Introduction
In the beginning of the 21st Century, everything costs more due to the rapid process of globalization: gas prices are higher, tuition prices are higher, medical costs are higher, just to name a few. Meanwhile, the income of minimum-wage earners remains stuck at a level that was barely even adequate when it was set ten years ago. Just to reiterate a previously stated point – since 1997, the buying power of the minimum wage has dwindled by 20 percent to its lowest inflation-adjusted value in over fifty years (Fox 1-2). It is an implied understanding that a wage increase would increase the average wages of low-income earners without causing significant effects in the amount of unemployment.
However, politicians looking to aid Americans in the lower income brackets most often evoke the minimum wage debate. The most commonly used argument against raising the minimum wage rests on the basic rules of supply and demand. Theoretically, an ideal equilibrium exists in the relationship between X – the quantity of goods offered, and Y – the price the goods are sold for, where the relationship is most efficient because the quantity of goods offered equals the quantity of goods demanded. Replacing X and Y with workers and wages, respectively, would then raise a valid question. The law of demand affirms that the higher the price of a good, or wage of a worker, the less employers will desire that commodity. Correspondingly, the law of supply asserts that the higher the wage, the more the workers would be willing to work for that wage. Consequently, it can be reasoned that by holding the minimum wage price floor above market equilibrium, employers will hire fewer employees, thereby increasing the unemployment rate. This, ironically, undermines the desired effect of a wage increase. While the workers receiving minimum wage might be paid more, there will be less of those workers. The responsible solution is to set the minimum wage floor at the equilibrium point; not using it to regulate the market, but rather to protect those in danger of being paid unfair salaries.
Why Not Appropriate
Branching off this argument is the additional problem that with the pressure of paying suddenly increased wages, employers may decide, or have no choice, but to decrease spending in other areas. Economists delight in stressing the limited nature of resources with regard to the minimum wage problem. On average, firms can only afford to pay so much on a fixed budget; a wage increase cannot happen with a reciprocal decrease elsewhere (Gorman 5). Often, low-wage earners profit from many other fringe benefits included in their compensatory packages, including but not limited to paid vacation, free room and board, inexpensive health insurance, subsidized child care, employee discounts, uniforms, credit toward college tuition, and on-the-job training (OJT). Especially in the case of low-income single mothers (constituting a substantial percentage of low-wage earners), being able to work is oftentimes contingent on those benefits such as child-care and room and board. In one scenario, full-time minimum wage jobs with many needed benefits would be reduced to slightly higher paying part-time jobs with reduced benefits and fewer hours. Or, in an equally undesirable scenario, employers will be forced to reduce their number of employees to pay at the higher rate. One added effect would be the remaining employees having to absorb the responsibilities of their fired, or as the case may be not-hired, counterparts. Furthermore, to maintain sustainability of employee numbers and benefits, firms will be forced to pass higher costs of production onto consumers, resulting in an increase in inflation.
The importance of on-the-job training should also be considered. A large number of minimum-wage workers have little experience and require training to be able to fulfill their job responsibilities. Hand-in-hand with training comes the likelihood of being better prepared for future, possibly higher-paying, job opportunities. According to the Library of Economics and Liberty, data from the 1967-68 U.S. minimum-wage hike (a 28% increase) was shown to reduce the value of on-the-job training by 2.7 - 15% (Furman 3).
Fringe benefits are not subject to payroll and income taxes, therefore it could be said that a $1 value in benefits is equivalent to $1.25 or more in direct wages. According to the NCPA, fringe benefits constitute on average 30% of overall job compensation; these benefits are received by one in three minimum or near minimum-wage earners (Goodman 6). When previous federal minimum wage increases were analyzed, it was concluded that a 20% increase in the minimum wage resulted in a 4% decrease in health insurance provided by the employers (Goodman 5). This has wide-reaching implications when considering the number of individuals below the poverty line nationwide who also lack important benefits, such as the 27% without health insurance (the U.S Census Bureau 2).
Also imperative is the shift of more and more domestic American industries towards outsourcing much of their labor. Today this shift not only encompasses menial assembly tasks, but even consulting and technical support positions. While some of this outsourcing is occurring to develop an international presence and proximity to developing markets, the vast majority is happening to take advantage of a vast international supply of cheap labor (the U.S Department of Labor 3). The limits of this paper alone are too finite to divulge into international trade relations and international worker standards. However, in the United States, workers are afforded a great luxury in pay standard and numerous federally required benefits. The expense of the aforementioned can grow exacerbated as minimum wage increases, causing many domestic firms to reconsider where in the world their low-wage tasks are performed. Creating a minimum wage too high on the international scale can have adverse effects on the American job market as more and more firms move overseas in favor of lower costs of production and higher profit margins.
It is furthermore important to understand that depending on the geographic region and sector, a wage increase will have different effects (IRS 4). In large cities where workers tend to earn more, a wage increase might have insignificant effects. However, in a rural area where the new wage substantially exceeds the prevailing wage, it will inevitably cause greater unemployment. Studies have demonstrated that for such rural areas characterized by lower wages, a substantial increase in the minimum wage can shrink industries and impede job creation. When considered more broadly, this might yet have implications on even bigger societal issues, such as increasing the social and economic gap between industrialized cities and fringe rural areas (EPI 3).
