimum wage increase can have, including increased unemployment of not only minimum wage workers but also those earning well above $7.25, no benefit to the very subset of the population its said to benefit; impoverished families, and will have damaging effects to businesses. For these reasons, any increase in the minimum wage must be carefully analyzed and studied as increases could have the opposite intended affects to our economy. 

The difficulty in figuring out what will best benefit low-skill workers and the economy as a whole comes from the fact that all theories on the effects of an increase are speculation, although well calculated in most instances, our economy is vastly too complex to be able to know exactly what far reaching implications an increase can have on the economy. For this reason, we must carefully consider the wide variety of theories and viewpoints on the topic. However, I find that the most sensible arguments and data point to a minimum wage hike creating negative effects on a major portion of the economy. Any substantial increase in the minimum wage from the current level, although ideal in concept, will be detrimental to the economy because it will lead to increased unemployment of low skill workers, negatively affect businesses forced to comply to the increased wages, and have a negligible effect on families living in poverty. 

The minimum wage debate has been a vigorously debated topic ever since it was stealthily signed into law in June of 1938 by President Roosevelt. Due to staunch opposition by the majority of congress, Roosevelt signed it into law along with 121 other bills a week after congress adjourned to help conceal it. The bill containing the minimum wage law was The Fair Labor Standards Act of 1938, intended originally to aid in the economic recovery and limit oppressive labor practices post Great Depression. The bill in its ultimate form after much alteration by Congress, contained provisions prohibiting child labor, set a maximum work week of forty-four hours, and placed the minimum wage at twenty-five cents, or $4.19 adjusted for inflation in today’s dollars (Kurtz). At the time of conception however, the new minimum wage only applied to approximately one-fifth of all laborers (Grossman). Although the Fair Labor Standards Act was watered down numerous times as it made its journey through Congress and became much less restrictive than originally intended, it was still quite controversial at the time. According to the UC Davis Center for Poverty Research, the minimum wage has been raised twenty-two times since 1938; the most recent increase taking place in 2009 when it was raised to its current level of $7.25 an hour. The minimum wage now covers approximately eighty-four percent of the labor force. Although the federal minimum wage has remained unchanged for the past eight years, twenty-one states have a minimum wage higher than the federal level, the highest being Washington State with a minimum wage of $9.32 (UC Davis Center for Poverty Research). Throughout the past few years many law makers and lobbyists groups have fought for an increase from the current level of $7.25 to a new federal minimum wage ranging from $8 all the way to $15 an hour. 

Higher minimum wages have substantial negative effects on employment, especially the low-skill workers that the minimum wage laws intend to help. The basic fundamental economic premise on why minimum wages are counterintuitive is that if a “binding” minimum wage is set above the equilibrium price of labor, then there will be a shortage in labor demand as firms will substitute expensive low skill labor for other inputs such as new technology or more efficient equipment, and as a result of the more expensive labor, firms will move that burden onto consumers in the form of increased prices. Although this basic economic model does not account for the myriad of different factors that affect our complex economy, it still rings true and is the basis on why the minimum wage can be harmful. When businesses with already low profit margins are forced to pay a higher wage for unskilled workers, they are forced to make some concessions in order to remain profitable. The first being businesses would employ fewer unskilled laborers as their output for the business would be less than the value of their compensation, creating a negative return for that business’s investment in those low skill workers. For example, if there were to hypothetically be a law mandating no one can be paid less than $40 hours a week, those workers who are not worth $40 a week to employers will not be hired. The Government cannot make “a man worth a given amount by making it illegal for anyone to offer him anything less” (Hazlitt 110), thereby depriving that man of the right to earn an income comparable to his abilities as well as depriving the community of his “modest services that he is capable of rendering” (Hazlitt 110). Those unskilled workers that do remain after a wage hike will certainly benefit from the increased income in the short term, however the incentive to gain more experience and move up to better jobs is greatly reduced. And those workers that are fired due to a minimum wage increase will have a much harder time finding low skill employment. Throughout the second term of the Obama Administration, he proposed and attempted to raise the federal minimum wage to $10.10, a modest increase compared to the $15 minimum wage many Americans have vigorously fought for the past few years. According the Congressional Budget Office (CBO), the increase from the current $7.25 minimum to $10.10 would lead to an estimated 500,000 jobs lost, and even with the CBO’s estimate of $31 billion in additional income being created, “just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold” (Congressional Budget Office). 

