Published 11/03/23
Throughout the past few decades, the federal minimum wage has existed as a topic of hot debate in the United States, with the push for an increase to $15 per hour recently gaining traction from a sizeable portion of the American populace. While some argue that a higher minimum wage could lead to job loss and higher prices, many others contend that it would help lift workers out of poverty and stimulate the economy. The recent executive order issued by President Biden in January 2021, to raise the federal minimum wage from $7.25 to $15, has sparked a heated debate between critics and supporters, revealing the need for discussion about the upcoming policy. Despite having the possibility to induce a period of higher unemployment, the Biden administration's proposal to increase the federal minimum wage to $15 per hour should be implemented to lessen poverty and income inequality, improve worker productivity, and reduce the federal deficit.
The implementation of the $15 federal minimum wage is not without repercussions: it carries the trade-off of potentially increased unemployment in the short term. This is observed in the tendency for business owners to turn to layoffs. When asked about the possibility of implementing a federal minimum wage, Nya Marshall, the owner of a small restaurant in Detroit, says that “adding a wage hike would increase a huge number of closures” and that she is “barely keeping her doors open week by week” (PBS NewsHour). Marshall’s concerns are made clear in that the state of the US economy is not favorable for small businesses to take on increased costs in their operations, especially when they must pay back debt after months of being forced to halt their services due to COVID-19 lockdowns. Her sentiment is only reflected in a survey that cited that around a third of all small business owners believed that the $15 minimum wage would lead to not only layoffs but also reduced work hours (Sabin). With small businesses making up the backbone of the US economy, layoffs resulting form either closure or simply cutting the number of workers on the clock can reach a very large portion of the labor force. Despite seemingly being a good thing at face value, reduced work hours means that some would be compelled to take on part time jobs to compensate for the lost pay resulting from lower total pay from current occupation. Furthermore, a report by the Congressional Budget Office makes clear that the new proposed minimum wage policy will displace around 1.3 million workers (Alsalam 14). The figure of 1.3 million is quite a substantial figure, as it means that around 1% of the working population, most of whom in lower income brackets, would be forced into stern competition with each other. This spells highly undesirable consequences for the economy and social welfare in general as the policy, which intends to alleviate poverty and ensure that those who are affected have an increased level of happiness, rather than being constrained by deepening levels of stress and financial hardship. However, a recent international review by UMass economist Arin Dube found that for every 1% increase in wages is an associated decrease of 0.04% in employment (Loudenback). This ratio makes the decrease in employment an almost negligible number, calling into question the validity of the CBO’s 2021 report by suggesting that new trends may have rendered the analysis of the level of unemployment outdated. Arin Dube, also known as Arindrajit Dube, is a highly regarded economist who wrote numerous research papers cited by other researchers and policymakers alike. In his interview at PBS NewsHour, he makes it clear that the projections by the CBO are too pessimistic and overlook the potential of job creation in the future. This means that the possibility of higher levels of employment in the long run can only be realized with a greater minimum wage, even if it may reduce employment in industries with low profit margins or where labor costs account for a significant portion in the business’ finances.
Even if some households will encounter greater struggles in the process acquiring employment, the enactment of the Biden administration’s federal minimum wage policy will bring about significant reductions in poverty and income inequality, inconceivably outstripping the extent of the aforementioned issue. This is illustrated in a study quantifying the reductions in poverty. For example, research conducted by the Economic Policy Institute notes that a $15 minimum wage would lift 1.3 million workers out of poverty, and that women and people of color would disproportionately benefit from greater relative purchasing power (Cooper). This means that raising the minimum wage can provide economic relief to low-income earners who are from underrepresented and marginalized groups, and who are overrepresented in low-wage jobs. Poverty alleviation is especially important in the context of the current post COVID-19 pandemic era. The estimated hourly income required to cover basic expenses, including but not limited to housing, food, healthcare, transportation, and taxes, for a single living adult is $12.80, which exceeds the current $7.25 minimum wage (MIT Living Wage Calculator). For single parents with one child, the income required is even higher. From a direct comparison of the numbers, it can easily be concluded that increasing the minimum wage to $15 would allow for low-wage earners to live a sustainable life by allowing them to be better able to afford the costs of necessities for survival. Moreover, research shows that a higher minimum wage could lead to improvements in health and livelihoods for low-wage workers and their respective families. A 10% increase in the minimum wage led to a 1.6 percent reduction in smoking prevalence, while a $1 dollar increase led to a 16% reduction in absences from work due to illness and a 1.1% decrease in the prevalence of low birth rates (Blavin and Gangopadhyaya 6-8). This is a crucial point to consider in the context of how the deprivation of income, or rather a means to be self-sufficient, can cause substantial stress that adversely impacts affected individuals. Low wage workers are not only affected on a physical level, but also suffer a mental toll from financial stress, which tends to lead to often health adverse behaviors such as smoking or drug use. By diminishing the need to toil under laborious and often injurious working conditions for low wage workers, the policy will allow for supported populations the freedom to experience a more financially sound life, where survival is no longer a cause for immediate concern. Thus, raising the minimum wage would not only improve the economic status of low-wage workers but also contribute to better health among individuals currently living in the U.S.
