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The minimum wage debate


Chandan Hegde

By

March 26th, 2014


Why would you raise the minimum wage? Chandan Hegde weighs in on the economic dilemma playing out in the U.S.


The minimum wage is one of the most controversial topics in economics, so it comes as no surprise that debate regarding this topic has once again ignited in America after President Obama recently called for hikes in America’s minimum wage. While the intent of this action is to assist the lower class, there has been much discussion on whether this will actually be beneficial or detrimental to the cause. To the typical minimum wage earner, the desirability of earning the Democrat proposed minimum wage of $10.10 is unquestionable compared to the minimum status-quo federal wage of $7.25 [1], however it is the latent effects that make this a contentious issue.

Economists from the Mises and Cato Institute are among those who view minimum wage increases as harmful and a delusional rejection of sound economic judgment. The argument presented by these economists is that the increased costs of production caused by this wage hike will force firms to lay-off some workers. This will mean low-skilled workers who were previously earning $7.25 will compete for jobs with higher-skilled workers who receive a wage of $10. Naturally it will be in the profit-maximising interest of the firm to keep more proficient workers and let go of low-skilled ones. Furthermore, in the long run firms may even resort to the substitution of labour with machinery or automation as a result of this increase in labour price, which will further drive up unemployment. [2]

This argument however, has been met with severe backlash from many, including 75 renowned economists who signed a letter endorsing this increase in minimum wage. These economists subscribe to the belief that demand for labour is not very sensitive to such incremental increases in wage and thus the effect upon unemployment will be relatively insignificant if existent at all. Finally, Democrats cite the unfairness of the current minimum wage for the lower class, which when adjusted for inflation is in fact lower than the minimum wage in 1978 [3].

To make matters even more complex there is empirical evidence for both sides of the argument. The Department in Labour in America estimated that the last increase in the minimum wage cost approximately 50,000 jobs out of the 300,000 earning below the minimum wage. From further data this department has estimated that there is a trend where increases of 10% in minimum wage lead to approximately between 1-3% increases in unemployment [4]. Simultaneously, however we have the research of such economists as David Card, who compared two neighbouring states, New Jersey and Pennsylvania, where in the former minimum wage was increased and there was no change in the latter. Card found that despite the relatively similar macroeconomic factors affecting each state, the number of fast food restaurant jobs actually increased in New Jersey, whereas they remained the same in Pennsylvania [5].

It is this conflict of theoretical and empirical evidence that continues to fuel the debate upon minimum wage changes. I, nevertheless, find the former argument regarding the detrimental effect of wage hike to be more persuasive. In a post-GFC economy already suffering from an uncertain economic environment and outsourcing of jobs, this staggering forty percent increase in minimum wages could be lethal to the viability of low-skill jobs in America. The last time such an increase was enforced was under the Bush administration; teen unemployment increased from 15 to 25%. Furthermore this also leads to the ethical issue that those benefiting from this increase in minimum wage are doing so at the expense of those lowest-skilled workers who will be left unemployed. It is for these reasons that I believe increasing minimum wages is simply damaging and unfair to the lower class.

 

References

[1] Huffington Post (December 2013), “$10.10 Minimum Wage Would Actually Create New Jobs: Study”. http://www.huffingtonpost.com/2013/12/19/1010-minimum-wage_n_4474183.html

[2] Ludwig von Mises Institute (January 2014), “The Minimum Wage Forces Low-Skill Workers to Compete with Higher-Skill Workers”. http://mises.org/daily/6630/The-Minimum-Wage-Forces-LowSkill-Workers-to-Compete-with-HigherSkill-Workers

[3] Cato Institute (January 2014), “Minimum Wage and Unemployment”. http://www.cato.org/blog/minimum-wage-unemployment-0

[4] Cato Institute (April 2013), “Raising Minimum Wage Will Hurt More than Help”.

http://www.cato.org/publications/commentary/raising-minimum-wage-will-hurt-more-help

[5] Card, D & Kreuger, A, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania”. http://davidcard.berkeley.edu/papers/njmin-aer.pdf 

[6] Employment Policies Institute. http://www.minimumwage.com/wpcontent/uploads/2014/01/EPI_NYTimes_EPI_minwage_final_out.pdf

 

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Owen Wakely

    Well written article about a highly contentious and much debated issue. I recommend to you a wonderfully insightful article by Christina Romer, Chair of President Obama’s Council of Economic Advisors published in the New York Times last year (http://www.nytimes.com/2013/03/03/business/the-minimum-wage-employment-and-income-distribution). On a lighter note Yannis’ article on this issue from last year included a link to a very funny segment from the Daily Show on this matter. Well worth looking it up. Owen

  • hujsh

    It was mentioned that the teen unemployment rate increased under Bush when the wage was increased. One thing I wonder is how much of this was caused by an increase in the participation rate, as opposed to a reduction in jobs.

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