The second main concern when a minimum wage increase occurs is the burden that businesses bear when forced to pay a premium price for sub-premium labor. While many large corporations will be able to adapt to a significant minimum wage increase such as the current $15 proposed minimum, many small businesses would not survive. According to the Small Business Administration, “small businesses provide 55% of all jobs” (Chhabra) in the United States as well as accounting for 54% of net sales. Small businesses are the backbone of our Country and any significant increase can be devastating, as many have already been put out of business by local and state minimum wage increases. A total of nineteen states have passed higher minimum wage laws in 2017 thus far although most are gradually raising it till 2020. The most notable changes are being made in California and the District of Columbia which both are raising the minimum wage to $15 an hour by 2020 with Arizona, Colorado, Illinois, Maine, New York, and Oregon raising their minimum wage to between $12 and $13 also being phased in through 2020 (Doyle). These significant increases in state minimum wages will likely cause many more small businesses to close down and will create a stark increase in many consumer goods especially in the restaurant business. In order to compensate for the vast increase in labor expenses all firms, especially small businesses, will be forced to raise prices, lower quantity/quality, and cut hours of their employees in order to maintain an appropriate margin to remain in business. 

An example of what is to come for businesses can be seen in the city of Seattle, Washington, where the city wide minimum wage was raised to $13 in 2016, the second raise in the wage from the first phase in of $11 in 2015 (Jardim). Although aggressive state-wide wage increases are drastically different than a single city’s increase, there are still parallels worth examining.  A study on the effects of Seattle’s Minimum Wage Ordinance published by the National Bureau of Economic Research provides interesting data on the effects of this aggressive minimum wage up unto June 2017. The results of this study conclude that in 2015 with the wage at $11 an hour, there was no statistically significant loss in workers hours earning below $19 an hour. However, their findings in 2016 were dramatically different. By contrast, the “subsequent minimum wage increase to $13 associates with larger, significant hours reductions between 7.9% and 10.6% (averaging 9.4%)” (Jardim). These results remain consistent when examining workers hours earning all the way up to $25 an hour, meaning even workers earning almost double the new minimum wage saw a decline in their hours. As a result of this decline in hours worked, payroll declined an average of %5.8. Based on their findings, the researchers conclude that “within Seattle, low-wage workers lost $3 from lost employment opportunities for every $1 they gain due to higher hourly wages” (Jardim). The average low-wage worker in Seattle earned an average of “1,897 per month” (Jardim) and the “reduction in hours would cost the average employee $179 per month, while the wage increase would recoup only $54 of this loss, leaving a net loss of $125 per month (6.6%)” (Jardim) which is quite significant for low-wage workers. The data from Seattle suggests low skill work is being substituted by fewer, more skilled workers, and it is likely firms will begin replacing low skill workers with automated technology. Although the effects of Seattle’s minimum wage increase may not directly translate into what would occur with a state or federal minimum wage hike of this magnitude, it is certainly worth comparing as these adverse effects at a national level would be devastating to the economy. The proposed federal increase to $15 would have untold consequences but thankfully more data should be available from the many states initiating a steep raise before a federal wage raise gets passed into law, such as the recently proposed “Raise the Wage Act”. 

The Raise the Wage Act was introduced to Congress in January of 2017 by Virginia Congressman Robert “Bobby” Scott and mandates an increase in the federal minimum wage to $15 over a seven-year period ending in 2024. According to the Economic Policy Institute (EPI), 41 million workers would have their wage lifted and those affected would receive an average of $3,500 of added yearly income. The primary arguments of those in favor of passing the Raise the Wage Act are that a $15 federal minimum would “begin to reverse decades of growing pay inequality between the lowest-paid workers and the middle class” (EPI) and that because low wage earners typically spend any extra income they receive, the economy would be stimulated and job growth and business activity would be boosted. Those in favor of this wage increase believe that by mandating a $15 wage, women, who make up 56 percent of low wage workers, will greatly benefit as well as helping to lift families out of poverty as 28 percent have children. The reasons why the Raise the Wage Act was created are certainly ideal and noble reasons. However, it is quite clear a large increase in the federal minimum wage is not the way to remedy pay inequality and poverty as these conditions will likely be amplified with such an increase and will stifle the economy. The problem comes from the majority of poor families having no workers in the household and poor workers having low hours (Neumark).

