Minimum Wage Reality

There is a heated debate going on in America right now over minimum wage. Supporters argue that increasing minimum wage boosts low-income consumer spending thus stimulating the economy. Opponents of minimum wage propose that it ultimately increases unemployment and inevitably hurts those who it intends to help. So which argument is right?

Introduction to Minimum Wage

At the start of 2015, Nebraska’s minimum wage increased to $8.00 an hour, and in 2016, it is set to increase further to $9.00 an hour as a result of Initiative 425. According to Dick Clark, a policy adviser at the Governor's Policy Research Office, with the cost-of-living factored in, Nebraska's minimum wage ranks the highest out of all its neighboring states. President Barack Obama has proposed a federal minimum wage increase to $10.10 an hour. Increasing minimum wage seems like a simple fix that would help solve a real problem in America. However, increasing minimum wage is not the best solution to help low-income workers and stimulate the economy. Increasing minimum wage actually causes several negative economic consequences including increased unemployment, inflation, and fewer job opportunities for low-income workers.

Historical Data

By taking a look at historical data, one can see there is a definite relationship between minimum wage and unemployment. Christopher Jaarda, who works as a policy analyst and attorney, examines this relationship in his article "Raising Minimum Wage Increases Unemployment". He states that in 1974, Congress enacted a minimum wage increase. Before the increase, the national unemployment rate was at a steady five percent. However, thirteen months after the increase, unemployment was at an astounding nine percent. The same happened in 1978, 1990, 1996, and again in 2007 when the national unemployment rate jumped from four percent to a high of ten percent after Congress implemented an increase in minimum wage that was phased over three years. By studying the past, it is obvious to see what will happen in the future if minimum wage is increased.

Increased Unemployment

When the minimum wage is raised, there are numerous repercussions that occur as a result. Christopher Jaarda states that about eighty percent of economists agree that an increase in minimum wage increases unemployment. Increasing minimum wage increases unemployment because it forces businesses to pay their employees more, even though their employees are not being more productive. Employers value workers based on the productivity they bring to the company. The productivity of a worker must exceed the cost of employment for the business to make a profit. Therefore, many businesses are forced to either cut their employees' hours or eliminate them altogether. Employers also turn to cost effective technology to replace low-skilled workers. One example featured on NPR is Joe Olivo, a small business owner in New Jersey. Due to a recent increase in minimum wage, Mr. Olivo was forced to lay off several employees and began to look for new technology to replace existing employees because he simply could not afford to give virtually all of his employees a raise. According to Logan Albright and Ike Brannon, the nonpartisan Congressional Budget Office issued a report stating that an increase in minimum wage to $10.10 an hour would eliminate between five-hundred thousand and one million jobs nationwide. Overall, increasing minimum wage has an extremely negative impact on employment.

Inflation

An argument that is commonly used by supporters of increasing minimum wage is that it will put more money into the pockets of low-income workers. Jeanne Mejerur argues that giving minimum wage workers more money will stimulate and grow the economy because studies show low-income workers are more likely to spend their extra money compared to middle to high income workers. However, economics professor William Dukelburg debunks that point by describing how every dollar a minimum worker receives will come out of the employer’s pocket. Small businesses that already run on thin profit margins cannot afford to absorb these enlarged labor costs. With increases in labor costs, employers are forced to pass those costs onto the consumer in the form of higher prices for certain goods and services. This general increase in the price of goods and services is otherwise known as inflation. The higher take home pay of minimum wage workers will go to paying higher prices due to consumer inflation. According to Dick Clark, about two-thirds of minimum wage employees are employed in the service industry, therefore, consumers will see the biggest hike in prices in the fast-food and restaurant industry. Menu prices must rise in order to compensate for higher labor costs.

Raising the Employment Hurdle

Supporters of raising minimum wage, such as Doug Hall and David Cooper, argue that increasing minimum wage helps those who are struggling financially to support families. They propose that an increase in minimum wage makes it easier to live off of. However, supporters of increasing minimum wage seem to lose sight of who minimum wage jobs are intended for. They are not intended to be careers. Dick Clark points out that the majority of workers who earn minimum wage are young high school students who are not working to support their families. They are working to gain experience and skills that are necessary in order to be promoted to higher paying jobs down the road. William Dunkelburg also notes that about sixty percent of the officially poor are not employed, and thus raising the minimum wage inevitably hurts those who are struggling the most. With the increased cost of labor, it makes it more difficult for individuals who already have few employment options to obtain a job because employers are not looking to hire costly new employees with few skills. Raising the employment hurdle for potential employees also brings with it long term consequences. Potential employees experience delayed workforce advancement because they were denied the opportunity to get a job in the first place.

Impact on Nebraska's Small Businesses

Raising minimum wage has the biggest impact on small businesses. One example, highlighted by Adam Weinberg and Dick Clark, is Martha Jenkins. Jenkins owns a small golf course located south of Omaha, Nebraska. She works alongside her staff day in and day out because she cannot afford to hire anymore employees. In fact, she recently had to let her dishwasher and table busser go because she could not afford to keep paying them. When Nebraska's minimum wage increases to $9 an hour in January of 2016, Martha fears she will have to fire even more employees. Gary Tharnish, the owner of a small flower shop in Nebraska, is also in the same boat as Jenkins. He hires mostly young employees. By teaching these young employees basic skills, Tharnish hopes that they will gain experience and skills necessary for work force advancement later on in their lives. However, an increase in minimum wage will cause him to cut down on the number of employees he hires. Jenkins and Tharnish, along with over three hundred other business owners in Nebraska are against the increase in minimum wage. In a recent survey done by the Employment Policies Institute, forty percent of Nebraska business owners said if minimum wage was increased they would have to cut the hours of their current employees, and sixty percent said their prices would increase. 

Solution

Overall the consequences of increasing minimum wage outweigh the benefits. An increase in minimum wage to $10.10 an hour would increase unemployment, raise the price of certain goods and services, and make it harder for low-skilled workers to obtain jobs. Because increasing the minimum wage would ultimately result in less productive state economies, the best solution would be to implement methods and programs that allow low-income workers to improve their skills and education. According to Todd Palmer, these programs would make workers more valuable to potential employers because they are able to be more productive and thus earn more money. Former Governor of Nebraska Dave Heineman gave his support for this solution in the article Ballotpedia, stating that “I believe the key is increased training opportunities to help employees increase their skills, resulting in better job opportunities and higher pay.” This solution would ultimately help solve the minimum wage crisis that is going on in America today. 

University of Nebraska at Kearney Library Sources

Albright, Logan, and Ike Brannon. “A Federal Minimum Wage And The States.” Regulation 37.2 (2014): 30-33. Business Source Premier. EBSCOhost. Web. 23 Feb. 2015. 

Mejeur, Jeanne. “Maximum Divide on Minimum Wage.” State Legislatures 30.3 (2014): 14-17. Academic Search Premier. Web. 16 Mar. 2015. 

Palmer, Todd. "The Downsides Of Increasing Minimum Wage." Production Machining 14.6 (2014): 27. OmniFile Full Text Select (H.W. Wilson). Web. 24 Feb. 2015.