The Sharp Divide Over Raising the Minimum Wage

The Fiscal Times

President Obama’s call Tuesday night for raising the federal minimum wage by 40 percent to help lift millions of Americans out of poverty rekindled a long-standing debate over the economic benefits and risks of raising the floor on wages for the lowest-paying jobs.

“Profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover,” Obama said during his nationally televised State of the Union address to a joint session of Congress. “We should too. . . . Today the federal minimum wage is worth about twenty percent less than it was when Ronald Reagan first stood here.

Related: Minimum Wage and What It Buys You: 1950s to Now

Obama urged Congress to act on a proposal sponsored by Rep. George Miller (D-CA) and Sen. Tom Harkin (D-IA) to gradually raise the minimum wage from $7.25 to $10.10 per hour for all workers across the board. He also announced plans to sign an executive order raising the minimum wage to $10.10 an hour for future federal contract workers.

Obama proposed a slightly smaller increase in the minimum wage during his State of the Union address last year, but that plan languished in the face of overwhelming opposition from Republicans and many business groups including the U.S. Chamber of Commerce. While his latest proposal will provide Democrats with a useful economic equality issue in the coming congressional campaigns, there is little chance it will win approval.

"The increase in the minimum wage is a very powerful message. It resonates across the country," said Democratic Sen. Ed Markey of Massachusetts, according to Reuters. "I think this will really give some wind to this year's Obama agenda."

Related: Raise the Minimum Wage and Get Minimum Jobs

But Republicans strongly disagree with Democrats over the economic efficacy of raising the minimum wage, saying it could harm the economy and kill jobs for low-income workers who need them most. "When you raise the cost of something, you get less of it," House Speaker John Boehner told a news conference on Tuesday.

The current minimum wage rate took effect in 2009. Nineteen states and the District of Columbia have higher minimum wage rates than the federal requirement. For now, Washington State's is highest at $9.19 per hour. But California Gov. Jerry Brown signed a bill last September designed to raise the state’s minimum wage to $10 by 2016. 

Advocates for a higher minimum wage say a boost to $10.10 an hour would be enough to push a large number of working poor out of poverty. A June study by Restaurant Opportunities Centers United concluded that a $10.10 an hour minimum wage would have pushed more 58 percent of the nation’s 10 million-plus working poor above the government poverty level in 2011, according to the Huffington Post.

Related: Obama’s SOTU Wish List—What Will He Get Done?

However, a number of studies show a link between a higher minimum wage and higher unemployment.

Heritage Foundation policy analysts James Sherk and John L. Ligon concluded in a December 2013 paper that a $10.10 a hour minimum wage would deliver a serious blow to the employment level and the economy. They took strong issue with liberal and Democratic assertions that increased spending power for low-income workers who benefitted from higher wages would stimulate the economy and offset potential job losses

“Conventional macroeconomic modeling shows that this minimum-wage hike would likely eliminate 300,000 jobs per year and reduce gross domestic product (GDP) by over $40 billion annually,” Sherk and Ligon wrote. “This legislation would raise the minimum wage one-seventh above its all-time high. It would significantly raise the cost of hiring unskilled and inexperienced workers during an already weak economy.”

Their argument goes like this: Businesses would respond to an increase in the minimum wage the same way they respond to other cost increases—by purchasing less of the more expensive good or service. This would hurt less-skilled workers’ prospects for advancement.

They noted that most minimum-wage jobs are entry-level positions filled by workers with limited education and experience. Almost three-fifths of minimum-wage workers have no more than a high school education, and half are under the age of 25.  They work for the minimum wage because they currently lack the skills to command higher pay.

Related: How Well Can You Live on Minimum Wage?

“Over two-thirds of workers starting out at the minimum wage earn more than that a year later,” they wrote. “Minimum-wage increases saw off this bottom rung of many workers’ career ladders.

A poll commissioned by the U.S. Chamber of Commerce and the International Franchise Association last fall found that raising the minimum wage would push businesses to make adverse personnel decisions--including halting entry-level hiring, scaling back on training, cutting work hours, and automating parts of their business.

The University of California-Irvine’s David Neumark and William Wauscher of the Federal Reserve Board conducted a literature review in 2007 that found a majority of studies pointing to negative effects on employment — particularly among low-skilled workers.

Seminal research by economists David Card of the University of California, Berkeley, and Alan Krueger of Princeton on employment changes following a 1992 increase in New Jersey and a 1988 increase in California found no evidence of a fall in employment when compared with trends in areas that did not see increases.

Related: Why Raising the Minimum Wage is Fantasy

An analysis for the Federal Reserve Bank of Chicago last June concluded that a federal minimum wage hike would boost the real income and spending of minimum-wage households.

“The impact could be sufficient to offset increasing consumer prices and declining real spending by most non-minimum wage household, and therefore, lead  to an increase in aggregate household spending,” according to the report prepared by Daniel Aaronson, vice president and director of microeconomic research, and Eric French, senior economist and research advisor.

The American Progress Action Fund compiled a series of studies dating back several years showing that an increase in the minimum wage – even during hard times – is good policy and provides higher pay but no loss of jobs. The review covered at five different academic studies that focused  on increases to the minimum wage made during periods of high unemployment—with unemployment rates ranging from 7 percent to 12.3 percent. It found that an increase in the minimum wage has no significant effect on employment levels. One explanation was that a boost in demand and reduction in turnover provided by a minimum wage counteracted the higher wage cost.

A few states, including Alabama and Tennessee in 2009, saw 12-month job increases well above the national average. Some states, however, including Michigan in 2008 and Arizona in 2011, had significantly worse employment outcomes than the national average. But the average state that increased its minimum wage had 12-month job growth that mirrored the national average, with most states doing slightly better than the national average, according to the findings.

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