Impact of Increasing Minimum Wage Rates

Abstract/ Introduction
Minimum wage increases have not kept pace with real wages, according to testimony given before the U.S. Senate Committee on Health, Education, Labor and Pensions (Dube, 2013). As a result of what amounts to a declining minimum wage, there is rising inequality mainly in the bottom tier of the pay distribution. Some believe that raising the minimum wage would help to close the gap and reduce inequality. Others argue that raising the minimum wage would only worsen the economic conditions that prevail today, drive employers to lay off workers or offshore more jobs, and drive the prices of goods up for consumers as the cost of labor is passed on to the customer. This paper will examine the impact of increasing minimum wage rates and what effect it would have on employers and employees, the local economy, the global economy and on consumers.
Effects on the Employers and Employees Due to the Increase
What do economists think of a wage increase and its effect on employers and employees? Economists are divided on the issue. According to Employment Policies Institute (2007), the low-skilled workers will be worst hit by a minimum wage increase: “Over 73 percent of American Economic Association labor economists believe that a significant increase will lead to employment losses and 68 percent think these employment losses fall disproportionately on the least-skilled. Only 6 percent feel that minimum wage hikes are an efficient way to alleviate poverty” (Employment Policies Institute, 2007). In other words, the majority of economists believe wage increases would hurt both employers and employees. However, there are other economists who hold the exact opposite position.
Thus, according to most economists surveyed by the Employment Policies Institute, employers would be forced to turn to high-skilled workers in order to make ends meet and so all the low-skilled workers would be let go. This would lead to an increase in unemployment that would cause the economy to be worse off than before. According to others, like those at the Economic Policy Institute (2018) believe a wage hike would help employees: they say that “a $15 minimum wage by 2024 would result in $121 billion in higher wages for 39.7 million low-wage workers, which would also benefit their families and their communities”—but they are silent as to the effect it would have on employers.
How Do Economists Think the Increase Will Affect the Local Economy?
The majority of economists believe the minimum wage hike would lead to an increase in unemployment and a downturn in the economy as more people would be out of work and rely on government subsidies. The alternative to this problem is to increase the Earned Income Tax Credit. Rather than raising the minimum wage, the government should give workers a tax break so that they could keep more of the money they earn. This would lead to more gains in employment as it would allow employers to keep more workers (Employment Policies Institute, 2007).
Economists at the Economic Policy Institute (2018) on the other hand believe a wage increase would be a good thing for the economy. They state that “since lower-paid workers spend a large share of their additional earnings, this injection of wages would modestly stimulate consumer demand, business activity, and job growth” (Economic Policy Institute, 2018).
Other Views of Increasing Wages
Other views are that increasing wages will be unlikely to do anything to make prices more affordable or to prevent inflation from occurring. Dube (2007) points out that “adjusted for inflation, the real minimum wage has fallen from a high of $10.60 in 1968 to $7.25 in today’s dollars.” The problem is that inflation is not going to stop. As the Federal Reserve is still likely to print more money in the future when the next recession hits and use those dollars to buy up Treasuries and boost asset prices, the value of the dollar will plummet and the purchasing power will decline. What once looked like a great wage hike will then be just another low wage. Increasing wages is only a temporary fix on a permanently bad situation.
Effects on the Consumers
What Economists Think Wage Increase will Have on Consumers
Again, here economists are divided as well. Some believe raising the minimum wage would boost consumer spending (Filion, 2009). Others say it would hurt consumers (Sunde, 2018). Economists at the Economic Policy Institute argue that wage increases generate more spending: they point to a study released by the Federal Reserve Bank of Chicago which suggested a correlation between wage increases in 2007 and 2008 and an estimated $4.9 billion in extra spending. Of course, 2009 was when the U.S. economy was in the pits of recession and the only thing that got the markets moving again was the Federal Reserve’s unconventional monetary policy, also known as quantitative easing—which saw the Fed spend trillions on buying up mortgage backed securities and U.S. Treasuries. The Fed is also the primary cause of inflation, as it is responsible for increasing dollar liquidity in a short amount of time which puts inflationary pressure on the dollar and hurts consumers as such pressure devalues the dollar and increases prices of products. So a study released by the Federal Reserve is unlikely to be free of bias since the authors are the ones responsible for the devaluation of money in the first place.
Economists at the Acton Institute argue that raising the minimum wage only hurts consumers: they point to a working paper from the University of Zurich which found that “analyzing scanner data in relation to ‘166 minimum wage increases and 62 legislative events in the US,’” researchers found “that consumers bear the bulk of the cost from such increases. Moreover poor households are most negatively affected by the price response” (Sunde, 2018). Unless economists look beyond the immediate impact of wage growth—i.e., more money in one’s pocket—they will fail to truly recognize the full impact of wage increases. Wage increases do not stop at more money for workers: it also means less money for producers, which means that costs inevitably are passed on to consumers through price hikes. In other words, wage increases lead to product and service increases.
Positives
The positives of wage hikes according to short-sighted economists are that it enriches workers who thus have more income to spend. This in turn leads to growth in the economy. A growing economy in turn means more jobs for workers. Wage hikes thus bring about a wealth effect. Moreover, those economists who say they take the big picture actually only take a myopic picture. They say that wage hikes lead to price hikes—but many consumer goods in the U.S. are actually made in China (i.e., practically everything at Walmart comes from China). Thus, they point out that wage hikes would not impact those prices. The other side of the story is, of course, that economists who view wage hikes as problematic point to other consumption—housing, cars, furniture, health care—all of which could potentially be impacted by higher wages in a negative manner.