Not only will the revision of the proposed federal minimum wage by the Biden Administration reduce poverty and income inequality, but it will also advance the U.S. economy through improving worker productivity and reducing employee turnover. First, it is necessary to acknowledge that workers feel more valued and invested in their jobs when they are paid a higher wage. In fact, the National Bureau of Economic Research found that the increase in the minimum wage can lead to greater effort and productivity from workers (Horsley). Workers who feel that their efforts are appreciated by associates and consumers and feel that they are being compensated fairly tend to have the motivation to work harder. The $15 minimum wage can also lead to lower absenteeism, which can further increase productivity by ensuring that workers are eager to participate in company activities (Cooper et al. 9). This is vital to the growth of the U.S. economy as increased worker productivity means that the natural rate of unemployment (NRU) will reach a level consistent with full employment and that the overall output – otherwise referred to GDP – will grow. In addition to improving productivity, the Biden administration’s federal minimum wage can also reduce turnover rates. Several studies, including one conducted by the Ford Motor Company, found that higher wages are associated with lower turnover rates, particularly in industries with high turnover rates (Emanuel and Harrington 3). It should be noted that the study focused on specifically workers with jobs at manufacturing plants, which means that the effect may not fully apply to other low wage jobs. Nevertheless, it is inherently logical that workers who are paid a living wage tend to stay in their jobs for longer periods of time, as they have an incentive to maintain their current lifestyle rather than taking on risks associated with unemployment, such as time elapsed when job-seeking. This can benefit employers by reducing the costs associated with recruiting, hiring, and training new workers. Costs from attrition tend to hurt the morale of remaining employees, hurting the image of businesses to both consumers and top talent. For small businesses, reductions in costs of employee turnover are crucial to ensuring that entrepreneurs can pursue their goals and reveal innovations to the public. An increase the federal minimum wage to a more attractive rate will directly address the root of such issues, effectively making sure that the U.S. economy closely abides by the natural rate of unemployment. Increased worker productivity also has broader economic implications. A report by the National Employment Law Project found that a $15 minimum wage would boost consumer spending and generate billions of dollars in economic activity (Sonn 2). With more money to spend, workers are more likely to invest in local communities to support local businesses. Take Noah, who works as a cashier at the local flower shop, as an example. Prior to the implementation of the new $15 minimum wage, Noah must spend a minimum of around 70-80% of his income on his necessities, including rent, food, and associated living expenses. After the implementation of the $15 minimum wage, Noah can choose to spend only 50-60% of his income on necessities since his real income rises relative to the general price of goods. This is supported by a study by Princeton which found 10% increase in the minimum wage only led to an increase of 1.4% in the price of the Big Mac at McDonalds (Loudenback). Though the study did not extend beyond McDonalds stores, the results can be safely generalized to similar cheap fast-food restaurants and stores. Clearly, the new minimum wage provides Noah with around a 20% increase in discretionary income, which he can then choose to either invest in Apple, save in Wells Fargo, or spend at Walmart. Down the line, this would allow for the introduction of new job opportunities and stimulate economic growth, which could offset any potential job losses resulting from the wage increase. This will lead to a virtuous cycle of economic growth and development, ensuring that the U.S. maintains its global standing as the leading economic powerhouse.
The depth of the U.S. national debt is a cause for concern, particularly due to the economic consequences that it entails, such as the ever-increasing interest payments that the U.S. needs to pay to other nations and international institutions. To abridge this prevailing issue, the Biden administration’s federal minimum wage policy can assist in reducing the accumulating federal budget deficit in numerous ways. This can be predominantly observed in the increase in revenue from tax revenue programs. As they earn more money, workers would pay more in income taxes and payroll taxes, thereby increasing tax revenue for the government. A recent report from the Congressional Budget Office estimated that a minimum wage increase to $15 per hour would increase federal revenue by $52 billion over 10 years, simply via non-discretionary fiscal policies enacted in the past ("The Budgetary Effects of the Raise the Wage Act of 2021"). The estimated increase in revenue of $52 billion from the CBO’s report would be a significant boost to the federal government's finances, as it could be used to pay down the federal deficit. By reducing the deficit, the federal government would be able to avoid the need to borrow more money, which would save taxpayers money in interest payments. Not only does it serve to reduce the federal budget deficit, the new minimum wage also drastically diminishes the need for concern about time lags and menu costs that are associated with revising such policies. This increases market efficiency. Moreover, a higher minimum wage would reduce the federal deficit by reducing spending on public assistance programs. A study by UC Berkeley in 2018 found that increasing the minimum wage to $15 per hour in California would result in a reduction in public assistance spending of around $3.7 billion per year (Autor et al.). With the artificial increase in their wages, low-wage workers are less likely to rely on government programs like food stamps and Medicaid. This is because the current incomes and revenues of numerous low wage earners are insufficient to pay off the aggregate costs of living in U.S. society. Another report estimates that increasing the federal minimum wage to $15 per hour would reduce federal spending on public assistance programs by $17 billion over 10 years (Zipperer). Doing so would reduce the burden on the federal government to provide these financial aid services, allowing for government expenditure in other areas of the economy. Decreases in welfare spending will also allow the government to either increase the budget surplus or decrease the budget deficit, leading to a smaller federal debt. A high federal debt stunts economic growth at an increasing amount, as the government increasingly crowds out private investment while it takes on loans with higher and higher interest rates. In fact, a recent CBO report estimates interest payments will total a staggering $10.5 trillion over the next decade, with the burden falling on taxpayers (Wolf). Thus, it is important for the federal government to find sources of revenue to reduce the annual federal deficits that only serve to accumulate on top of the incomprehensibly large federal debt.
