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🐻 The Bare Minimum

Abby Hadidian
Abby Hadidian

Right now, President Biden is pursuing legislation to more than double the current federal minimum wage, saying it would lift many low-wage workers out of poverty and deliver pay increases to many essential employees. But, some businesses and economists are pushing back.

Like many of the big issues, and it's difficult to feel like we know enough about the minimum wage to form our own opinion. Today, let's take a look at arguments on both sides around the debate, so you can form your own conclusion.


📰 Headline Translator

🗳Tensions high at Amazon warehouse as vote gets underway

Amazon employees might be forming a union

Last week business news sites exploded over the news that Jeff Bezos, the next day delivery king himself, will be stepping down as the CEO of Amazon and handing over the reins to Andy Jassy later this year. Employees are taking this changing of the guard as an opportunity to rally a vote to unionize. Forming a union would allow workers to collectively bargain over safety standards, training, breaks, pay and other benefits. Amazon has been relentless in discouraging unionization so far, but many think that this effort might be the one that breaks through the line.

🌾 USDA lifts forecast for U.S. soybean exports

US farming is regaining its strength

After dealing with trade wars, pandemic shutdowns, and supply chain issues for the past few years, US soybean exports are strong again. This is thanks to both some harvesting issues being encountered in Brazil (our main soybean rival) and improved relations with our biggest customer, China. Why does this matter? Studies have shown that increase in cash crop exports indicate a growth of the entire US economy, and is especially beneficial to anyone like me who took a position in the soil industry back in December.

🤖 DoorDash buys Chowbotics, maker of food-preparing robots

Food delivery needs to become a lot more efficient

From the emergence of ‘Ghost Kitchens’ to investments in self-driving vehicles, delivery companies are betting heavily on their scalability. Currently, delivering food has certain fixed costs they cannot escape: the prices restaurants are charging for their food, and the costs of people to deliver it. If companies like Doordash, Uber, and Grubhub are able to use tech to reduce those costs, they can undercut their competitor's pricing, or increase the profits going back to their stockholders.


🎭 Seeing Both Sides

The debate about minimum wage is incredibly complex and can quickly become divisive. I even find myself switching sides often, especially the more I learn. On the one hand, I don’t want anyone to be stuck living in poverty, but isnt the free market supposed to figure this out for us?  

Luckily, economists and social scientists have been studying and theorizing about the minimum wage for decades now, leading to some interesting data about what the effects of raising the minimum might be. To help you determine which side of the issue you land on, or just to help you sound smarter next time you discuss it, we’re going to look at the pros and cons of raising the minimum wage.

First, Some Background

The federal minimum wage was first introduced to Americans during the Great Depression by President Franklin Roosevelt. During an address FDR gave about one of his many economic salvation packages, he stated that “no business which depends for existence on paying less than living wages to its workers has any right to continue in this country.”

At the time, Roosevelt’s Fair Labor Standards Act of 1938—passed as part of New Deal legislation—set minimum wage at 25 cents. Roosevelt intended this rate to be “more than a bare subsistence level.” The minimum wage was created expressly to ensure that people of all skill-levels, if they worked, could “earn a decent living” off those wages—thus, a living wage.

FDR initially set the wage at $0.25 per hour (about $5 today). Congress has since adjusted the minimum wage over 20 times, to where it now sits at $7.25 an hour.

Decide for Yourself

Take a look at the arguments on both sides on the most popular debates around the topic of minimum wage and come to your own conclusion.

🏚 Impact on Poverty

The Argument: Increasing the minimum wage would reduce poverty.

A person working full-time making the minimum wage earns $15,080 in a year, which is 20% higher than the federal poverty level for a one-person household, but 8% below the poverty level for a single-parent family with at least one child. So the minimum wage is only a livable income if someone is able to work full time and has no dependents. A 2013 study by University of Massachusetts economist estimated that increasing the minimum wage to $10.10 is “projected to reduce the number of people living below the poverty line by around 4.6 million within 5 years, or by 6.8 million in the long term”

However: Some studies have shown that increasing the federal minimum wage would disproportionately harm the areas of the United States struggling the most with poverty.

In 2015 Mississippi had the lowest cost of living at 83.5% of the national average, while Hawaii had the highest at 168.6%. In areas like Mississippi where the cost of living and average incomes are especially low, employers would need to spend proportionally more to pay their minimum wage employees than employers in higher cost areas like Hawaii, and yet would be unable to cover the cost by raising prices because their customers would not be able to afford them. According to the American Enterprise Institute, the results of this disparity “could be disastrous for small communities around the country.”

🛒 Impact on Businesses

Some Argue: Raising the minimum wage would increase economic activity and spur job growth.

