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Raising the minimum wage: Supply and demand analysis
Although there is a great deal of disagreement about how to regulate the minimum wage in America, statistics indicate that the minimum wage has not been keeping pace with inflation. "The federal minimum wage is just $7.25 an hour and hasn't been raised in three years. But a raise is much more overdue than that. If we look at the minimum wage 44 years ago, and simply adjust it for inflation, it would be more than $10 today" (Weisbrot 2012). However, there is tremendous resistance to raising the minimum wage, because of the belief that to improve the economic recovery, workers must be 'cheap' to encourage businesses to buy more labor. According to classical economic theory, as supply increases in the form of unemployed labor, labor prices should be allowed to decrease accordingly. Then employers will want to hire more workers, creating a new market equilibrium. Increasing the minimum wage counteracts such an effect. Unfortunately, given the global nature of many companies, cheaper sources of labor already exist abroad and "employment in the overall economy depends on aggregate demand or spending, which is determined -- especially in our currently weak economy -- by macroeconomic policy" (Weisbrot 2012). This paper will argue that the negative effects of raising the minimum wage have been greatly exaggerated -- but so have some of its potential benefits.
Advocates for raising the minimum wage counter that it is a basic issue of social justice. American workers are working more for less money (in inflation-adjusted dollars). "The amount that a worker produces in an hour has more than doubled over the past 44 years. When the minimum wage doesn't rise, or falls in terms of its purchasing power, it means that these millions of low-income workers are not sharing in the gains from improved technology, knowledge and organization" (Weisbrot 2012). Rising corporate profits have not translated into rising wages. If a new market equilibrium is established with a very low minimum wage, workers who are struggling to get by at present maybe permanently disenfranchised and unable to ever live a comfortable existence.
Most recent studies indicate that raising the minimum wage, even during recessions, has not resulted in overall job loss. "During recessionary periods in the past two decades -- including the Great Recession of 2007 -- 09, when Congress raised the federal minimum wage from $5.15 to $7.25 -- increases in the minimum wage did not cause employment declines" (Hall & Gable 2012). But the effects of raising the minimum wage would seem to be relatively small in terms of the impact on the American economy. Only 1 to 2% of people are earning minimum wage "and they make up only about 5% of the workforce nationally" (Kaste 2012).
Still, raising the minimum wage could actually help, rather than hurt the economy, according to classical Keynesian analysis. "Increases in the minimum wage are essentially a shift from corporate profits to low-wage employees...low-wage employees spend more of their money. They're going to spend essentially every penny they get, so that increased demand is going to result in more economic activity and potentially more jobs" (Kaste 2012). Wealthier people hoard away small increases in their salary while poor people must spend it immediately on purchases they have been putting off. Given the "trifecta of persistently high unemployment, resulting lack of wage growth, and a severe jobs deficit" wages are unlikely to increase without government intervention, as an oversupply of labor puts downward pressure on wages (Hall & Gable 2012)
Thus a minimum wage increase will have a more simulative effect upon the macro economy than maintaining the status quo, creating more consumption and generating more jobs. One study found that "increasing Illinois' minimum wage to $10.65 across four years would give an additional $3.8 billion to directly affected families," who derive more than half of their income from minimum wage jobs and "who will, in turn, spend those extra earnings" (Hall & Gable 2012). "Intuitively, raising the minimum wage means shifting profits from an entity (the employer) that is much less likely to spend immediately to one (the low-wage worker) that is more likely to spend immediately in the economy" (Hall & Gable 2012). In addition to the Keynesian argument in support of the minimum wage there is also the efficiency wage argument which states that "businesses may take steps to improve production processes, workplace training etc. If they know that they must pay at least the statutory pay floor" which also improves productivity and has a stimulating effect (Riley, 2012).
Some argue that minimum-wage workers are mainly young people who do not need their employment income to be the primary source of their support. It is true that minimum wage workers tend to be disproportionately young. According to the Bureau of Labor and Statistics, "although workers under age 25 represented only about one-fifth of hourly-paid workers, they made up about half of those paid the Federal minimum wage or less. Among employed teenagers paid by the hour, about 25% earned the minimum wage or less, compared with about 4% of workers age 25 and over" (Characteristics of minimum wage workers, 2012, BLS). For individual workers, however, a low minimum wage can create downward pressure overall upon the wages within certain economic sectors, particularly retail. Raising the minimum wage can have a significant, positive effect upon workers in certain types of jobs, and for minority, young and female workers who make up a large proportion of minimum wage employees.
For example, "Zack Colon is just out of college, and while he prepares for grad school, he works as a chef. He says that extra 37 cents an hour will make an appreciable difference to his weekly income" if a recently-proposed increase in the minimum wage is passed (Kaste 2012). Minimum wage workers can use such jobs to transition to better, more highly-skilled jobs and the additional income gives them better financial security, reduces the likelihood that they will accumulate debt, and gives them the ability to make financial decisions (such as being able to buy in bulk, versus buying small amounts of groceries paycheck to paycheck). Furthermore, it is a widespread misconception that only very young teenagers are minimum wage employees. "An analysis of Current Population Survey data revealed characteristics of affected [minimum wage] workers: 84.2% are at least 20 years old (only 6.6% are teenagers who work less than 20 hours per week); and about three-fifths (60.6%) have total family incomes of less than $45,000" (Hall & Gable 2012). In fact, many teenage workers may receive less than the minimum wage, depending upon state regulations. Thus, although minimum wage workers may be young, this does not diminish the necessity of the wages they are receiving.
Such statistics not mean that 'more is better' when it comes to raising the minimum wage. Previous studies indicating a minimal impact upon employment dealt mainly with small, incremental increases. There is undeniably a balance that must be achieved between raising the minimum wage yet not raising it so high as to cause employers to reduce payrolls. According to David Neumark, director of the Center for Economics and Public Policy at University of California, Irvine: "I don't think there's any sensible economist who thinks you could double the minimum wage and not throw a lot of people out of work... The consensus from a lot of studies I've surveyed -- including my own -- says that a 10% increase in the minimum reduces employment of those very low-skilled groups by about 1 to 2%" he says" (Kaste 2012). Raising the minimum wage requires an analysis of the ideal equilibrium point for wages and labor. "If the equilibrium wage is below the minimum wage...there will be a surplus of labor: at the artificially high minimum wage, aggregate demand for labor is lower than aggregate supply, meaning that there will be unemployment (surpluses of labor)" (SparkNotes Editors, n.d., SparkNote on Labor Demand).
Those who argue against raising the minimum wage also contend that it can cause prices to increase for consumers, often for basic necessities such as food and clothing (given the dependence of the retail sector on minimum wage workers) and therefore undercut any stimulating effect of wage raises. For example, although Subway charges five dollars for a foot-long submarine sandwich in most areas of the country, "Subway restaurants in San Francisco are the only place in the U.S.A. not to offer this deal and they blame the newly increased minimum wage. The city recently implemented a minimum wage of $10.24 per hour (compared to the mandatory federal minimum wage of $7.25 per hour). This has…