One of the most hotly contested issues amongst U.S. policymakers at all levels of government is the minimum wage. Conservatives argue that increasing the minimum wage will drive up prices and unemployment, decreasing tax revenues and increasing the number of people dependent on welfare. Liberals argue that it would inject more capital into the economy, increase jobs and tax revenues, and make fewer people dependent on government assistance. There is an element of truth to both arguments depending on how much and how gradually the minimum wage is raised.
The economic impact of gradually raising the federal minimum wage from $7.25 to $10 would mean a reduction of about 500,000 low-wage jobs, but 16.5 million low-wage workers would see a substantial increase in their weekly earnings (Wihbey, 2015). Such an increase would also have a ripple effect, raising the wages of other workers making up to 150% of the minimum. These 35 million near-minimum wage workers represent approximately 30% of the entire U.S. labor force (Kearney and Harris, 2014). The Congressional Budget Office (CBO) predicts that such an increase would result in a slightly higher effective federal marginal tax rate for these 35 million workers (Alsalam et al. 2014).
Dale Belman and Paul J. Wolfson (2014) conducted a meta-analysis synthesizing the findings of over 200 different research papers for their book “What Does the Minimum Wage Do?” They found little evidence that raising wages has any negative labor market effects. While they found that hiring and quitting/layoffs slow in anticipation of any wage increase, “Hours and employment do not seem to be meaningfully affectedDecisive evidence that training or benefits responds at all to increases in the minimum wage does not exist” (Belman and Wolfson, 2014).
The fact that employment and benefits are not meaningfully affected by an increase raises the question of who ultimately bears the cost burden. To answer this question, David Card and Alan B. Krueger (1994) surveyed 410 fast-food restaurants in New Jersey and Pennsylvania both before and after New Jersey raised its minimum wage from $4.25 to $5.05 per hour. Even though the change was implemented during a recession, there was actually an increase in employment throughout the state (Card and Kreuger, 1994). Furthermore, they found that the “prices of fast-food meals increased in New Jersey relative to Pennsylvania, suggesting that much of the burden of the minimum-wage rise was passed on to consumers” (Card and Kreuger, 1994).
Increased prices seem to substantiate the theory of those who are opposed to increasing wages. In practice however, a 10% increase only raises food prices by less than 4% and overall prices by less than 0.4% (Lemos, 2004). Raising the minimum wage to $10 per hour would represent a 40% increase. Taken together, the research shows that a wage increase would immediately improve the economic standing for 35% of all American workers. This means fewer people dependent on government assistance. They would also pay more federal taxes, easing the tax burden for all U.S. taxpayers. Employment would remain stable, as would employee training and benefits. The slight costs of such an increase would be passed on directly to consumers, who would hardly notice they are paying a few cents more for their hamburgers. Empirical evidence shows virtually no downside to raising wages, as long as it is done incrementally over a period of several years to avoid any shocks to the market.
Works Cited
Alsalam, Nabeel, William Carrington, Molly Dahl, and Justin Falk. “The Effects of a Minimum Wage Increase on Employment and Family Income.” Congressional Budget Office (CBO), February 2014. Web. 13 January 2016.
Belman, Dale, and Paul J. Wolfson. 2014. “What Does the Minimum Wage Do?” Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.
Card, David, and Alan B. Krueger. Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania. The American Economic Review, 84(4), September 2014. 772-793. Web. 13 January 2016.
Kearney, Melissa S., and Benjamin H. Harris. “The ‘Ripple Effect’ of a Minimum Wage Increase on American Workers.” The Hamilton Project, 10 January 2014. Web. 13 January 2016.
Lemos, Sara. “The Effect of the Minimum Wage on Prices.” The Institute for the Study of Labor (IZA), March 2004. Web. 13 January 2016.
Wihbey, John. “Effects of raising the minimum wage: Research and key lessons.” Journalist’s Resource, 19 October 2015. Web. 16 January 2016.