The Economic Policy Institute stated that a minimum wage increase from the current rate of $7.25 an hour to $10.10 would inject $22.1 billion net into the economy and create about 85,000 new jobs over a three-year phase-in period. Economists from the Federal Reserve predicted that a $1.75 rise in the federal minimum wage would increase aggregate household spending by $48 billion the following year,  causing us to make more good to meet this demand and lead to job growth.

Also, a 1994 study by economists Alan Krueger, PhD, and David Card, PhD, compared employment in the fast food industry after New Jersey raised its minimum wage by 80 cents, while Pennsylvania did not. Krueger and Card observed that job growth in the fast food industry was similar in both states, and found “no indication that the rise in the minimum wage reduced employment.”  Their findings were corroborated by economists Hristos Doucouliagos, PhD, and T.D. Stanley, PhD, in a review of 64 minimum wage studies. The authors found “little or no evidence of a negative association between minimum wages and employment.”

However: A minimum wage increase could hurt businesses and force companies to close.

60% of small-business owners say that raising the minimum wage will “hurt most small-business owners,” according to a 2013 Gallup poll. Jamie Richardson, MBA, Vice President of fast food chain White Castle, said that the company would be forced to close almost half its stores and let go thousands of workers if the federal minimum wage were raised to $15. As far as data goes, Forbes reported that an increase in the minimum wage has led to the closure of several Wal-Mart stores and the cancellation of promised stores yet to open.

🏦 Impact on Inflation

The Idea: Raising the minimum wage would increase the price of consumer goods.

A 2013 article by the Federal Reserve noted that if the minimum wage is increased, fast-food restaurants would pass on almost 100% of their increased labor costs on to consumers and other companies may do the same. In 2015, Purdue University found that raising the wage of fast food restaurant employees to $15 or $22 per hour would result in a price increase of 4.3% and 25% respectively, or a reduction in product size: “a hamburger would be much smaller,” the researchers stated. NBC News found that the price of a cup of coffee went up by 10% to 20% in Oakland, California after a 36% minimum wage hike in the city to $12.25. The report also found a 6.7% rise in coffee prices in Chicago after the minimum wage rose to $10.

But Consider: Our improvements in productivity and economic growth have outpaced increases in the minimum wage.

While the estimates of how much the minimum wage should be increased vary, most economists agree that if it had kept pace with rising productivity and income levels, it should be higher than the current $7.25 an hour. According to a study by the Center for Economic and Policy Research, if the minimum wage had kept pace with increases in productivity since 1968,  it would have been $21.72 per hour in 2012, instead of $7.25. The Institute for Policy Studies estimated that average income grew by 100.6% from 1968 to 2012, while the minimum wage did not grow at all: “If our standard for minimum wages had kept pace with overall income growth in the American economy, it would now be $21.16 per hour.” In 2015, The Economist stated that “America as a whole is an outlier among advanced economies… one would expect America, where GDP per person is $53,000, to pay a minimum wage around $12 an hour. That would mean a raise of about 65% for Americans earning the minimum pay rate.

🗽 Impact on Public Services

The Argument: A higher minimum wage would reduce government welfare spending.

If low-income workers earned more money, their dependence on, and eligibility for, government benefits would decrease. Some stats to back this up? The Center for American Progress reported in 2014 that raising the federal minimum wage by 6% to $10.10 would reduce spending on the Supplemental Nutrition Assistance Program (food stamps) by 6% or $4.6 billion. The Economic Policy Institute determined that by increasing the minimum wage to $10.10, more than 1.7 million Americans would no longer be dependent on government assistance programs. They report the increase would shave $7.6 billion off annual government spending on income-support programs.

The Rebuttal: Increasing the minimum wage would force businesses to lay off employees and raise unemployment levels, increasing the number of people who rely on government services.

The Congressional Budget Office has projected that a minimum wage increase from $7.25 to $10.10 would result in a loss of 500,000 jobs. In a survey of 1,213 businesses and human resources professionals, 38% of employers who currently pay minimum wage said they would lay off some employees if the minimum wage was raised to $10.10 and 54% said they would decrease hiring levels. San Francisco’s Office of Economic Analysis said that an increase to $15 would reduce the city’s employment by about “15,270 private sector jobs.” The final kicker: In 2014, Steve H. Hanke, a Professor of Applied Economics at Johns Hopkins, surveyed the 21 European Union countries that have a minimum wage and found they had an average unemployment rate of 11.8%, which is about a third higher than the 7.9% average unemployment rate in the seven EU countries that have no minimum wage.

Final Thoughts

After reading all of this, you might have come to settle on one side of the debate, or, like me, you're more conflicted than when you started. Either way, being able to articulate the views on both sides is an important step to finding the best solution, even if we make some mistakes along the way.

If you would like to learn more, I highly recommend you click on a few of the sources I cited to and read more. If you come across something important that I missed or didn't include, I would love to hear about it.

TTYL,

Abby

abby@fourminute.fm

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Abby Hadidian

Newsletter writer for Four Minute Finance | Econ Nerd & Pun Enthusiast