A study conducted by Sara Lemos in 2005 examined minimum wage, price, and employment effects in association with poverty alleviation. Using Brazilian monthly household and firm panel data between the years of 1982 and 2000, a general wage-price inflationary spiral was exhibited, where persistent inflation counteracted wage gains. Her principal finding established that raising the minimum wage raised both wages and prices to negative effects in employment (Lemos 12). Essentially the study found that the potential for the minimum wage to aid the poor (the primary argument for raising the minimum wage) is dependent on low inflation rates. Although the study was conducted in Brazil, these results still have implications for how minimum wage raises should be considered in an inflationary America, namely, how likely is it that the U.S might fall into a similar wage-price inflationary spiral.
Finally, the problems with the minimum wage policy can be condensed into two main downsides: 1) The potential to increase unemployment and 2) Inefficient distribution to those in need. Firstly, according to the traditional economic supply and demand model, by increasing the minimum wage (price of labor) the demand (quantity) for labor decreases, which results in unemployment. Therefore, the immediate, short-run benefits of the $2.10 increase in the wage will not last in the long run because there is a greater chance of being laid off due to a decrease in demand for labor at the higher cost. Secondly, according to economists, the minimum wage policy is an inefficient way to target low-income workers because an increase in the minimum wage not only affects workers from low-income households, but it affects the entire spectrum of income distribution. Since many of the workers earning minimum wage are not from the low-income bracket (i.e. teenagers, part-time workers, etc.), the minimum wage is not an efficient policy to help directly alleviate the burdens of the low-income households. In addition, the minimum wage increase might result in a parallel increase in the prices of goods that are made by companies who employ minimum wage workers because of the increase in production costs, thus contributing to inflation in the long run.
Alternative Policies
The Earned Income Tax Credit was created in 1975 on a bipartisan basis, to help offset Social Security taxes for low-income workers. Since that time, it has grown to be one of the country's most successful anti-poverty programs (IRS 1). Research shows that a 10 percent increase in the maximum EITC refundable credit reduces poverty rates by 7 percent among full- time employed single moms (Henry Paulson, Treasury Department Briefing). The EITC affects many of the same actors that increasing the minimum wage does, but it impacts the U.S. government to a much greater degree. Increasing EITC programs reduce government revenue that could be used to help working class families in the form of social welfare programs.
Similar to the minimum wage policy, the alternate EITC policy is also receiving a great deal of support. The EITC is a “refundable federal income tax credit for low-income working individuals and families” (Internal Revenue Service 3). Many economists and policy analysts favor the EITC because of the “tax credit’s more precise targeting of beneficiaries [low-income households] and lack of market interference” (Bernstein 8). The EITC is a more efficient policy than the minimum wage at targeting low-income households because it is based on family income and not wage levels of a single, possibly supplementary worker. Therefore, under the EITC, low-wage workers in higher-income families would not qualify for the tax refund; hence, this policy would get rid of that particular dead-weight loss.
Conclusive Thoughts
Based on the above arguments, the best policy is to incorporate a balance of both the minimum wage and the EITC to help alleviate the burden of low-income households. Both the minimum wage and the EITC are important policies that should be implemented to work in tandem. While the EITC is an integral component to alleviating the burden on the lowest-income bracket, it is impossible to provide infinite tax credits on a salary of limited scope. Because minimum wage does not automatically adjust for inflation, it is important to package it with the EITC, a policy that does. Without the regular increase in the minimum wage, the “EITC alone is not enough to keep a family above the poverty line, and a minimum wage worker gets further away from the poverty line each year the minimum wage is not increased” (Bernstein 9). Therefore, the minimum wage needs to be increased on a regular basis and enacted in congruence with an intrinsically inflation-adjusted program to account for fluctuations in the cost of living and inflation.
It should furthermore be noted that a minimum wage increase most negatively affects the small firms and companies that have to conform to and compensate for these additional expenses by sacrificing in other areas that are just as beneficial to low-wage workers as a wage increase would be (i.e. health insurance). Thus, as a modification to this policy, it would be necessary to provide tax breaks to these small companies as an incentive for keeping all other relevant factors and benefits equal, and just increasing what is needed – the long dormant minimum wage.
Works Cited
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http://www.epi.org/content.cfm/webfeatures_viewpoints_minwg_eic
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http://www.epinet.org/issuebriefs/227/ib227.pdf.
“Characteristics of Minimum Wage Workers: 2006” 2 Mar. 2007. U.S. Department of Labor: Bureau of Labor Statistics.15. Apr. 2007.
http://www.bls.gov/cps/minwage2006.htm
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Goodman, John C. and Richard B. McKenzie. “Saving Health Insurance from the Minimum Wage.” National Center for Policy Analysis. 28 July 2006. 7 April 2007
http://www.ncpa.org/pub/ba/ba565/
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< http://www.econlib.org/library/ENC/MinimumWages.html>
"Health Insurance Coverage: 2005." U.S. Census Bureau. 19 Apr. 2007
http://www.census.gov/hhes/www/hlthins/hlthin05/hlthtables05.html
"It’s Easier Than Ever to Find Out If You Qualify for EITC." Internal Revenue Service. 19 Apr. 2007
http://www.irs.gov/individuals/article/0,,id=96406,00.html.
Lemos, Sara. “Minimum Wage Effects on Wages, Employment and Prices: Implications for Poverty Alleviation in Brazil.” Department of Economics University of Leicester. July 2005. 6 April 2007
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http://www.epinet.org/content.cfm/issueguides_minwage_minwagefaq