With a $15 federal minimum wage, job shortages will quickly arise and many low wage workers will see significant cuts to their hours. The only changes many poor individuals and families would see are increased prices for essential goods such as food and clothing, a decrease in economic opportunity, and increased dependency on government programs that already leave a plethora of low wage workers and the unemployed in a harsh cycle of poverty. With less entry level job opportunities available as a result of a wage hike, the poor will have no means of gaining needed experience to move up to better paying jobs, adding further barriers to their path out of poverty. Poor families, the population subset that proponents of a wage increase bring up most often as to why an increase is a necessity, would have no negligible benefits but rather would take the brunt of the negative consequences arising from a $15 minimum. The major reasons why this is the case are because “57% of poor families with heads of household aged 18-64 have no workers” (Neumark), 46% of poor workers have wages above $10.10 and 36% earn over a $12 wage, and many low wage workers are not poor, such as well-off teens who account for approximately 10% of low wage workers (Neumark). Almost half of poor workers that earn well over the minimum wage are poor due to a lack of hours rather than low wages. A wage increase will further burden these workers with a continued decrease in hours, and will make it extremely difficult for the majority of poor households without a job to obtain one. Although a large minimum wage increase will not solve our countries poverty and economic problems there are alternatives that have proved over time to be much more effective. 

There is an existing policy in the United States that if slightly modified can provide low-skill workers and their families with the income they need without destroying jobs and businesses, while at the same time of incentivizing low skill workers and the unemployed to work, and over time lead to a large decrease in those dependent on government welfare. The program originally called “Negative Income Tax” was advocated for by legendary American economist Milton Freidman in 1960 and came to fruition when it passed Congress in 1975 as the “Earned Income Tax Credit” (EITC) (The Conservative Reform Network). The EITC works by subsidizing low-income workers earnings by up to 40% and phases out as the workers income increases (Neumark). The EITC provides a much more effective means of assisting poor families because the amount of supplemental income provided depends on factors such as yearly income and the number of children or dependents that the worker must provide for. Contrary to a minimum wage increase which accounts for no variations in local economies, the EITC is individualized on a case by case basis. Rather than businesses being burdened by artificially high wages, the EITC comes from tax payers and is much more of a redistributive means as taxes primarily from the Country’s top income earners fund the program. Perhaps the greatest strength of the EITC is the strong incentive to work and offers a viable path for the poor to break out of poverty while at the same time reducing the number of welfare recipients that place a significant burden on tax payers. Rather than a harmful $15 federal minimum wage, the Earned Income Tax Credits should be increased and the supplements should be given on a monthly or quarterly basis rather than a lump sum after tax filings as it is now. Not only could the EITC solve a major portion of pay inequality but also encourages work, stimulates the economy, reduces welfare recipients, and offers a realistic path out of poverty without creating any of the major problems associated with high minimum wages. 

The current debate for a $15 minimum wage is one that has little evidence to substantiate politician’s and lobbyist’s claims on the supposed benefits. Although a federal $15 minimum wage is certainly appealing at first glance and seems as though it will quell the working poor’s struggles, when you pull the curtain back and delve into the details it becomes evident that such a wage hike would be dangerous, for our Country as a whole and especially for the working poor. One can only hope that American’s will see the risk in a $15 minimum wage and instead will fight for more effective policy’s such as increasing and reforming the Earned Income Tax Credit. For the sake of full time workers and families struggling in poverty, more American’s must become informed that there are much more viable ways to go about helping the working poor that doesn’t have more downside than upside. The unfortunate truth however is that many voters have become so captivated by “fighting for 15” and similar campaigns that it is unlikely their minds will be changed after so many years, and without a change in voter sentiment, politicians will continue to cater to their demands in order to remain in or get into public office. In closing, I believe Americans should be investing in and encouraging success for the working poor, rather than artificially adding value to low skill jobs and imposing additional highly restrictive laws on businesses, most of which have enough adversity to overcome as is. 