Negatives
For economists who look at the whole picture, it is more negative. Wage increases cause employers and producers to spend more money on labor, which decreases their profit margins. To preserve margins, they pass the cost of labor onto the consumer via price hikes. Consumers who thought they had more money from their wage increases actually find now that it costs more money to buy what they could buy yesterday for less. Their employers and producers have passed the increase in wages onto the consumer and so they gain nothing from their wage increase because now they just have to spend more in the market to get the same amount as what they bought prior for less.
Effects on the Global Economy
Economist Views
The global economy is impacted by far more numerous inputs than simply wage hikes. Subsidization from governments is a huge input and is responsible for the inflation seen in education prices, health care prices, and housing prices as all of these areas are backstopped by governments. Inflationary spending is another big input, and credit (i.e., borrowing) is another big factor in the global economy. Wage hikes are but a small part of the bigger picture. Still, economists point out that it is not an insignificant part of the picture.
Because today there is a global economy that has resulted from globalization, the big picture has to be examined by looking at countries like China, Japan, Canada, Mexico and the U.S. Gross domestic product is a big factor and job creation is a big factor in how well the economy is doing. China has been borrowing quite heavily as of late and they are likely to continue to do so as they attempt to complete the project of expanding a rail line from the East to the West to help with global commerce.
At the same time, economic sanctions levied by the U.S. at countries like Russia, Iran and Venezuela are having the impact of driving more and more countries away from the U.S. dollar and circumventing USD altogether by trading in gold-back yuan oil contracts or some other currency that is less likely to be impacted by American economic sanctions. These are other factors that impact the global economy.
Then there is the issue of what the world’s central banks are doing: are they buying or are they running off their balance sheets? That is another important question to ask as it will impact markets and have an effect on the global economy. The global economy is more than just how much money people earn from their jobs and have to spend on consumer goods. It is a measure of the velocity of money, the time value of investments, derivatives, funding requirements and so on.
Increasing the minimum wage is not going to impact the global economy in any significant way because there are simply too many dynamics involved in the health of the global economy. However, there can be some positive and negative effects that might be felt across the global economy as a result of wage increases in the U.S. These could potentially extend across Atlantic to Europe and across the Pacific to Asia.
Positives
Higher wages for employees could mean that consumers have more money to spend on consumer goods made in China. That means they could shop at Walmart or online at Amazon and purchase as much as they could spend. This would undoubtedly facilitate global trade as an increase in demand would boost China’s productivity, which would mean more shipping going from East to West. More shipping would mean more spending on fuel, which would be a boon for the oil industry, which has seen prices falling for a number of years until a recent bounce from a low of $20 helped to provide a relief rally.
If more consumers are spending on goods that are imported and which are unlikely to see price hikes on the products because the workers who made them were not impacted by the wage increase in the U.S., then it is very likely that the global economy could benefit substantially. However, this is to assume that consumers have not been hurt by price increases in other aspects of their lives (Economic Policy Institute, 2018). Food costs could go up, healthcare could go up, education prices could go up, rents and housing payments could go up, interest rates could go up making everyone’s debts more costly to carry. These costs have to be considered, too, so an increase in wages has to be balanced against the real world picture.
Negatives
Negative outcomes of wage increase on the global economy could potentially be a spiral effect of price increases across the board, as producers pass on costs to suppliers as well, refusing to pay higher costs for goods. This could cause consumption to halt by big producers who rely on cheap rates in order to keep operations going and to stay cash flow positive. Without cash flow and margins protected, large companies and businesses will find it difficult to continue operations. A domino effect could commence that puts one business after another out of business. Thus, as companies are squeezed at home due to wage increases, the global trade of supply and demand could be hit as well, as the first domino that falls will likely fall into another and it into another. A chain reaction of negative consequences could result for all businesses are essentially interconnected and dependent upon the health of one another at some level.
Conclusion
In conclusion, wage rate hikes could be good or bad for the local and global economy, depending on how one chooses to look at it and what data one chooses to consider. Likewise, wage increases could be good for employers and employees or it could be bad—again, economists are divided on the subject. Part of the problem is that there are so many different data points to consider that it is somewhat of a guessing game to actually say what is happening in the economy, whether local or global, at any given point in time. The more money that consumers have to spend can be seen as a positive in one sense, but it can also be seen as a negative in another light. It depends on whether the economist is simply looking at the amount of money that is being accumulated or if the economist is looking at how employers will pass the costs on. Additionally, there are far too many factors that impact the local and global economies, including federal subsidies, inflation, and central banking monetary policy. Wage hikes are but one small part of the story.
References
Dube, A. (2013). Statement before the Committtee. Retrieved from
https://www.help.senate.gov/imo/media/doc/Dube1.pdf
Economic Policy Institute. (2018). Economists in support of a federal minimum wage of
$15 by 2024. Retrieved from https://www.epi.org/economists-in-support-of-15-by-2024/
Employment Policies Institute. (2007). Majority of Labor Economists Believe Minimum
Wage Hikes Cause Unemployment. Retrieved from
https://www.epionline.org/release/majority-of-labor-economists-believe-minimum-wage-hikes-cause-unemployment/
Filion, K. (2009). Increases in minimum wage boost consumer spending. Retrieved
from https://www.epi.org/publication/snapshot_20090527/
Sunde, J. (2018). Study: How minimum wage increases hurt consumers and the poor.
Retrieved from https://blog.acton.org/archives/99873-study-how-the-minimum-wage-hurts-consumers-and-the-poor.html