A controversial subject that has been examined by several news outlets in recent months pertains to the debate about wage controls. Some argue that the minimum wage should be increased to help those with jobs to earn a “living wage.” Others argue increasing minimum wages will result in increased unemployment. Additionally, the government and some local and state governments have already increased minimum wages for government workers and have proposed increasing wages that private firms must pay their employees. If such wage increases indeed lead to increases in unemployment, then the result could be an increase in government transfer payments and a decrease in government tax revenues. If indeed mandatory wage increases lead to an increase in transfers and a decrease in revenue, then it would lead to an increased strain on government budgets and potentially increase budget deficits.
The New York Times recently published two articles pertaining to minimum wage-related issues. Scheiber’s (Scheiber, 2015a) articles in the New York Times discussed the potential outcomes concerning minimum wage-related issues and policies, particularly as it pertains to a recent move by the state of New York wage board to push binding wage floors to $15 per hour for workers in several industries, including the fast food industry. The article argues that economists do not agree about the potential effects of an increase wages on the unemployment level. Scheiber (2015) argues that minimum wage laws do little to increase unemployment in the fast food section. Interestingly, Scheiber cites as evidence for this claim by referencing another New York Times article, which is in fact another article written by Scheiber (Scheiber, 2015b).
At the federal level, the government recently increased minimum wages for some of its employees, and the city of New York is currently considering an increase in it for city employees. These policies would have a minimal impact on the budgets of the government at the federal level, and the budgets of cities such as New York and San Francisco. The minimum wage debate is starting to have a real world impact in our local, state and larger communities, because the cries for a wage controls may lead to an increase in unemployment, which would affect state and local budgets in a deleterious fashion by increasing transfer payments to the unemployed and reducing tax revenue that could be collected from the economic activity generated by the otherwise unemployed individuals.
The arguments surrounding the controversy of minimum wages are directly related to the foundational economic principles of demand and supply. A binding wage is a price floor below which employers may not hire labor for their businesses. As noted in economics principles texts, a binding price floor results in a surplus in the market, which in the case of a labor market is called “unemployment.” Higher wages result in more people supplying their labor and fewer employers demanding that labor, which means that more people will find it difficult to get a job. (Minimum wage increases do not affect the supply and demand for labor, but it does affect the quantity demanded and the quantity supplied of labor.)
While some observers argue that increasing minimum wages does not lead to more unemployment, the vast body of empirical evidence shows that increasing minimum wages leads to increased unemployment. A vast body of evidence analyzed by economists who specialize in labor economics shows that the garden-variety explanation of the minimum wage’s effect on unemployment is verified. Neumark, Salas, & Wascher analyze many studies that show that increasing the minimum wage does not increase unemployment and, relying on more reliable models of labor markets, verified that raising the minimum wage leads to increases in unemployment. Neumark, Salas, & Wascher verified in their study that previous studies purporting to show that increasing wages do not lead to increased unemployment are false due to the fact that their “methods are flawed and lead to incorrect conclusions” . These same authors also argue that the absence of evidence is not necessarily evidence of absence—that a failure find evidence of the unemployment effects of increases in the minimum wage does not in itself prove that minimum wage increases have little or no effect on the unemployment situation. Additionally, Neumark, Salas, & Wascher conclude their analysis by stating that “minimum wages pose a tradeoff of higher wages for some against job losses for others” . So, a strong body of evidence shows that increases in minimum wages can lead to increases in unemployment.
Increases in minimum wages can have real world impacts on both the general state of the economy and directly on state, local and federal budgets. Employment situations are directly and indirectly tied to the revenues and expenditures of state, local and federal governments via several mechanisms. First, if increases in wages result in lower employment, then businesses will suffer due to the multiplier effect and the reduced spending power of people who lose their jobs or who are unable to find work. Second, an increase in wages could result in increased demands for unemployment benefits, food stamps and other transfers that constitute an important transfer payment out of government coffers. Third, a decrease in employment could result in decreased tax revenues. The reduction in tax revenues combined with increased transfer payments could have a significant deleterious effect on government budgets, and could even result in budget deficits—this is especially true for local and state governments who operate on smaller budgets and many of which must operate on a balanced budget basis at the state level.
Given the issues and complications that could arise from increasing wage controls, and the possible increase in budget deficits that wage increases might spur, some economists and policymakers advocate not raising the minimum wage at this time. Additionally, given the potential impact that a wage increase could cause, it would be premature to enact a balanced budget amendment at this time, just in case budget stabilizers are needed in the case of increased unemployment. In the event that policymakers increase the minimum wage and price individuals into the unemployment line, prudence dictates for the federal government to maintain the flexibility required to supplement the incomes of the unemployed who are possibly suffering because of the poor decision-making of the government. This is the not the first-best solution, but it seems to be fair given the circumstances.
In conclusion, there is a significant and controversial debate about the possibility of raising minimum wages in both the public and private sector, and several governments have already increased the public sector minimum wage levels. The textbook treatment of minimum wage increases contends that such an increase will lead to increased unemployment, and many empirical studies find evidence that strongly supports the textbook economic principles in this regard. If increases in minimum wages lead to increased unemployment, then there could be serious and significant effects on the budgets of local and state governments, which might see increases, perhaps of a significant and substantial economic nature, in both transfer payments and decreases in tax revenues, through both indirect and direct mechanisms. Given that the increase in minimum wages, particularly if it were mandated at the federal level, could lead to increased hardship and unemployment of the least-skilled workers and new entrants into the labor force, and that these individuals could be severely affected by these policies, it might be unwise to impose harsh budget control measures that could restrict payments to those who are negatively affected by government policy.
References
Neumark, D., Salas, J. M., & Wascher, W. (2014). Revisiting the minimum wage-employment debate: Throwing out the baby with the bathwater? ILR Review, 67(3), 608-648.
Scheiber, N. (2015b, July 26). Raising Floor for Minimum Wage Pushes Economy Into the Unknown. Retrieved from New York Times: http://www.nytimes.com/2015/07/27/business/economy/scale-of-minimum-wage-rise-has-experts-guessing-at-effect.html
Scheiber, N. (2015a, August 12). What a $15 Minimum Wage Would Mean for Your City. Retrieved from New York Times: http://www.nytimes.com/2015/08/13/upshot/what-a-15-minimum-wage-would-mean-for-your-city.html?_r=0&abt=0002&abg=0
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