The push for the Biden Administration’s Federal Minimum Wage policy goes beyond simply the consideration on people’s livelihoods in the present; it extends to considerations about the long run that must be kept in mind to weigh the benefits against the drawbacks. Economists have made clear that the policy will be bring about an overall reduction in poverty in the long run, offsetting the short-term increase in poverty following the immediate enaction of the policy. The economic growth and decreases in the federal deficit only further the argument to employ this $15 minimum wage policy. Nonetheless, policymakers should still consider the ethics of rendering a portion of the lower income workforce unemployed. Only by using a nuanced viewpoint that not only considers the economic benefits but also the social repercussions of implementing the policy can an ideal resolution be found to the contentious debate about the federal minimum wage.
References
Alsalam, Nabeel, et al. “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage.” Congressional Budget Office, Congress Of The United States Congressional Budget Office, July 2019, www.cbo.gov/system/files/2019-07/CBO-55410-MinimumWage2019.pdf.
Autor, David et al. "The Effects of a $15 Minimum Wage in California and Fresno County." Institute for Research on Labor and Employment, University of California, Berkeley, 2018. https://irle.berkeley.edu/files/2017/Effects-of-a-15-Minimum-Wage-in-California-and-Fresno.pdf.
Blavin, Fredric, and Anuj Gangopadhyaya. "How the Minimum Wage Affects Low-Wage Workers and Their Families." Urban Institute, July 2022, https://www.urban.org/sites/default/files/2022-07/How%20the%20Minimum%20Wage%20Affects%20Low-Wage%20Workers%20and%20Their%20Families%20v2.pdf.
Cooper, David, et al. “Raising the Federal Minimum Wage to $15 by 2025 Would Lift the Pay of 32 Million Workers: A Demographic Breakdown of Affected Workers and the Impact on Poverty, Wages, and Inequality.” Economic Policy Institute, Economic Policy Institute, 9 Mar. 2021, www.epi.org/publication/raising-the-federal-minimum-wage-to-15-by-2025-would-lift-the-pay-of-32-million-workers/.
Emanuel, Natalia and Emma Harrington. "Effects of a Minimum Wage Increase on Employment and Poverty: Evidence from the 2016 California Minimum Wage Increase." Journal of Policy Analysis and Management, vol. 40, no. 2, 2021, pp. 455-491, https://scholar.harvard.edu/files/nataliaemanuel/files/emanuel_jmp.pdf.
Horsley, Scott. "How Economists See Biden's $15 Wage Proposal." PBS NewsHour, 17 Feb. 2021, https://www.pbs.org/newshour/health/how-economists-see-bidens-15-wage-proposal.
Loudenback, Tanza. "Here's Why Raising the Minimum Wage to $15 Is Good for America." Business Insider, 3 Feb. 2021, https://www.businessinsider.com/why-raising-minimum-wage-to-15-is-good-for-us-2021-2.
PBS NewsHour. "How a minimum wage increase could impact people's livelihoods." Online video clip. YouTube. YouTube, 24 Feb. 2021. Web. 19 Mar. 2023.
Sonn, Paul. "The U.S. Needs a $15 Minimum Wage." National Employment Law Project, 10 Nov. 2020, https://www.nelp.org/publication/u-s-needs-15-minimum-wage/.
"The Budgetary Effects of the Raise the Wage Act of 2021." Congressional Budget Office, 8 Feb. 2021, https://www.cbo.gov/publication/55681.
Wolf, Zachary B. “Analysis: Here's Where 20 Cents of Every One of Your Tax Dollars Will Go in 10 Years.” CNN, Cable News Network, 16 Feb. 2023, edition.cnn.com/2023/02/16/politics/national-debt-tax-interest-what-matters/index.html.
Zipperer, Ben. " Gradually raising the minimum wage to $15 would be good for workers, good for businesses, and good for the economy." Economic Policy Institute, 2019. https://www.epi.org/publication/minimum-wage-testimony-feb-2019/.
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